Regulators, from the US to the UK, are moving fast to bring some sunshine to the cryptocurrency market, encouraging investor confidence and more institutional participation through positive, progressive regulatory changes.

For example, it will probably flip digital assets to commodities, ruling that people did not mislead anyone about them, and finding that digital assets are not securities but another way to trade underlying commodities. That aggressive horsecollar will have repercussions. If the Commodities Future Trading Commission successfully declares digital assets commodities, investors will be better protected.

Boosting Investor Protection

But because of wild volatility, repeated security breaches and hacks, and the conviction of the former founder of the FTX and Terra Luna exchanges, Sam Bankman-Fried, on fraud charges, many potential investors have become spooked by the inhomogeneous security surrounding most cryptocurrency assets. Managers of other regulated investment products can centralise or outsource their back-office operations to specialised service providers that support large numbers of customers, which makes AML prevention easier. Gary Gensler of MIT Sloan finance argues that regulators can help to build investor trust by focusing on consumer education and frontloading demanding cybersecurity, AML and market surveillance regulation.

Regulators have to decide whether to rely on old regulations or develop new ones tailored to crypto markets. Relying on existing laws would accelerate the regulation of the market but may lead to unfair rules. Conversely, developing new ones would ensure more precise standards but would also be more time and resource expensive.

Global co-ordination challenges undermine attempts to create an appropriate regulatory regime – but it is necessary. Without the careful oversight and stable predictability that an appropriate regulatory regime provides, the crypto-asset ecosystem will likely stagnate and innovation will be stifled. Regulators, industry participants and stakeholders must continue their dialogue to explore all the twists and turns, and navigate their way through.

Increasing Market Stability

Some of these actions involve regulation to improve market stability such as bans, tighter rules and more protection for investors. This also should help develop trust from the investors because they know their rights, which would reduce illegal activities such as fraud, money laundering and terrorist financing, and other malpractices. At the same time, heavy restrictions will be an impediment to development and growth so, perhaps, the best approach is finding balance between security and free enterprise.

Companies can use consumer protection and disseminating reliable information about their products as the basis for their businesses and gain the upside from regulation by enhancing credibility and trust in their brand and helping to maintain a healthy marketplace. Businesses should familiarise themselves with developments on the regulatory front, adjust their strategies accordingly and actively engage within industry associations to advocate for more supportive policies. Regulation can either accelerate or hinder the development of cryptocurrencies; either way, it will always have an impact on the market in some way. Digital assets are volatile and grasping market volatility is a key competitive edge in digital asset success. The rollercoaster of cryptocurrency regulations has veered between periods of mistrust rising to hype and an excessively permissive regulatory climate, before eventually entering a standardisation phase in which society generally embraces it.

Incorporating Cryptocurrencies into Conventional Financial Institutions

Allowing cryptocurrency to be traded through legacy financial platforms comes with many benefits for investors, such as increased customer protection, gains in reputation and acceptance by markets, and compliance checkpoints along the way. Businesses should get compliance off on the right foot by requiring know-your-customer processes and trade-surveillance technologies to shut down illicit activity or, where necessary, utilise privacy-enhancing technologies such as zero-knowledge proofs to keep customer data private while being transparent with regulators.

Cryptocurrency risks for investors can be minimised through regulatory changes, including setting rules about the oversight of fiduciaries, and mandating platforms to follow anti-money laundering (AML) and countering financing of terrorism (CFT) protocols. Law enforcement can be supported by providing regulators with knowledge about suspicious transactions that could be illegal. This would reduce investor fears related to predatory management practices, and help detect and prevent market manipulation.

Deregulation can be a boon and stymie business just as regulators’ anxiety or priorities loom regulatory uncertainties and delays in the arrival of authoritative regulations could trigger sudden price shocks, especially if governmental announcements such as those of China’s crypto activity ban of 2017 cause jolts to the crypto-verse. Thus, businesses operating here need a regtech flying squad to maintain compliance.

Increasing Market Consolidation

And, with the proposed approval of Bitcoin ETFs and the growing regulatory oversight, we’ve also seen an increase in market concentration, as institutional players enter the crypto market and drive prices up. This could eventually lead to a more stable market that provides less volatility for investors, and make crypto assets more appealing to traditional finance.

The third step involves strict enactment of anti-market manipulation rules and high degree of operational surveillance, which would reduce the probability of excessive price volatility, and also promote confidence among investors, who are essentially on the conservative side, to enter the market, which would expand liquidity.

And regulations can help consumers by requiring businesses to maintain transparent disclosures and to have identification processes to verify customers, helping to limit money laundering, fraud, regulatory arbitrage (when businesses shift in-country operations to less regulated locations to avoid having to comply) and consumer fraud. Developing coordinated schemes with foreign governments would encourage compliant conditions within crypto industries through global regulatory collaboration.

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