Investors know what to expect when dealing with regulated financial markets like the stock market. There are laws that companies must adhere to when going public and allowing the general public to purchase company stock; typically, these regulations protect investors from fraud and alleviate money laundering. Similarly, investors must adhere to specific regulations in line with traditional financial policies set by the government.
The case is different for cryptocurrency; the space is unregulated, and anyone can participate; any company can raise funds via ICOs, IDOs, and IEOs, without necessarily complying with traditional finance rules. Also, investors aren’t limited or audited; it is a totally free reign that allows people to enjoy access to investments without gatekeeping or restrictions.
Generally, the Unique Value Proposition (UVP) of cryptocurrencies, from the first ever – Bitcoin, is the ability to carry out peer-to-peer, permissionless, and borderless transactions without regulations from government bodies, financial organizations, or any third party. Transacting with cryptocurrency allows some level of privacy and automation, and this has rapidly attracted investors. However, due to the recent hacks, scams, and other unfortunate events within the crypto space, where hardly anyone is held responsible, some experts call for regulations in the crypto industry.
Pro-regulation advocates argue that regulation will make the technology easily adopted by many mainstream businesses and consumers since everyone is aware of a law guiding all transactions. However, anti-regulation advocates maintain that regulation in cryptocurrencies is against everything blockchain technology represents. This article aims to compare the pros and cons of regulating cryptocurrency and determine if regulation is really worth it.
Crypto regulation: The pros and cons
The foremost argument in favor of crypto regulation is the amount of equity a seal of approval will bring. Of course, if regulated, major world governments would legalize cryptocurrency, and this eventuality will move the industry to the next level as potential investors who have taken a back step due to the unregulated nature of the industry would be more than happy to step in.
Another common argument that is a major driving force for experts demanding industry regulation is the prevalence of scams and fraudulent activities in cryptocurrency. Despite being around for almost a decade and a half, frequent stories of fraudulent activities keep increasing; in fact, the industry has recorded more losses in 2022 than in 2020 and 2021 combined. Worse still, many perpetrators are left unprosecuted due to insufficient information to pin these attacks on specific individuals.
Perhaps, one undeniable worry about the lack of regulation in the crypto industry is how it has given room for criminal operation. Despite the stringent Anti-money Laundering (AML) regulations imposed on Centralized Exchanges, malicious users have found loopholes to use cryptocurrency to launder illicit gains or evade taxes; in fact, the U.S. government fears that cryptocurrency may be used in financing terrorism. Moreover, due to the semi-anonymous nature of blockchain transactions, it is very probable that cryptocurrency is being used to sponsor criminal activities, which is a huge global concern.
Despite the many arguments in favor of regulation, many tech experts kick against the idea, claiming that it will kill the Unique value presented by cryptocurrency, which will kill the technology rapidly. Indeed, the irresponsibility of the traditional financial system led to the global recession in 2008, and Satoshi Nakamoto created Bitcoin to prevent future occurrences.
Investment experts also claim that investing in cryptocurrency is easier and without bias, unlike traditional investments that may be gatekept and only open to high-net-worth individuals. No special application is required to participate in a cryptocurrency’s ICO, and all users have equal opportunity to get whitelisted or purchase early tokens, unlike a traditional IPO. Investment experts argue that regulating the crypto industry will remove this equality and take several steps backward.
Should Cryptocurrency Be Regulated?
Both ends of the divide have plausible arguments as to why cryptocurrency should be regulated or not. However, given the permissionless nature of blockchain technology and the problems it seeks to solve, regulation could destroy the entire industry and turn the promise of Web 3.0 into a mirage. Hence, a middle ground should exist that protects investors, maintains anonymity and privacy, and reduces illicit use of blockchain technology to the barest minimum.
Crypto and DeFi projects are encouraged to practice self-regulation within the governance body of each blockchain to protect investors without interfering with the permissionless nature of the blockchain; this would reduce the impacts of illegal and fraudulent activities on the blockchain, making them lucrative enough for investors. Government bodies are urged to look in the other direction, as trying to regulate a novel technology without fully understanding it could jeopardize it entirely.