It’s certainly been a wild ride recently for anyone involved in the trading of bitcoin and other cryptocurrencies. The aggregate market cap of all digital currencies in circulation recently touched an all-time high exceeding $170 billion, a result of the market’s meteoric rise in just a few months. Almost as dramatic, though, were the steep declines that followed, in part due to negative comments by leading market figures and intervention efforts by authorities.
Volatility has truly been mind-blowing. Bitcoin, the market bellwether which accounts for more than two-thirds of all digital currency trading, was only worth around $250 on average for most of 2015. A few weeks ago, it breached the $5,000 level and, despite having fallen sharply since, it still hovers around $4,000; that’s an impressive sixteen-fold rise in its value in a mere couple of years.
Global Trend Towards Cryptocurrency Regulation
These wild price swings are proof that the market needs to be regulated, according to Bart Chilton, the former chair of the US Commodity Futures Trading Commission. In a recent op-ed for CNBC, Chilton described the lack of bitcoin regulation in the US as a “big blind spot” for the digital currency.
Chilton isn’t alone in voicing this view. Calls for a push towards developing a regulatory framework around the use of cryptocurrencies are growing, and they aren’t confined to the US.
Japan, traditionally at the forefront of developments relating to the digital currencies market, will start monitoring all cryptocurrency exchanges operating in the country as of next month. It will be the task of a newly-formed, specialised surveillance unit set up by its Financial Services Agency (FSA). The move follows a bill, passed earlier this year, which established the operational standards to be followed by these exchanges. The bill also recognized bitcoin as a form of legal tender for the first time.
Australia isn’t far behind. Back in August, its government proposed a set of reforms with the aim of bringing the supervision of its digital currency exchanges under the umbrella of the Australian Transactions and Reporting Analysis Centre (AUSTRAC), the country’s financial intelligence agency responsible for monitoring money laundering, terrorism financing and tax evasion.
And the list doesn’t stop there. Indeed, a growing number of countries have started drafting relevant legislation for their jurisdictions. Mexico recently proposed a bill to regulate companies which interact with bitcoin and other cryptocurrencies. A similar announcement was made by the Gibraltar Financial Services Commission, the financial watchdog for the British Overseas Territory. Bank Negara, the Malaysian central bank, is reportedly about to publish its own guidelines on cryptocurrencies, despite having warned against investing in them a mere two weeks ago.
What Might Regulation Look Like?
Actual control of cryptocurrencies by any given body is next to impossible, since they operate in a decentralized system. Instead, authorities around the world are focusing their efforts on regulating exchanges and other companies associated with the trading and use of cryptocurrencies. The target is to ensure these organizations comply with Anti-Money Laundering (AML) rules and the Know Your Customer (KYC) process, which ensures a proper identification and verification of a company’s clients.
The Argument for Regulation
Because of the relative anonymity they offer, dealings in bitcoin and other cryptocurrencies have traditionally been linked to illegal financial activities, such as money laundering and tax evasion, a view that’s often highlighted by market authorities worldwide. In a recent conference, Norman Chan Tak-lam, CEO of the Hong Kong Monetary Authority (HKMA), issued a stark warning to the banks and financial institutions the country’s regulatory body oversees, not to breach AML requirements while trading bitcoin and other digital currencies.
Those in favour of introducing some form of regulation to the market argue that doing so will limit illegal activities, while also protecting the general public and market participants as a whole. This in turn will help build confidence and bring stability to the market.
Aurélien Menant, founder and CEO of Hong Kong digital currency exchange Gatecoin, is squarely in this camp. “Compliance with AUSTRAC policies will weed out the crooks and ensure that only serious bitcoin businesses are able to serve the market”, he told CNBC, welcoming the recent Australian reforms.
Regulation as an Opportunity
For some countries, setting up a regulatory framework for digital currencies may well present an opportunity. One such example could be the UK, which has so far kept a neutral, “wait and see” stance on the issue; bitcoin is legal but unregulated. Dr Bob Swarup, a principal at Camdor Global Advisors, believes that a post-Brexit Britain could reposition itself as a hub for digital currency trading.
Russia, which is putting a bill forward next month to regulate cryptocurrency trading, is another case in point. Anatoly Aksakov, Chairman of the State Duma Committee on Financial Markets, is eyeing the sector with close interest. He recently proposed a pilot programme involving the trading of bitcoin on Russian exchanges. Aksakov believes that opening this market may make possible the circumvention of current sanctions against potential investors in Russian projects.
China’s More Aggressive Stance
And then, there’s the more aggressive stance, such as that applied by China, which has enforced strict limits, temporary halts and even outright bans in certain segments of the cryptocurrency market. In early February, it imposed a freeze on withdrawals from the cryptocurrency exchanges operating in its territory, a surprise action which caused a stir in the market.
The withdrawals freeze was eventually lifted in May, after China’s central bank was satisfied that its digital currency exchanges were adequately scrutinising their clients. But this wouldn’t be the country’s last intervention in the cryptocurrency space. Earlier this month, the Chinese announced a ban on initial coin offerings (ICO), the novel way of fundraising through digital currencies, effectively shutting the financing door for many local startups.
The Lesser of Two Evils?
Indeed, many are pointing to this type of aggressive approach, to support the need for proper regulation in the market. The concern is that the longer the regulatory framework takes to be applied, the greater the danger that there will be overreactions, such as in the Chinese examples earlier this year.
Finally, regulation is also considered by some as a necessary form of maturing for the cryptocurrency market. “If Bitcoin was going to become any kind of valid currency with widespread appeal, then it really needed to grow up and growing up in the currency world means accepting the influence of the state and regulation in some way”, Dr Swarup says.
In effect, with the increased focus cryptocurrencies have enjoyed in the last couple of years, some form of reaction by the authorities was perhaps to be expected. Despite opposition by the more traditional cryptocurrency visionaries, regulation may be the lesser of two evils.
In fact, many are encouraging the cryptocurrency community to take a lead in the efforts to introduce a regulatory framework to the market, rather than take a backseat and let the governments lead. “Rather than waiting for governments to take actions that thwart the development of digital currencies, they should lead efforts to put in place appropriate regulatory oversight for these new and innovative financial technologies”, former US Trade Commissioner Chilton says.
“Visionary leadership is needed. Without it, there’s a mounting risk that more and more governments will simply ban, or over-regulate, bitcoin and other digital currencies.”