Regulation, as much as innovation, will shape digital finance in the years ahead. Whether it will stall or support its continuing development is on the mind of every crypto trader and investor.
Part 1 of this two-part series surveyed some of the varying regulatory regimes around the world. This article, part 2, looks at past precedence and recent developments to show how regulation may ultimately bring about wider crypto adoption.
To examine the possible correlation between fast-evolving crypto regulations and the global adoption of cryptocurrencies, we start by looking at key trends that might share some clues. The number of Bitcoin wallets grew from one million in January 2014 to more than 66 million in January 2021, according to Statista.
Just in 2021, the total number of wallets grew significantly, to over 75 million in August 2021. This number comes from the most common crypto wallet apps and exchanges, such as Coinbase, Blockchain Wallet, Crypto.com, and Binance.
Meanwhile, Triple A estimates the number of cryptocurrency owners to be more than 300 million worldwide, and over 18,000 businesses are accepting digital assets as a means of payment.
The growth is exponential: between 2018 and 2020, there was a 190% increase in wallets. Bitcoin’s adoption is especially notable, growing at a rate comparable to internet adoption in its early stages, and it is estimated that Bitcoin users will grow to over 1 billion in the next four years.
Emerging from Infancy
When Bitcoin was created in 2009, it became a means for transferring value, which also made it appealing to the black market due to its anonymous nature. As the first cryptocurrency ever created, it drew much controversy in the initial stages, as no central authority had any control over it.
However, to state that crypto is being used for criminal activity is to feed a misperception. Between 2% and 5% of global GDP ($1.6 trillion to $4 trillion) is connected to criminal activities compared to only 0.34% ($10.0 billion in transaction volume) of the total crypto activity in 2020.
The digital assets industry is still in its infancy, but in 2021 major companies such as AMC, PayPal, Square, and Tesla started accepting Bitcoin payments and even investing in the crypto market. Other big names, including Amazon and Walmart, have started looking for cryptocurrency and blockchain experts.
As more countries implement cryptocurrency regulations, end consumers can benefit from owning digital assets with the primary goal of wealth accumulation. But collectively, they also play a part in bridging the current and future financial industry. It will likely take longer to use crypto for day-to-day expenses, but new digital initiatives are being explored by several economies, both large and small.
Setting the Framework — and Fueling Momentum?
The US government took note of the Chinese e-Yuan experiment and is currently testing its own digital dollar called FedCoin, a cross-product between Apple Pay and Venmo. As a Central Bank Digital Currency (CBDC), Fedcoin has the potential to aid the unbanked sector of the population and offer various advantages, such as speed and lower transaction costs.
Without a doubt, the entire world is turning digital. The Covid-19 pandemic since 2020 has overall helped to accelerate an obvious inclination towards digitization. Even established financial services launched services that support cryptocurrencies. As of 2020, PayPal allowed its users to buy, sell and hold cryptocurrency.
The Bank for International Settlements (BIS) is an international financial organization that aims to promote global financial stability by coordinating the efforts of global central banks. It is regarded as the bankers’ bank, as it provides gold and foreign exchange transactions and acts as a fund manager for international financial institutions.
In May 2021, the BIS released a report stating that retaining governments’ monetary independence can only be done by offering central bank digital currency (CBDC).
The BIS’s recommendations showed foresight, not least of all urging all Central Banks to start researching CBDCs. It recognizes that digital assets will be able to provide innovative services and specialized features that can make them more appealing than traditional fiat. Furthermore, less usage of fiat and the reduced role of traditional central banks are a threat to global economies.
We’ve Been Here Before
As the industry continues to grow, there’s an increasing interest in developing stablecoins, each being a cryptocurrency backed by a regulated asset providing price stability. But this is not a new idea. For almost a century, until 1971, the US dollar was backed by gold.
The US monetary system had a direct link between the US dollar value and gold. That meant it held a certain gold supply, and that the US dollar could be exchanged for a quantity of gold. The gold standard would keep inflation and overspending in check.
As the economy grew faster than the global gold reserve did, the link between the monetary system and gold was terminated. Currently, no country holds a gold reserve to back up its national currency, and this is the fiat monetary system we are used to.
Similar in theory to the gold-pegged US dollar, stablecoins are pegged to fiat currencies or even silver or gold. And similar to the gold standard, many see cryptocurrency’s role as a store of wealth.
So what happened to gold? Well, it became a highly regulated asset around the globe.
Gold can be traded as a good and the various stages from mining to production are subject to taxation, to ensure responsible exploitation and a trustworthy investors’ market. This development can spark an idea of what the future may hold for cryptocurrencies.
From the perspective of storing value, some see Bitcoin as similar to gold and compare Ethereum to silver. Much like precious metals, they can be used for trading and investment.
