After so much hype towards the end of 2017, cryptocurrencies have faced a shockingly bad start to 2018. Cryptocurrencies had finally broken away from being a niche financial industry, to becoming much more mainstream or commonplace. But 2018 has seen regulation somehow clip their wings. Regulatory headlines have dominated the industry this year, with market price action indicating that this is a very sensitive issue to both traders and investors. But is regulation a crypto-killer, or a crypto-savior?
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The Start of Regulation?
Ripple trading was the most affected in January as the token shed off over 60% of its value in January 2018 alone. Bitcoin and other major cryptos also posted losses of over 40% of their values. China was the first to act, continuing its assault on cryptos from late last year, by banning crypto mining and stamping out domestic exchanges. South Korea took the cue and went as far as raiding banks with links to cryptocurrencies as well as major exchanges.
The wind of tougher regulation crept into February, with China again extending the crackdown on exchanges to include foreign companies and blocking websites associated with cryptocurrencies as well as imposing a blanket ban on the issuance of ICOs (Initial Coin Offerings). India joined the party as the country’s Finance Minister categorically stated that the government does not consider cryptos to be a legal tender and that all measures will be undertaken to eliminate their use in financing illegitimate activities. There was, however, a glimmer of hope after the minister stated that the government would ‘explore’ the use of the blockchain technology in ‘ushering the digital economy’.
Controlling Crypto Trading
In a pointer on the direction regulation will follow, South Korea, after coming in hard on cryptos, introduced legislation that seeks to curb speculative crypto investing and also limits trading to real-name bank accounts. This gave a clue on what ‘bothers’ regulators and governments globally. The decentralized nature of cryptocurrencies promotes anonymous transactions between parties, something that poses serious money laundering threats and the finance of illegal activities. The threat is even much bigger considering that Bitcoin, the world’s first cryptocurrency, was first used as a means of exchange on the dark web.
The United States, a previous firm critic of cryptocurrencies, is also seemingly going the regulation route, rather than the path of a blanket ban. When testifying before the US Senate, SEC Chair Jay Clayton, said that he believed ICOs were a security, while CFTC Chairman Christopher Giancarlo acknowledged that the blockchain technology and the introduction of Bitcoin Futures helped in getting crucial data that could be analyzed for fraud or manipulation, something that previously was not possible.
It is after this congressional hearing that the market has now began to welcome regulation in the crypto space. This has been well reflected in the market price action this week, with almost all the major cryptocurrencies posting steady positive gains. It is a vote of confidence for cryptos as governments actually consider regulating them.
The future of cryptocurrency regulation will likely follow the blueprint provided by the European Union, a region that has always been warm to the technology. The EU has issued major proposals; the first of which seeks to eliminate anonymity. Exchanges and intermediaries will be required to comply with international AML (Anti-Money Laundering) and KYC (Know Your Customer) policies, which will require users to issue proof of their identity as well as address when opening accounts. Another proposal is a set of instructions to both the public and regulators that will subject virtual currencies to taxation. This will solve the tax evasion issue. Finally, there is also a proposal to impose caps on virtual currency payments, something that will validate the status of cryptocurrencies as a means of payment, because such caps currently exist on cash transactions.
Final Word
Regulation was always going to be a mixed pill for cryptocurrencies. This has been well witnessed on the market price action this year. There is, however, widespread appreciation of the disruptive potential of blockchain technology, which makes regulation a way of dealing with the negative threats of cryptocurrencies. Despite short term price fluctuations and negative impact on liquidity, regulation is an overall positive for investors. It increases value and legitimacy of cryptocurrencies and may well help entrench them into the mainstream global financial system.
About Carson Derrow
