Questions around regulation have only grown as cryptocurrency continues to prove itself as a solid and enduring asset class for investors. As a result, many have begun to wonder if it will ever be fully regulated the way stocks are.
For the moment, crypto still isn’t fully regulated, which makes buying new crypto coins a challenging task. According to crypto expert Alan Draper, well-informed guides can help novice crypto traders understand the risks and pitfalls to make finding the best new cryptocurrencies more straightforward.
However, cryptocurrency’s constantly changing regulatory environment plays a big role in shaping investment decisions, especially for those exploring the market and looking for new crypto to buy and trade. From today’s complicated decentralized finance (DeFi), NFTs, and stablecoins to Bitcoin’s anonymous origins, the cryptocurrency world has become a focal point for regulators and investors alike.
Although cryptocurrencies can gain full regulation like traditional stocks, the process of doing so is complex and comes with its own set of unique challenges. To better explore this issue, here’s an in-depth look at what the future likely holds for crypto regulation and how you can best prepare for it.
Why Aren’t Cryptocurrencies Fully Regulated Now
Cryptocurrencies remain largely unregulated because of their global and decentralized nature, as this doesn’t fit neatly with traditional financial frameworks. Crypto projects aren’t designed with a central authority that oversees or audits their operations, which is unlike traditional financial institutions, making regulation tricky.
Additionally, all cryptocurrencies operate across borders. This leads to inconsistencies and regulatory gaps because each country has its own approach to regulation. Another element is the rapid growth of blockchain technology and how it’s being applied to various use cases.
Blockchain technology is constantly changing and evolving, which outpaces the development of regulatory frameworks. Combined with the lack of unified global standards, this speed has kept crypto largely out of the scope of full regulation.
What Would Need to Change to Have Crypto Be Fully Regulated?
For crypto to be fully regulated, several major shifts would need to take place. This would include some of the following considerations.
Global Standardization of Crypto Regulations
International consensus on how to approach and regulate cryptocurrencies would be required to achieve full regulation. Putting this global framework in place would prevent regulatory arbitrage, which is where companies shift to countries with looser regulations. Consistency would be gained by putting these global standards in place, which would make it easier for regulators to protect consumers and enforce rules.
Legal Classification for Crypto Assets
For crypto to be fully regulated, a consistent legal classification system would need to be established. This might include classifying tokens as securities, commodities, or currencies. By making these classifications, it would clarify each asset’s legal status, which would subject each asset to appropriate regulatory frameworks. Doing this would help simplify tax obligations.
Implementing AML and KYC Standards on Decentralized Platforms
Decentralized exchanges and DeFi platforms would be required to adopt Anti-Money Laundering (AML) and Know Your Customer (KYC) standards to gain full compliance. Identity-verifying smart contracts and other new technology could be used to implement these measures, which would allow decentralized platforms to meet these compliance requirements.
Challenges of Getting Crypto Fully Regulated
Several challenges are also presented when attempting to get cryptocurrencies fully regulated. Here are some of the most important ones so far.
Policy Differences and Global Coordination
It’s difficult to coordinate regulations across countries because of the varied perspectives and approaches on crypto’s role. Some countries remain restrictive and cautious about crypto while others have embraced these digital assets and established legal frameworks. Fully regulated cryptocurrencies would require significant international cooperation, which would mean aligning global policies.
Anonymity and Privacy Concerns
Some cryptocurrencies provide high levels of anonymity, especially privacy coins. This complicates efforts to enforce AML and KYC regulations. With these privacy issues, concerns are raised about potential illicit operations, which poses challenges for regulators who want to maintain user privacy while simultaneously reducing risks.
Balancing Innovation with Compliance
Most cryptocurrency projects experiment with new models by combining finance and technology. By fully regulating crypto, innovation might be deterred. This is because the complexity and cost of compliance would likely be prohibitive for smaller crypto projects. As a result, the diversity of projects within the crypto space could be limited with larger, more established entities dominating the industry.
