Crypto Requires Comprehensive Regulation To Bounce Back From The Impending Winter

With cryptocurrencies and other digital assets still mostly under-regulated – in some parts of the world – financial experts are calling for a globally standardized regulatory framework, but would this give the crypto market the leverage it needs to bounce back from the enduring crypto winter? 

Arguments that speak of cryptocurrency regulation have been building momentum in recent years, as institutional players are facing scrutiny from bad actors within the market. 

The bull run of 2020 and 2021 saw the crypto market grow by 300% year-over-year (YoY) as many enthusiasts rushed to the market amid financial uncertainty. The sudden spike in interest helped boost crypto prices significantly, with the leading crypto, Bitcoin (BTC) experiencing some of the biggest price changes. 

In January 2020, BTC was trading at $9,545.08 and by November 2021 prices jumped to $61,374.28, marking the highest BTC has ever traded since coming onto the market. 

Despite these major price swings, which are still largely influenced by macroeconomic conditions and investor sentiment, regulatory frameworks are being used as a counterargument that could help boost prices and market valuation amid the ongoing crypto winter. 

Since the start of this year, the crypto market has lost more than $2 trillion in value. BTC prices are down 58% since the start of September 2022, while Ethereum (ETH) has also plummeted by 59% year to date. 

As the market quickly turned sour against the backdrop of tumultuous economic conditions, from soaring inflation to skyrocketing interest rates, investors and traders quickly pulled their cash from the market, looking to redirect their investments towards assets that can offer recession-proof benefits. 

Even with market sentiment slightly down, the mass institutional and governmental adoption of digital assets has meant that regulatory entities have become more hands-on in their efforts to curtail illicit and dangerous activities that are usually found within an unregulated financial ecosystem. 

This year alone, crypto enthusiasts have experienced system failures, an increasing number of crypto scams, and ongoing regulatory battles with state and federal governments due to a spike in financial misdeeds. Now on the back of these developments and mass adoption, some experts have called for governments to come together to decide on a regulatory framework going forward. 

A recent article published by Aditya Narain (deputy director) and Marina Moretti (assistant director) of the International Monetary Fund’s (IMF) Monetary and Capital Markets Department highlighted the importance of having collaborative efforts to establish more innovative and coordinated sector regulation. 

According to Narain and Moretti, they believe that having a global framework that encapsulates a solidified standard will “bring order to the markets, help instill consumer confidence, lay out the limits of what is permissible, and provide a safe space for useful innovation to continue.”Currently, nations are left to decide and work through regulatory conditions at their own pace and implement as needed to help control the mobility of digital assets. 

The sudden boom in interest has meant that there are now more active players within the crypto and digital asset market, and as some countries bring in more stringent regulations, traders and investors are simply migrating their assets to friendlier jurisdictions, causing a regulatory arbitrage. 

Regardless of where investors may be situated, crypto and digital assets remain largely accessible by anyone with internet access. Even in countries such as the United States, which has the highest number of crypto users globally according to a recent Merchant Machine study, guidance on regulation and taxation are still relatively incomplete and unclear. 

The largely unregulated digital finance ecosystem has become a breeding ground for malicious activity, only further pushing investors and ordinary enthusiasts to withdraw their interest from the market completely. 

Reports found that cryptocurrency was one of the most prominent payment methods used in investment scams and fraud, racking up more than 45,228 reported cases in 2021, up from 9,542 reported cases in 2020 and 1,206 in 2019. 

Yet, even with the surge in crypto-related scams plaguing the market, it’s not necessary to say that regulation and ongoing security improvements would draw back investors and traders. 

There are various arguments – for and against – the idea of regulating crypto for the sake of security purposes. 

In a recent statement by the Governor of Banque de France, Francois Villeroy de Galhau, also a member of the European Central Bank, reiterated the idea that central governments should not diminish their interest in regulating the cryptocurrency market. 

Furthermore, Villeroy believes that the crypto market should function under a regulatory framework in an effort to regain investor trust. Having inappropriate regulatory models in place would only further harm the already fragile digital financial system, leaving investors and individuals exposed to malicious and fraudulent activities. Varying opinions on the matter have been echoed throughout the marketplace, but it could still be some time before a comprehensive regulatory conclusion can be achieved or agreed upon. 

While investors and traders might feel more complacent when matters are appropriately regulated, there’s also a side that feels formal government and regulatory intervention would only increase skepticism among individuals who use the industry due to its highly decentralized capabilities. 

The argument of bringing together a statutory framework in the crypto market to draw back individuals might only sound like a pipedream as of right now, but thinking long-term, this could perhaps be the best way to boost investor confidence, while at the same time helping the global marketplace to be more innovative, progressive and comprehensive in its performance.