Gaps in the System and How Crypto Can Fill Them
No matter where you live in the world, you live in a fiat economy, governed or strongly influenced by the US dollar, the Euro in the European Union, or the Yuan in China.
The purpose of central banks is to steer the economy away from (or through) a financial crisis, regulating the money supply available to the population and other foreign central banks. In short, it assures as much stability as possible to the national currency.
But central banks can also lead economies far into dreadful scenarios, from which recovery can be nearly impossible. A recent example is the situation in Venezuela, which entered hyperinflation in 2013 and has been in an economic collapse ever since.
Among the many lessons is that the current financial system is only as good as the people overseeing it. When personal interests and mismanagement interfere with the system, the results can be disastrous. But there is a way to avoid all this in the future.
Into the Light and Transparency
You already know about Bitcoin, the killer application that made blockchain technology famous. But the underlying technology is what gives the hope that one day the manipulation of any one financial system will become obsolete.
The advantages of adopting a blockchain-based currency are easy to acknowledge when it comes to the transparency of the transactions.
The main benefactors are the consumers. The decentralized network offers transparent and immutable transactions at a much lower cost than the current banking system. What’s more, there is no central authority overlooking transactions as the network has to reach a consensus to approve a transaction on the blockchain.
Another key difference between the two systems — the traditional financial and digital financial — is the latter’s security and anonymity afforded to each user when they use the blockchain platform.
A Regulated Market is a Safe Market
Regulating cryptocurrency might look counterintuitive to the libertarian community and supporters of the technology who may see it as an on-coming dark cloud on the horizon. But regulations also convey endorsements from institutions, and that could bring more use cases to the everyday crypto user.
A regulated digital financial market is a safe place for financial institutions to offer services in the crypto space, provide lending solutions and become an overall complementary market for the traditional financial system.
However, in the case of cryptocurrency exchanges, most of them have a threshold for withdrawals that will require their users to complete the KYC identity verification, to mitigate money laundering and terrorism financing risks — or better known as AML (anti-money laundering) and CFT (combatting the financing of terrorism) in the global regulatory environment.
Regulations are meant to keep the economic system in balance, providing more stability to an otherwise volatile market, which will be able to filter out malicious crypto projects.
Regulatory Touch Points and Impact
The impact of fast-evolving regulations is being felt across various areas of the entire crypto ecosystem. Cryptocurrency owners are required to declare their funds and pay tax just as one would for any other capital asset. For instance, South Korea will have a 20% tax for crypto gains starting from 2022. The US and the EU have already issued amendments regarding how crypto will be taxed. In addition, startups that plan to have an ICO must obtain a license that establishes the prerequisite framework for securities offerings.
Cryptocurrency exchanges are also prominent targets of these regulations and are required to have IT compliance checks, fulfill capital requirements, and be KYC compliant. More and more exchanges are working with regulatory authorities to ensure the lawful compliance of their services.
But many do not. For example, Binance is one of the largest global crypto exchanges to operate outside of key jurisdictions. While known for its largely decentralized organizational nature — with no headquarters and no official office — it has recently attracted attention from multiple regulators. The UK banned Binance, while Japan, Italy, and Canada issued warnings to signal its lack of authority to operate in those countries. The exchange significantly scaled back its services to users in Singapore to comply with local market standards set by the Monetary Authority of Singapore.
Certainly, there are several crypto exchanges that have implemented AML controls and KYC processes, in order to reinforce account security and prevent illicit transactions. Coinbase, BTSE, and Gemini are just a few examples of global exchanges strengthening user onboarding controls and transaction monitoring to ensure greater compliance standards are met.
A Way Towards Wider Adoption
Cryptocurrency is considered to have value by governments around the world, even if it is not a legal tender anywhere except El Salvador, for now. A few other countries, including Panama and Ukraine, may follow closely behind, with legislative processes pointing towards making Bitcoin a legal tender.
Stocks and other assets are not legal tenders either, but they have value; governments are taxing them and there are financial organizations that are auditing and regulating them. And as capital gains, profits are being taxed, just like for any other means of storing wealth.
However, markets in practice have historically served to point out flaws in legislation that have led to new or amended regulations. Owning assets has always been a driver in our economy and lives, and technology is here to support a system that has proved to have cracks.
Regulating cryptocurrencies is a powerful means to attract the big players to the new era of digital assets — it already has, in fact. Crypto investing, lending, payments and a growing range of other cryptocurrency transactions are secure financial operations when performed in regulated environments.
At the same time, a transparent and regulated crypto market could become an extension of the current financial system. This can also help attract new users to the crypto world, create wealth and open a new realm of financial services and innovations for both individuals and institutions. The undeniable movement gathering towards digital finance is fast and fast-evolving, posing a challenge for governments to keep up. The process of modifying or re-shaping a new financial system to better serve society’s needs will also serve to legitimize, at least, and even foster the digital financial transformation already underway.
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