How regulation can put an end to crypto’s Wild West

There’s an anonymous quote that circulates social media, often used to lament today’s ‘Age of Undiscovery’ and the drab lack of exploration, and excitement, within: “Born too late to explore the Earth, born too early to explore the galaxy.”

This may be true in the physical sense. Yet it’s easy to forget our generations are the first to navigate multiple revolutionary digital developments. First came the worldwide web, now well-regulated but previously a lawless ‘wild west’ in the 90s and early 00s. Soon we’ll leap into the metaverse, an immersive yet unpredictable virtual universe. But perhaps today’s most volatile digital breakthrough is the world of cryptocurrency.

Reminiscent of those pioneering early days of the internet, crypto organisations and users are relatively free from supervision and regulation. This freedom has resulted in a vast range of standards, currencies, and innovations, bringing booms in coin value and versatile trading abilities. But it’s also magnified the risks of fraud and crashes—with Bitcoin itself seeing its value more than halve in under a year. Crypto’s entry into the mainstream via this ‘decentralised control’ could cause the industry to burn out. Much like any newly-explored frontier, long-term progress requires regulation. But what does that journey look like? 

The involvement of legacy banks

Cryptocurrency and the blockchain typically operate via decentralisation. This means that control and decision-making are spread between a wide network of computers, rather than supervised by an individual, group, or organisation. And while decentralisation allows for unfettered innovation and user anonymity, it can leave crypto as a hotbed for speculation, scams, and market manipulation. Around 46,000 investors have cumulatively lost over $1bn to cyber criminals since the start of 2021.

Big banks do have the money to explore crypto, but the risks are currently too significant. The ever-changing ‘rules’ of the crypto game might make products and investments obsolete or require radical changes, which becomes overly costly. For example, privately-issued stablecoins, a cryptocurrency pegged to a fiat currency, still lack effective regulation. As a result, it’s often impossible to know what assets are backing these coins. With no tangible, tradeable assets, it becomes too precarious for banks to participate, and they would rather wait than shoulder unacceptable levels of risk. Ultimately, regulation is crucial to encourage investment and a safer ecosystem. But this requires accountability, and fast.

Who’s in charge of regulation?

Understanding what regulation can look like requires consideration of who is, or should be, responsible. Similar movements, such as open banking, often develop because governments drive requirements and adherence in their respective countries. In other instances, it’s been more of a market-led approach, with industry trade associations establishing protocols. 

Ironically, this type of regulation goes against the original decentralisation principles underpinning crypto. Some trading exchanges like Coinbase are already centralised, meaning they monitor transactions and secure assets on a trader’s behalf. But this also means that the exchange can impose its own unregulated rules and fees, often for profit. For the strongest consumer protections, federal or independent supervision will remain the most suitable approach.

Until recently, little has been agreed upon internationally or even regionally. In fact, some countries can’t even agree on how they classify crypto: in the US, the Commodity Futures Trading Commission considers bitcoin to be a 'commodity', while the Inland Revenue Service categorises it as ‘property’. But in 2022, we’re starting to see some important progress.

Looking to the future

Recent regulatory advancements, such as the EU’s markets in crypto-assets (MiCA) proposal and Japan’s law to regulate stablecoins for investor protection, show there is a growing appetite for industry clarity. Meanwhile, the UK has recently concluded a consultation into its regulatory approach to cryptoassets and stablecoins, and in September the US released its first-ever framework for American crypto regulation.

A continued lack of international cooperation means these country-by-country laws are all we’re likely to see for now. For many, this offers enormous potential for digital prosperity, particularly in emerging markets: Africa already boasts six countries within the top 20 for crypto adoption. Meanwhile, some countries’ central banks are issuing digital currencies (CBDCs) to enable faster monetary policy changes and a clearer view of overall financial health. CBDCs will slash the costs of moving fiat currency between banks, companies, and consumers. However, progress is slow.

Ultimately, we still need worldwide collaboration. The International Monetary Fund is calling for a global response that is: ‘(1) coordinated, so it can fill the regulatory gaps that arise from inherently cross-sector and cross-border issuance and ensure a level playing field; (2) consistent, so it aligns with mainstream regulatory approaches across the activity and risk spectrum; and (3) comprehensive, so it covers all actors and all aspects of the crypto ecosystem.’

Some traders might feel perturbed by this clamour for supervision. But just because regulation is required doesn’t mean this brave new cryptocurrency world can’t still be exciting. It’s simply up to us early pioneers to set the rules and standards that enable equality, security, innovation, and prosperity for all. If a pre-defined, universal policy emerges, we’ll see wider opportunities for global commerce. Then, our missing out on the physical exploration of Earth and space may no longer matter. After all, concurrent developments like crypto and the metaverse mean we can proudly say we were just in time to spearhead history’s greatest virtual revolution.