The World Wide Web, as its name suggests, has no boundaries, and so does crypto. The general ethos of the internet and cryptocurrencies is one of wide-open communication and exchange, unhindered by national borders. However, on the ground, as crypto has become a more important player in the financial system, countries are beginning to consider issues of sovereignty and regulation. While many countries have so far remained open to crypto, others have restricted its use or banned it outright. The same reasons that some have advocated for crypto and blockchain technology – as a way to revolutionize the international financial system – have alarmed many world leaders.
For example, Hillary Clinton, calling attention to the risks of crypto and the need for regulation, said at the Bloomberg conference in Singapore in 2021, “Another area that I hope countries begin to pay more attention to is the rise of cryptocurrency because. [it] it has the potential to destroy the currency, to destroy the role of the dollar as a reserve currency, to destabilize the country, perhaps starting with something small but bigger. These are strong words, and the government has begun to take these claims seriously. Despite the decentralization of crypto, regulation seems inevitable and could alter development and adoption worldwide.
Regulatory environment
In general, financial regulation oversees the financial world, setting limits, requirements, and guidelines for these institutions, with the aim of keeping the financial system stable and establishing and maintaining its integrity. For traditional financial institutions around the world, these rules have been around for a long time. The cryptocurrency market, as a newer area of finance, does not have a greater history, and due to its rapid growth and maturity, it now faces the prospect of regulation.
As the crypto market has grown, governments and international organizations, such as the International Monetary Fund, have taken notice of its potential. annoying established economic system – in both advanced words, tech-world sense of the word and other troublesome senses create problems, such as those related to the collapse of the crypto exchange FTX in November 2022. In other words, the cryptocurrency industry is now extensive enough that financial analysts are worried that it can have adverse macroeconomic consequences if not properly managed, even if they have the potential for positive effects. The increased risk has led to calls for more regulation. The World Economic Forum, for example, says that cryptocurrency regulation – like other financial regulations – aims to “encourage financial stability, transparency, protection for consumers and investors, and a level playing field for different market participants.”
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To date, most regulatory activity in this space has been at the national level. But the use of cryptocurrency is not limited, or meant to be limited, to national borders, making international regulatory cooperation something ideal – and one whose realization still seems far away. But regulatory agencies have reason to pursue: As of this writing, one in five Americans claim to have participated in cryptocurrency trading at some level. In Singapore, the figure is even higher. And as the market grows, everyone will be eager to avoid repeating the financial crisis of 2008. In general, the bigger the market, the more likely it is to be organized; this is based on the assumption that the market grows, it is more likely to affect the common good.
On the other hand, crypto supporters point to the possibility that crypto itself is trying to avoid a 2008-style crisis by its very nature. These are alternative financial structures that are not dominated by major financial institutions that need to be regulated. There is a clear tension between the independent ethos of crypto and the nature of regulation. Will this be a creative or destructive tension? It may be too early to speculate, but either way, the government has begun to assert its authority.
Managing cryptocurrency in the US
The history of cryptocurrency regulation in the United States mirrors that of most Western countries. Initially, the perspective of the US government was that Bitcoin (BTC) and other cryptocurrencies were a fascinating innovation but did not require the attention of federal agencies. This frictionless system may appeal to early adopters, but more crypto skeptics will fail.
However, to the surprise of many people, crypto has not only disappeared but has continued to grow in value and popularity. However, US regulatory agencies such as the Securities and Exchange Commission, whose function is to monitor the market and protect investors, are still waiting for some time. Finally, the crypto market has become very important to pay attention to: Problems with initial coin offerings led to its regulation in 2017. Additional regulation seems inevitable, for example, after the collapse of FTX Sam Bankman-Fried in November 2022. The question, then, becomes the regulation that will be implemented , and what areas to work on.
The government’s concern is really focused on fraud and the use of cryptocurrencies for illegal activities on the dark web, but existing laws cover these cases. Until Congress passes additional legislation directly related to crypto, the SEC’s approach will continue to be what it calls “regulation by enforcement” of existing statutes. Current regulations include provisions against money laundering and terrorist financing – these may apply to crypto-related cases but not regulations written in crypto.
The future of crypto regulation
What is worth noting is the turbulent crypto regulatory landscape. There are so many different approaches that change so often – sometimes by 180 degrees – that it is difficult to determine what the attitude of individual governments is from year to year, or even month to month.
Predictions are always risky, especially in volatile situations like cryptocurrency. While you can expect louder calls for regulatory clarity and cross-border consistency, there is little chance that governments will heed those calls in a timely manner.
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This lack of clear direction may prevent some crypto trading in the short and medium term from those who feel that trading is too risky. But one thing that is almost certain is that crypto and other digital currencies, and the blockchain technology that supports them, will continue to be a force for governments to reckon with.
Crypto and, by extension, blockchain are part of a larger technology-driven global movement known as the Fourth Industrial Revolution. In this revolution, the world is undergoing a digital transformation, and digital currency only makes sense as every aspect of our lives evolves from analog to digital. How important is the digitization of money and the distributed ledger in this revolution? Klaus Schwab, founder of the World Economic Forum – best known for its annual conference in Davos, Switzerland – said, “Blockchains are at the heart of the Fourth Industrial Revolution.”
Just as fears about the possible consequences of artificial intelligence and genetic engineering are regulated by some level of regulation, rather than stopping their progress, national concerns about the possible destabilizing effects of cryptocurrencies cannot stop their widespread use. Regulation, if properly applied, may lead to the often chaotic spread of cryptocurrencies, but finding the right approach to manage this emerging phenomenon is a challenge.
This column is an excerpt adapted from Cryptocurrency Quick Guidescheduled for release on February 27.
Dr. Jonathan Reichental is the founder of Human Future, a global business and technology advisory firm, investment, and education. He holds a Ph.D. in information systems from Nova Southeastern University and is an adjunct professor at the School of Management at the University of San Francisco.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.