Bitcoin and other cryptocurrencies are usually defined as digital currencies, assets, and platforms for smart contracts. However, legally defining them becomes a bigger dilemma than expected, making regulation challenging. Cryptocurrencies were developed with the primary intent of being decentralized and distributed – two unique qualities that make it difficult, or even impossible, to regulate Bitcoin. Despite this, there is a compelling case for regulating cryptocurrencies like bitcoin, as highlighted below.
1. Countering illicit finance
Proponents of bitcoin regulation insist that the move would be a good thing for the industry’s longevity. In essence, regulation brings a layer of safety and security that makes crypto more accessible for those who would otherwise avoid the risks related to its adoption.
According to Founder and Principal of Capitol Peak Strategies Alex Zerden, “the entire digital asset ecosystem benefits from regulation by creating a fair and level playing field to promote responsible innovation while addressing key policy objectives like countering illicit finance, investor/consumer protection, market integrity, and other priorities.”
2. Attract financial institutions’ interest
Thanks to over-reliance on outdated systems, bureaucracy and regulatory restrictions regarding cross-border payments, banks have been extremely slow in adopting technological innovations like cryptocurrencies.
Furthermore, financial institutions need to understand how a new asset class like bitcoin operates clearly, and the risk factors associated with it before actively embracing and promoting it. Under present circumstances, this is impossible. These institutions cannot operate and create financial instruments in a market where they cannot clearly determine the origins and the long-term legality of the underlying assets.
Think of it this way. Suppose a bank sells Bitcoin to a client, which is later traced back to an exchange hack either before or after the transaction; the bank could find itself under criminal investigations or class-action lawsuits that could do more than damage its reputation.
3. Enhanced investor protection
Market manipulation or ‘spoofing’ and price volatility are common occurrences in the world of cryptocurrencies, according to a 2019 Bitwise Asset Management report. During a presentation to the SEC, Bitwise claimed that “95% of Bitcoin trading volume was fake and/or non-economic in nature” and that cryptocurrency exchanges purposely manipulated data to attract traders to their platforms.
Spoofing allows unscrupulous traders to artificially influence the price of a cryptocurrency by making large buy/sell orders without ever filling them. This tricks other investors into making trades since the price of the cryptocurrency will be adjusted accordingly.
With regulation, a watchdog, comprehensive information infrastructure in addition to financial advisors can be introduced to the ecosystem to help investors avoid such risks of manipulation.