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Cryptocurrency regulation can be a controversial topic, but many experts say crypto investors should welcome it.
For starters, more regulation could mean more stability in a notoriously volatile crypto market. “There will be rules and they have to come at some point, which would stabilize the market even further,” said Tally Greenberg, head of business development at Allnodes, a platform that provides hosting, monitoring and staking services. “That protects investors, so that’s a good thing. It does not matter.”
Still, many cryptocurrency enthusiasts are vehemently opposed to new regulations. They say it would hinder innovation and go against the spirit of cryptocurrency, which emphasizes decentralization at its core.
For these anti-regulatory crypto enthusiasts, the decentralized nature of digital currencies like Bitcoin – which, unlike traditional currencies, are not supported by any institution or government agency – is a major draw. So in this view, any new regulation would threaten the decentralization that is a feature rather than a bug.
New regulations also have the potential to protect long-term investors, prevent fraudulent activity within the crypto ecosystem and provide clear guidance to enable companies to innovate in the cryptoeconomy, according to Aaron Klein, a senior fellow in economic studies at the Brookings Institution, focused on financial technology and regulation. But upcoming regulations will have to strike the right balance, he says.
“In reality, you have three options: no regulation, bad regulation, good regulation,” Klein says.
What’s the next step in crypto regulation?
While an increase in mainstream crypto adoption in 2021 sparked an ongoing debate about the government’s role in this largely unregulated sector, clear rules are still under development. This has left the industry guessing as thousands of tokens and digital currencies are introduced, and new companies and platforms are emerging to help store and trade them.
“No policy has been devised yet, because there is no precedent for blockchain and crypto, so it is quite a task,” says Greenberg. “I understand why people are procrastinating, but something has to be done quickly.”
Recent conversations on Capitol Hill suggest it’s not a question of whether further regulation will come, but when. President Biden signed new crypto legislation late last year addressing taxes in the $1.2 trillion bipartisan infrastructure bill. And the Federal Reserve is toying with the idea of issuing a US digital currency.
The Fed released a long-awaited report in January examining the costs and benefits of a government-issued digital currency. The report ultimately delayed a final decision on whether or not to proceed, and the Fed is giving the public and other stakeholders until May 20 to share their input before taking further action. Stablecoins are also a hot button topic and many experts expect it to be the first type of cryptocurrency to be regulated.
While new regulations have the potential to bring more stability to the crypto market, it is still a highly volatile and speculative investment. That is why financial experts advise most investors to keep crypto holdings to less than 5% of their portfolios, and never invest in crypto at the expense of emergency savings or paying off high-yield debt.
Why crypto regulation would be good for investors
We asked experts for their views on the evolving cryptocurrency regulatory landscape. This is why they say more regulation would be a good thing for crypto investors in the long run.
1. More stability in the market
Regulating cryptocurrencies could be a healthy development for the industry, at least as far as ordinary investors are concerned. More regulatory guidance, if properly targeted, could help reduce speculation between crypto assets. Less speculation could lead to more investor confidence, which could attract more long-term investors who have said no thus far thanks to a highly speculative, volatile crypto market.
“Even if it doesn’t bring in more people, it can change people’s current behavior,” Klein says. Enthusiasts argue that cryptocurrency has many advantages over fiat currencies and other asset classes, but those advantages can only come to fruition “if an appropriate regulatory framework is put in place,” Klein said.
It is difficult to predict how the price-sensitive asset class will respond to regulation in the long run, as it will depend on whether the US government takes a more lenient or stricter approach. In the short term, any new regulations could trigger reflexive responses from investors in the markets, suppressing cryptocurrency trading values. For example, when China banned cryptocurrency transactions in September 2021, cryptocurrency markets plummeted. But in the long run, regulation may have the potential to stabilize the market and mitigate some risk for cryptocurrency investors, Greenberg says.
To be clear, new regulations could slow down the role of those who want to get rich quick by predicting the next coin to go “to the moon,” she says. But that’s a good thing for long-term investors.
“Slowly but surely we are not only being massively adopted as an industry, we are also more or less stabilizing. Regulation will stabilize the market even further,” says Greenberg
2. Increasing investor protection and confidence
Crypto investors currently have little to no protection in the market as there is no regulatory framework to ensure asset protection.
Some exchanges continue to comply with evolving federal and state regulators in the United States. This includes many established, large-scale exchanges in the US, such as Coinbase and Gemini, but they are not regulated in the same way as public exchanges or alternative trading systems. That can be problematic, says Timothy Massad, former chairman of the Commodity Futures Trading Commission and senior fellow at Harvard University’s Kennedy School of Government.
“Most of the trading that takes place in the crypto world today is not regulated by a federal authority, which is a big gap,” says Massad. “That means investor protection is much, much weaker on these major exchanges than on our securities markets or our futures market.”
That’s why regulation is needed to make the market safer, says Klein. Crypto will likely still be a risky investment like individual stocks, but investor protection could make the market less vulnerable to outside manipulation. Safer markets can lead to greater investor confidence, which often means more value over time.
†[Regulation] is important for investor confidence. It’s important for basic justice and ultimately it’s important for the industry to grow,” says Klein.
3. Safer Crypto Ecosystem
Crypto Has Been Described As The “Wild West” By SEC chairman Gary Gensler due to lack of regulation in the industry. The lack of laws and policies in this burgeoning area has created an opening for widespread fraud, scams, carpet pulling and market manipulation.
“Crypto is not subject to any requirements to prevent fraud manipulation. It is not subject to any conflict of interest standards,” Massad said. “My point is just that we don’t have the same kind of standards as in other markets. Nowadays, that essentially means that the buyer has to be careful.’
Crypto crime has grown tremendously in the past two years. Scammers took $14 billion in crypto last year, a record compared to the $7.8 billion scammers took in 2020, according to a report by blockchain data company Chainalysis. And there are over 17,000 altcoins, which tend to be even more volatile and speculative than Bitcoin, and carry a higher risk of crypto scams and fraud. Even the most advanced and enthusiastic cryptocurrency experts understand that there are many new and evolving risks in the world of crypto right now.
But there are several ways to protect your crypto. For starters, watch out for some common red flags similar to classic money-wiring scams and credit card fraud, such as obvious misspellings in emails or social media posts, promises to make you rich, or even large-scale crypto schemes on social media. which are known as carpet pulls.
To protect your digital wallet from hackers, you need to practice good digital security habits, such as using a hot or cold wallet for extra security or keeping your crypto in an exchange with robust security. It is also extremely important to keep your wallet key and not show it to anyone. If you lose your key or get it stolen, you could lose your cryptocurrency completely.
“As much as I love the decentralization and lack of government [involvement]I’m glad they’re paying attention because unfortunately there are a lot of scams out there with cryptocurrency,” Kiana Danial, author of “Cryptocurrency Investing for Dummies,” recently told NextAdvisor.