Cryptocurrency has been one of the biggest disruptors in the financial world in recent years. While some people see cryptocurrency as a revolutionary new form of money, others have voiced their concerns about its validity. Despite the backlash, the growth and adoption of crypto have been staggering, to say the least, and as a result, governments around the world have somewhat begun to regulate cryptocurrency.
There is an ongoing debate about whether or not crypto regulations help with its adoption. Some people believe that regulations will stifle innovation and make it more difficult for people to use cryptocurrency. Others believe that regulations will provide much-needed protection for consumers and businesses alike and help with its adoption as it will finally be seen as legal tender with clear rules and guidelines for its use in the mainstream economy.
There are quite a few instances where companies operating in the digital asset market get caught up with law enforcement agencies. Coinbase and Binance, the two biggest names in the crypto space, are currently under heavy legal scrutiny by the US government for non-compliance with the law, with both sides, the government and the 2 companies, defending their own grounds.
So do regulations really help the crypto industry or do they make things more difficult? Let's see the two sides of this coin we call regulations.
/* The Good... */
<Protect Consumers>
Blockchain is a groundbreaking technology that supersedes the existing one in almost every avenue. But, like any financial institution, the crypto industry has also been subject to scams and fraud at the expense of honest users. Regulations can help to reduce these risks by requiring businesses that operate in this space to follow certain standards. One such example would be the need for ID verification of users using services such as trading platforms and exchanges to better protect customer experience and reduce scams.
<Prevent Criminal Activities>
With privacy and anonymity at its core, crypto decentralizes the existing system and gives users control of their funds. But due to this, it can be used to anonymously transfer large amounts of money, which makes it attractive to criminals.
Additionally, with no checks in place, there can be a higher chance of illicit activities within crypto companies that could jeopardize customers' assets. A clear exhibit is the infamous FTX collapse where the CEO, illegally used customers' assets to fund risky investments causing the company to file for bankruptcy and wiping billions from the crypto market in a matter of days with millions of customers losing their funds.
Proper regulations and checks can help avoid such instances and make the space safer to some degree.
By providing a clear and consistent regulatory framework, governments can encourage businesses to develop new products and services that use cryptocurrency and also integrate it into their existing businesses. As more people enter the space, the products and services crypto offers will likely diversify.
<Invoke Trust>
As crypto resides in a legal grey area in most countries, many people tend to shy away from its use as it can cause regulatory hurdles for businesses both big and small. Even businesses that want to use cryptocurrency in some form cannot do so as there is no clear legal framework in their regions of operations. With more structured and well-defined regulations such concerns would be elevated for a lot of interested users both for personal and business needs.
/* The Not So Good... */
<Stifle Innovation>
While some say that regulations would help crypto others argue that it would hinder its growth. The blockchain industry is still in its early stages and regulations could make it more difficult for new businesses to enter the market. Heavy taxes, expensive licenses, and complex reporting requirements could deter new entrants into the market and propel existing ones to exit.
<Discourage Use>
Referred by many as a catch-22 in the crypto space, regulations can very likely discourage people from using it. With ID checks, monitored transactions, heavy reporting, tax implications and to put it bluntly an inability of government organizations to understand the digital asset space to actually create regulations around it, seems to create more hurdles for the crypto space than actually making it smoother.
<It's Decentralised>
Blockchain by definition is decentralized, meaning that no central authority which controls it. So introducing regulations in such a space is a task that many governments seem to be struggling with. This seems to be the very argument that both Binance and Coinbase are making, stating that a sheer lack of clear regulations pertaining to the digital asset industry is what is causing problems for these companies and not the actual compliance.
Plus introducing regulations could very likely centralize this space by giving governments the power to manipulate it according to their will. There is a possibility that governments take control of the cryptocurrency market, which could be used to manipulate prices or censor transactions.
{Conclusion}
The debate about whether or not crypto regulations help with its adoption is likely to continue for some time. There are valid arguments on both sides of the issue. Ultimately, it is up to governments and businesses to decide how to balance the need for regulation with the need to protect innovation.
As the cryptocurrency industry matures, we can expect to see more regulations both in and against its favor. However, it is important to remember that regulation is not always a bad thing. Regulation can help to protect consumers and businesses, and it can also to some degree promote innovation.
This is a companion discussion topic for the original entry at https://insights.blockonomics.co/do-crypto-regulations-help-with-its-adoption/