Knowledge Gaps and Technological Complexity
Blockchain technology, DeFi, and cryptocurrencies are complex topics that require specialized knowledge, which many regulatory bodies are still acquiring. This makes it challenging to develop laws that accommodate these technical components of decentralized projects, especially in understanding how smart contracts and other blockchain elements function.
Benefits of Cryptocurrencies Being Fully Regulated
Full regulation of crypto could offer numerous benefits, especially around market stability and investor protection. Some of the advantages of fully regulating cryptocurrencies include:
Reduced Volatility and Improved Market Stability
Speculative behavior would likely dampen from regulation, which would make crypto assets less volatile and more predictable. Not to mention, rules against price manipulation would create a more stable market and attract more conservative investors interested in more long-term and stable results as opposed to high-risk speculation.
Clearer Tax Obligations
Crypto would have more standardized tax treatment in a fully regulated environment, which would simplify compliance for businesses and individuals. Investors would gain a better understanding of tax obligations when clearer classifications are put into place, leading to improved confidence regarding participating in the market.
Better Institutional Adoption
Larger institutional investors might find crypto more appealing with more regulatory oversight. That’s because these institutional investors have traditionally avoided the crypto sector because of concerns over its unregulated nature. Full regulation would address the protections and transparency that many institutions require to confidently invest in digital assets.
Greater Investor Protections
Investor protections would significantly improve with full regulation. With fully regulated crypto, these projects would need to provide clear risk information, transparency, and disclosures. In doing this, frauds, scams, and “rug pulls” would likely decrease, which could possibly create a safer environment for potential investors.
Future Predictions of Fully Regulated Crypto
We could expect significant changes to the industry if crypto becomes fully regulated. As an alternative to private stable coins, governments might start issuing Central Bank Digital Currencies (CBDCs) though some believe this isn’t a good thing.
These CBCDs would likely operate within a structured regulatory framework but could result in losing influence with private stablecoins. This would then increase government control over digital currencies.
Additionally, we might see a hybrid approach where stablecoins and centralized exchanges are heavily regulated. In this fully regulated future, decentralized finance could still retain a level of flexibility. With this hybrid approach, investor protections would be provided in centralized areas while innovation could continue within DeFi.
Moreover, cryptocurrencies would likely be integrated with traditional finance in a regulated environment. Investment funds, banks, and other financial institutions would be more confident in adopting and offering crypto products. This would lead to closer alignment between traditional and crypto markets.
Pros and Cons of Crypto Being Fully Regulated
The crypto industry would experience major changes with full regulation. Although this approach might increase protections and stability, it would also impact the foundational elements of crypto. Here are the potential pros and cons individuals and businesses could expect from fully regulating crypto:
Pros of Fully Regulating Crypto
Greater investor security and protection would be provided by fully regulating crypto. This would mean that new investors can have more confidence when entering the market, as safeguards would decrease fraud and scams. Adding to this, reduced volatility coupled with market stability would attract investors who previously viewed crypto as too volatile.
Cons of Fully Regulating Crypto
On the other hand, full regulation of crypto would mean that privacy and anonymity are potentially lost. That’s because AML and KYC regulations require user identification, which would deter privacy-focused users from using these regulated platforms.
In addition, costly administrative services and legal work would be required for full compliance, which could result in innovation being stifled. Experimentation could be limited because it might be costly for users to participate in blockchain projects, which could dampen the fundamental principle of cryptocurrency—innovation.
The Bottom Line
Even though fully regulating cryptocurrency would bring transparency, security, and legitimacy, it would also add risks to the decentralized and innovative elements that define crypto. A balance between these factors would be needed to provide flexible regulation that would protect investors without compromising the technology’s potential.
As technology continues to evolve and governments develop regulatory frameworks, we can expect to see a gradual shift towards cryptocurrencies operating with more structured oversight. Nonetheless, the future of cryptocurrency regulation is dependent on how well regulators and the industry can collaborate to foster investor protection and innovation. By prioritizing this collaboration, the likelihood of cryptocurrencies in mainstream finance is greater.
