Why Legal and Regulatory Aspects Should Be Strengthened in the Crypto World

Being a CEO of the global fintech ecosystem and cryptocurrency exchange Kyrrex, let me share with the community some thoughts on the crypto industry regulation.

While cryptocurrency is popular among certain demographics, the fact remains that it's still not well-understood by most people, and much of the news about it is unfavorable.

Between splashy headlines about major scandals like the collapse of FTX, Bitcoin's rocky valuation rollercoaster, and the risk of collapse or scams that could cost someone thousands or millions, it's understandable that most consumers are hesitant to jump on the crypto bandwagon.

The Federal Trade Commission (FTC) notes that, since 2021, people have lost more than $1 billion in crypto scams, with an average loss of around $2,600.

One of the biggest reasons crypto is so susceptible to fraud is the same reason some are drawn to it: There is a total lack of government regulation or centralized authority to govern transactions. In fact, this makes it an easy target for money laundering and other criminal activity, which makes investors even more wary of taking it seriously as a financial asset.

Crypto has plenty of potential as an investment asset. However, to realize this potential, some form of regulatory framework must be introduced.

The Two-Edged Sword of Decentralization

To the average person doing a cursory search for crypto information, it looks like valuations spike and plummet frequently, indicating a high risk. Part of the volatility problem here is that so many factors influence crypto prices: supply and demand, media hype, and user sentiment are just a few.

It's also easy for outside manipulation and artificial inflation to impact valuations, too. Most cryptocurrencies aren't tied to actual currency; they're backed "by the faith of the people who own them" rather than a government or bank. Certain tokens, called "stablecoins," are tied to some type of collateral (like the U.S. dollar or gold), but this only underscores the need for some kind of security tied to crypto.

Decentralization is the hallmark of crypto and is touted as a way to create a "zero-trust" system that eliminates the middle man (e.g., the bank or federal government), giving people privacy, security, and global financial mobility. However, this same system also causes unpredictable value swings, opens the door to bad actors, and makes it hard for the average person to use crypto for everyday living.

It's also worth noting that creating a brand new crypto token is easy for anyone with the resources or technical know-how to do so. The barrier to entry is quite low, and this also poses problems for those who are not well-versed in how this asset works, creating even more hesitancy.

One solution to this problem is to impose a legal or regulatory framework. Unfortunately, this is also a major sticking point that's slowing the progress of crypto as a valid asset.

Crypto Needs Global Regulation, But How Do We Get There?

The International Monetary Fund recently released two Fintech Notes on the crypto ecosystem, offering several recommendations to help stabilize the market and facilitate long-term growth. If we hope to see crypto gain trust and be taken seriously as an asset class, this topic must be given precedence.

One of their recommendations is pushing for more aggressive segmentation of customer assets, which is something that could have protected consumers during the FTX collapse. FTX handled wallets, exchange services, and market-making all under a single group, unnecessarily heightening the risk profile of customer assets.

Another is establishing comprehensive, globally consistent supervision of the industry. This part is challenging due to the borderless nature of crypto and the need for all countries to work together to develop standardized guidelines to follow.

Some regulatory bodies have already begun working on regulatory frameworks that include more comprehensive anti-money laundering (AML) and anti-terrorism financing (CFT) standards to include crypto assets and providers. While this is a positive step, the continued lack of standardization across nations means unequal enforcement and a throttled potential.

However, there has been plenty of pushback regarding regulation.

A Camp Divided: Naysayers Have Plenty of Criticism For Crypto Regulation

Of course, the premise of crypto is privacy, anonymity, and zero centralization or interference, so many would be against the idea of imposing legal regulations.

While many of those against a standardized framework are laypeople focused on the lack of government interference and creative possibilities, there are also economists and finance experts weighing in on their side. One such person is economist Stephen Cecchetti, who makes the distinction between legitimizing crypto and regulating it.

He believes that it needs more legitimization as an asset class, driving popularity, free market competition, and adoption while keeping it insulated from the traditional finance realm. Former Congressional chief economist Thomas Hogan agrees, noting that pushing more regulation could lead to unfair enforcement, less transparency, and an increase in risk.

Where Do We Go From Here?

Crypto has massive potential as an investment asset despite the growing pains and difficulties it has been facing recently. The solution to unlocking its full power lies in establishing a legal or regulatory framework to offer a certain level of stability, legitimacy, and trust that can help boost its popularity and make it more viable in financial markets.

The private, decentralized nature of cryptocurrency makes regulation more complex, but the first step toward strengthening it as an asset class is to have an open, honest conversation about its strengths and weaknesses so the finance realm can work together to find a solution that works.