What are the major risks with crypto regulation?

Top 3 crypto regulation risks that regulators must be aware of

While cryptocurrency has taken the world by storm with its astronomical growth in a spur of time- the industry has also earned flak for the illicit risks it poses. It is not for anything that crypto is dubbed as the favorite of the dark web. Popular cryptos like Bitcoin are widely abused for money laundering, cyber crime, and even terrorism. Then, of course, volatility has always been a major issue with crypto that mostly stems from crypto’s vulnerability to manipulation. There is a dire need for crypto regulation. However, there is a caveat- the concept of crypto regulation also carries its share of risks.

When it comes to crypto regulation, the key problem is different countries perceive the crypto industry in different ways. Over the years, crypto has become a global phenomenon. But, given the variable stance on crypto across the world, it’s becoming extremely difficult to develop a structured crypto regulation framework that would be followed for crypto universally. Put simply, the situation is extremely complex and poses a serious challenge in drafting a seamless regulatory policy. There are other risks as well.

The post below offers a brief on the different risks associated with crypto regulation.

No universal classification

To regulate a particular industry, the first task is to determine a standard official identity for the industry. Some countries define cryptos as a “commodity” while some others have embraced the digital asset as a currency. On the other hand, two countries have already entrusted legal tender on crypto.

In the USA alone, there is a difference in the classification of crypto. While the U.S. Treasury has recognized crypto as “currency”, the asset is considered as “securities” and “commodities” by the SEC and CFTC respectively.

It is almost next to impossible to develop a meticulous framework for crypto regulation unless the national governments –as well as the Federal and State governments- devise a uniform standard classification for crypto assets.

Incoherent regulation framework

Taking cue from the discussion mentioned above, this point explains how variable perception about crypto is posing serious crypto regulation risks and challenges.

Different countries have come up with variable approaches regarding crypto regulation.  For example, the Swiss government follows a liberal and open policy. On the other hand, the American government maintains an open yet strict system for crypto regulation. The Chinese government is currently completely against cryptocurrencies and follows a closed system. As now, these are the three kinds of crypto regulation systems that are followed across the world.

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But, this 3-pronged approach is not going to help.

The “variable” aspect makes it increasingly difficult to bring the whole system under a universal curriculum for easier management and compliance.

Crypto is a global phenomenon

When it comes to devising crypto regulation, we cannot undermine the fact that crypto, unlike fiat, is a global phenomenon. Fiat currencies and developed and regulated by a nation’s government. Thus, it’s natural that the regulation of a particular fiat will be determined by the specific laws of its issuing country.

But, it’s not the case with crypto. The very blockchain ledger on which the crypto operates is a global phenomenon. Unlike fiat, a cryptocurrency is not issued by any specific country and no particular national government can impose ultimate regulation on crypto. You might cite the example of China’s regulation policy here that has banned crypto in the country. Well, the “ban” part cannot create effective crypto regulation. It’s because crypto trading happens on a global level. So, if your particular country has imposed a ban on crypto use within the national border, you can still trade crypto at international crypto exchanges. So, despite the ban, your national government cannot keep the citizens shunned from crypto as a whole.

Urgent need for global collaboration

The IMF has expressed concern time and again about the increasing delay in devising an organized crypto regulation framework. The esteemed organization has further pointed out that proper crypto regulation won’t be possible unless national governments are able to reach a uniform consensus about crypto. Since crypto is designed to operate on a global level, there is an urgent need for global collaboration regarding addressing the legal, tech, monitoring, and regulation challenges in the cryptocape.

Yes, it’s going to be a herculean and time-consuming task to reach a coordinated and coherent consensus about crypto and crypto regulation. But, there is no other alternative; sooner the process starts the better.

Overregulation

Cryptocurrencies are defined by a decentralized framework. Lack of centralized control helps crypto to make finance inclusive for all, even the unbanked populace of the world. The decentralization architecture is the key reason why crypto payments are way faster and more affordable than fiat-based payments even during international transactions. But absence of centralized control is also a  prime reason why crypto can be easily abused for cyber frauds and money laundering antics.

One of the major goals of crypto regulation is to prevent and eliminate these nefarious acts. But, in doing so, it runs the risk of overregulation that might eventually hamper the “decentralization” aspect of cryptocurrency. As mentioned previously, the “decentralization” aspect is a central feature that makes crypto a breakthrough asset. And, if that futuristic feature is hampered, crypto has a lot to lose.

Balanced crypto regulation framework

Regulation in cryptocape is the need of the hour. An organized universal crypto regulation framework will help to bring stability in the market, keep volatility in check, and reduce risks of wild losses that crypto is infamous for. Most importantly, crypto regulation will help to make the crypto market more secure. A regulated market always inspires confidence in aspiring investors. There is a large group of investors who want to invest in crypto but feel apprehensive due to lack of proper crypto regulation.

But while crypto regulation is indispensable, regulators must also be careful about the risks of overregulation.  The crypto regulation framework must not allow an approach that might otherwise hamper the soul and spirit of cryptocurrency. Regulators must focus on creating a balanced regulation framework that will protect the interests of cryptocurrency, the users, and also the businesses working on it.


Kevin Hall

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