Can the Crypto Space Survive without Regulators? Are Regulators Good or Bad For Crypto?

Financial regulators, commonly referred to as watchdogs, are systems set nationally and internationally to help control and ensure the financial world is reliable. It’s the fundamental duty of these watchdogs to develop policies that help in protecting the citizens from any financial dangers. Globally, watchdogs, including SEC, FCA, among others, have always sought to regulate crypto. However, there’s one problem: cryptos were never supposed to be a regulated entity. 

In the past years, many top financial analysts have demanded more regulations within the crypto space. The question is, why? Additionally, do cryptocurrencies need regulation? Also, is this regulation a good or bad thing for them? Keep reading as we look into how the calls for crypto regulations started and if they’re dispensable.

Governments Call for Crypto Regulation

After crypto started getting popular, investors, financial experts, and governments began calling for more regulations in the crypto industry. However, at first, most of these nations did not grasp the concept of how cryptocurrencies operate. Also, there were inconsistencies in how different governments classified crypto assets. 

Consequently, regulating bodies for consumer protection, payment systems, and businesses went into deep research on virtual currencies. Several questions guided them in that research. For instance, were they currencies or investment assets? Their lack of understanding drove them to push for more regulations in the crypto industry.

Authorities have consistently cited the following reasons for calling for heightened regulation of crypto assets:

To Protect the Consumers

In the early years of crypto existence, governments deemed most crypto assets, including Bitcoin, as some financial scam. As a result, investors and expert analysts had issued warnings on most cryptocurrencies. In fact, for good measure, they introduced AML and KYC requirements to protect users from scams and illegalities.

Already there have been several scams connected to crypto in the past decade. Prominent among them include: 

  • The Onecoin Ponzi scam. Although authorities have not yet figured out the full extent of loss, estimates are that unsuspecting investors lost tens of billions. 
  • The Bitconnect Ponzi scam, created in 2016 and shut down in 2017, is considered the second biggest crypto scam. This scam got away with over $4 billion in investor money. 
  • The most recent scam is the Africrypt bitcoin scam which stole $3 billion in consumer money.  

Curbing Money Laundering and Terrorist Financing

Another reason why cryptos have required regulatory control is their increased use in illegal activities. According to experts, cryptos are private and anonymous assets whose transactions are difficult to trace. For example, Zcash, Monero, and Dash have unique privacy features that hide the transacting parties’ identities.  

Due to privacy, these assets are easy to use for laundering and illegal activities. There have been cases where kidnappers have demanded Bitcoin as ransom. Others started switching from using Bitcoin and focused on the privacy assets like Monero. The use of crypto in such illegal activities has been a significant cause for calls to regulate more. 

The US Senate has always been fighting for more crypto regulation because it’s prone to money laundering risks. 

To Trace The Revenue

The third and final reason governments have been calling for more crypto regulations is to trace the actual revenue they generate in a country. Unfortunately, due to their anonymity factor, it’s hard to trace the transactions and values related to crypto-assets. 

Therefore, governments could be collecting amounts that are much less than what they are supposed to. For that reason, the US treasury set new regulations requiring crypto exchanges to report any transactions surpassing $10k. Analysts estimate that this new rule will increase the US revenue by $700 billion in the next decade. 

Does Crypto Need Regulating?

Looking at those problems that most governments note, it’s safe to conclude that crypto needs some regulation. Generally, investor protection should always come first in any business start-up, and the calls aim to protect investors. 

Moreover, the calls for more regulations help increase the national wealth since nations will collect more tax annually. Some investors may use crypto to hide their actual income, thus vastly reducing the average tax collected by the government. Therefore, by regulating crypto, governments will be able to protect investors and also the national coffers. 

There are also some benefits of crypto regulations to the crypto world, including;

  • Increased investors’ trust- Once people notice that cryptos are adequately regulated, investors will now trust assets like Bitcoin because of the legal backup. If governments set more reasonable regulations, there will be an increase in the adoption of crypto, sending the currencies mainstream. Merchants will also be ready to accept crypto payments.
  • Increased use by governments- Once governments regulate the assets, they will regularly use them in their international trade. Such will help in disaster management, accelerating high-profile transactions, etc. 

Why Government Regulation Could Be Bad For Crypto

Although crypto regulation would have some positive consequences for the crypto space, it has its bad and ugly sides. So what’s the wrong side of crypto regulation?

Centralization or Decentralization?

It’s not a secret that the fundamentals behind creating the first crypto, Bitcoin, was to ensure true decentralization in the financial networks. Generally, everyone using the coin would have absolute control over their finances, and they’d complete their payments quickly, without going through intermediaries. 

Of course, there are some centralization factors, especially with large firms controlling most of the mining process. However, if governments start strictly regulating the crypto world, it’ll ultimately lose its decentralized nature.

Take, for instance, the government-issued digital Yuan by China. The central bank controls this asset, meaning it will fall under the interest and tax laws of the country. Similarly, if one international body would regulate crypto, then crypto will no longer be decentralized. 

What’s the effect of a lack of decentralization in crypto, then? Mainly, crypto enthusiasts will lose interest in the same. Therefore, as new investors come in, more experienced ones could exit the space simultaneously. 

Lost Privacy

Individual and financial privacy is one of the basic needs of every human today. However, although transparency is essential, the same has many risks, like in the Bitcoin public ledger system.  

Charles Lee, the Litecoin founder, once mentioned that although Bitcoins and Litecoin are considered fungible, they are not utterly fungible. He explained that someone might receive Bitcoin in their wallet, and it’s banned because it was involved in some ‘dark market.’ Such is not at all suitable for crypto and may lead investors to lose trust in crypto. 

If the governments ultimately involve themselves in the crypto world, privacy will end, and investors will quit. 

May Utterly Kill Crypto

Let’s face it, the goal of other governments to call for more crypto regulations is to kill crypto entirely. Once more governments control the asset, it could be easier to ban the currencies and operations. 

China is currently our leading example. This whole year, the country has been so focused on killing Bitcoin operations that some analysts already predict that the government is banning crypto. In fact, because of the ban, the country is blamed for the 2021 crypto crash. However, there are still uncertainties on how long the ban will last. 

Final Verdict

Is regulation needed in the crypto world? Yes and No; there is both an upside and a downside to the regulation of crypto. Since cryptos still lack investors’ confidence and are associated with criminal activities, industry regulation could increase trust and adoption. Furthermore, once regulated, more governments will also use the assets in international transactions and large transfers. 

However, the downside is that they’ll lose their decentralized aspects, which was the primary reason for their creation. Additionally, there will be no consumer privacy which will lead to loss of investors, and in some instances, governments may end up banning crypto. 

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It’s still possible for governments to accept the use of crypto only by instituting very few fundamental KYC and AML requirements. The case of El-Salvador, who made bitcoin their native currency, is an excellent example of acceptance of crypto with fair regulations. Hopefully, more will join in this race without focusing too much on killing the fundamentals of crypto. 

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