What needs to happen with cryptocurrencies for regulators to more readily accept this industry?
By Konstantin Anissimov, Executive Director at CEX.IO
Over the course of 2020 the crypto market has proven its resilience, as more and more people turned to digital currencies amidst the economic uncertainty.
Bitcoin and other cryptocurrencies have emerged as a new asset class, in many cases outperforming traditional financial assets.
Interest from investors, both retail and institutional, has risen dramatically – we have seen companies such as Microstrategy, MassMutual, Tesla and others invest considerable sums into crypto, which raised a lot of waves in the financial market.
Admittedly, some proportion of those only sought cryptocurrencies out due to the hype and have since then left to pursue other venues, but, in a way, it is a good thing. This means that those who remained genuinely believe in the potential of cryptocurrencies and blockchain, which is good for helping the market become more mature.
A good proof of this can be seen in how governments have begun to gradually warm up to cryptocurrencies. Back in 2017-2018, when cryptocurrencies were only beginning their journey, governments had no desire to interact with crypto in any way. But by 2020 and continuing into 2021 we have been seeing considerable developments in this direction.
Many countries are now putting serious effort into finding ways to regulate and tax cryptocurrencies, as well as research the applications of central bank digital currencies and stablecoins in their economies. China is making steady progress with its digital yuan, the EU is looking into developing the digital euro within several years – aside from them, the US, Sweden, Japan, South Korea and many others are also considering the notion of developing their own CBDCs.
All this shows that governments across the world have accepted the benefits of the blockchain technology which powers the digital assets and believe it necessary to integrate this into the modern-day financial ecosystem.
The crypto market is moving forward, but progress doesn’t come without complications
But, of course, a major transition like that cannot happen easily. Regulators across the world are still figuring out how they should treat cryptocurrencies and without clear-cut laws they remain wary of the industry at large. And seeing as the crypto sector is prone to developing at a rapid pace, this sometimes causes tension with crypto-companies since the new innovative projects sometimes feel that they are being held back. Many chose to forego dealing with regulation altogether, or limit themselves to following the rules in only one or two jurisdictions, in order to expedite their business processes.
One of the most recent examples of this is Binance who the FCA has prohibited from performing any activities based in the UK due to regulatory concerns. And that’s not counting a number of other countries (like Japan and Thailand), who are also scrutinizing the exchange heavily for operating in their territories without the necessary permissions.
Personally, I think that this kind of stance from regulators shouldn’t come as a surprise – their job is to protect an average user from suffering financial losses due to engaging with assets that they are not well-educated on.
It is true that people outside of the crypto industry are still not knowledgeable enough on the subject (though that is gradually changing), so concern from regulators is understandable enough.
What is necessary for the crypto sector to foster greater trust?
At CEX.IO we have always believed that steps need to be taken to ensure that our customers understand the risks that could come with dealing with crypto assets. It is why we choose to engage with our users and advise them in any way we can, so that they can make educated choices.
By the same token, we also strive to build trust with regulators by following all the necessary rules across all jurisdictions in which we operate. When the FCA declared a registration regime for crypto companies in the UK, we filed an application and successfully received the temporary status. In addition to that, we put a lot of effort over the years to receive money transmitter licenses in 48 US states, allowing us to operate across almost the entire country – and we intend to obtain them all in the end.
The reason why we welcome regulation in the crypto industry is because choosing to not follow it is likely to result in exclusion from the global financial system. Traditional finance businesses would find it hard to have faith in a company if it is perceived as “illegitimate”.
Legislation exists for a reason and willingly accepting it would help this industry mature. Sometimes it can be difficult from a business point of view, but it is important to look at the bigger picture here. Those crypto companies that understand this have already been taking steps to follow rules without any coercion from the regulators. Should they come under greater scrutiny at some point, it would be much easier for them to make adjustments to fit a specific requirement, instead of having to worry about halting their entire operation to focus on building up their whole compliance from scratch.
I believe that businesses like those will be the ones to remain in the market long-term and bring further strength and stability to it. Approaching things responsibly will help build trust and transparency with customers and gain rapport with regulators, leading to the crypto sector being taken seriously and eventually integrated into the modern financial society.
Establishing dialogue between crypto companies and regulators
On the regulators’ side it may be a sensible choice to engage with more people from the crypto field to consult on some of the innovative approaches and help establish better communications with members of this industry. Erasing communication barriers always helps to make the overall process more efficient.
There are working groups that are dedicated to improving industry practices and promoting development in crypto. By continuing the dialogue between these groups and government agencies both the parties can voice their concerns to each other and join hands in figuring out solutions to those issues.
Such cooperation requires patience and dedication on both sides, but it is paramount to fostering mutual understanding and bridging the gap between the markets of crypto and traditional finance. And I am confident that as long as earnest attempts at communication are being made, we will steadily move towards building a better global financial future.