Cryptocurrencies Regulations: A Necessary Next Step

FinTech, Investing, Opinion, Regulation | October 25, 2018 By:

The wide range of opportunities present in the cryptocurrency sector has led to a massive growth for the industry. However, with speculation on the legitimacy and reliability of the assets, these companies are making a concerted effort to organise the industry into a more structured format. With the advantage’s crypto presents to investors, this issue has never been more important.

The feasibility of regulation

Without a doubt, regulation and legislation will be vital to the evolution of cryptocurrencies and the maturity of the market. Holding cryptocurrency to the same regulatory standard that exists in the global financial system can, and should, be made a reality as this asset class continues to grow. However, those in the industry have faced scepticism on the viability of crypto integrating regulation into the wider financial market.

In many ways, a global regulatory standard for cryptocurrencies can be viewed as more workable than a jurisdictional structure. Blockchain, through the distributed ledger technology which underpins it, makes cryptocurrencies a far more traceable and transparent asset class over traditional fiat currency. Unlike fiat, cryptos are also traded across a single unified platform, making global oversight and regulation not only feasible, but preferable.

The challenges that remain

Uncertainty around the properties of cryptocurrencies remain an issue for both the regulators and investors. Like all technology-led products, cryptocurrency is seen as disruptive. While this has been the cause of the industry’s rapid growth, it does present concerns around stability of the asset. As a result of its disruptive nature, many governments have exercised a degree of caution in regulating an unfamiliar space.

Proactively shifting perception on how crypto is viewed will allow the market to better integrate with traditional assets. Rather than industries isolating crypto into a micro-sector, it needs to exist within the wider financial ecosystem. In doing so, not only will cryptocurrency will be able to respond to changes in the market, but it will be easier to define the correct controls needed to make the currency more effective.

This trend is already taking place, with businesses such as Fidelity Investments recently announcing a new and separate company – Fidelity Digital Asset Management – to make digitally native assets more accessible. Through increased understanding and accessibility, cryptocurrencies will mature in the market and be more compelling for hedge funds and high net worth individuals.

However, this shift in perception can be a slow process and with a lack of formal regulation in place, the sector needs to find a way to cope with the challenge. With the support of industry bodies and a self-regulating culture, many crypto businesses have been able to create a more stable environment for investment and growth. In time, these standards will help inform jurisdictional regulation and more formal controls.

Achieving legitimacy

Even with a formal regulation process in place, there is still a long road to making crypto a more credible asset for investment. There are many techniques that businesses are using to increase the reliability and legitimacy of the asset.

This is most noticeable with the rise of stablecoins. Crypto tied to traditional assets has allowed improved stability for investors and increased the trust towards the industry. This is not only relevant for those encouraging investment in the industry, but also for entrepreneurs looking to break into the crypto market. The recent launch of Gemini by the Winklevoss twins is one of the most recognised examples of a stablecoin, but it is by no means the only one.

As time progresses, the tokenisation of securities is likely to become another method with which the industry can increase legitimacy for financial institutions. Sectors such as real estate can be tokenised to segment the various forms of investment available. Tokenisation will not only make investment easier, but also provide a transparent overview of the market to help limit illegal activity.

With increased widespread cryptocurrency adoption, and tokenisation of non-digital assets, the industry will grow to become a reliable and integrated element of the financial market. In time, the asset class will be no different from the traditional forms traded today.

While cryptocurrencies are still in their relative infancy, they are clearly here to stay and there can be no doubt that they must be fully incorporated into the UK’s current regulatory framework.