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Challenges and Opportunities in Regulating Cryptocurrencies

by internationaldirector

By Diana Bailey, Columnist, International Director


When the first cryptocurrencies, such as bitcoin, started gaining traction, many banks initially dismissed them as virtual assets with no intrinsic value. Today, requests from clients have changed the minds of some of those banks, such as Goldman Sachs. Based on those requests, Goldman Sachs decided to start offering various contracts with bitcoin exposure. Even when executives were not true believers in the cryptocurrency, the bank did say that bitcoin was not a fraud. Many banks are likely to follow Goldman Sachs in its endeavors to start trading bitcoin. Cryptocurrencies are not going anywhere anytime soon, and there is a need for effective measures by governments to harness their positive impacts and keep their negative effects at bay.

Bold predictions about bitcoin

The demand for cryptocurrencies is not likely to fade soon. Despite recent times of illiquidity in major cryptocurrencies–such as bitcoin, ethereum and ripple—upswings in liquidity can follow, and trading volumes can increase. And even after the price of bitcoin did reach almost 20,000 and then crashed to below 8,000 in value, some major financial institutions still have made bold predictions about where its price is heading—some institutions expect the currency to go way above the 20,000 level.

The need for regulation is increasing.

Optimistic forecasts still have met with concerns, however, as recent reports by experts have indicated that the rise in the bitcoin price was in large part due to price manipulation. The manipulation was done indirectly via tether, a cryptocurrency that is pegged to the dollar. Data extracted from the blockchain showed that interventions in the tether price followed a decline in bitcoin prices, for the purpose of lifting it up. Those interventions were effective in increasing the bitcoin price, although they were carried out in another cryptocurrency as the effect was transferred through the bitcoin/tether exchange rate. The findings of the study clearly show that there is a need for more regulation of cryptocurrency markets in order to detect any unlawful interventions that would undermine them as free markets.

Even more significantly, the major cryptocurrency exchange Coincheck was hacked in February of this year. As a result, the exchange suffered from massive losses, estimated to be at $425 million in NEM tokens. This incident, and other high-impact hacks and data breaches, prompted the Japanese government to crack down on exchanges and impose stricter rules in order to protect investors’ security. This quick response made Japan the first nation to regulate cryptocurrency exchanges at the national level. Today, exchanges are required to register with regulatory authorities to be able to perform their operations.

Other countries followed suit, with the Financial Conduct Authority (FCA) also requesting information about security gaps and cryptocurrency storage from exchanges, and saying it would conduct proper investigations into system risks.

But the race is still in its beginnings. Governments’ tools for regulating exchanges and protecting investors in cryptocurrencies are still too old for such recent assets. Governments need to do more, not only in terms of protecting investors but also maintaining social security, as cryptocurrencies can be a haven for money-launderers and a means for criminals to carry out unlawful transactions.

Challenges in regulating cryptocurrencies

Regulating cryptocurrencies is associated with a host of new challenges that are not experienced with normal fiat currencies. The challenges stem from the fact that cryptocurrencies are mostly decentralized and fall under the umbrella of “no regulatory authority”, and that cryptocurrencies are only semi-transparent (transactions are transparent, but parties can remain anonymous).

Moreover, one of the major issues in regulating cryptocurrencies is the different attitudes towards them. Japan, for example, legalized bitcoin in 2017 and even accepted it as a legitimate currency. South Korea is also positive in that regards, as it legalized cryptocurrency trading but banned anonymity. China is implementing regulations to hinder bitcoin’s growth, thus making it unpopular to trade there. The United States accepts cryptocurrencies if they meet certain conditions and pass certain tests. Canada also has a positive stance on the issue, as it recognizes bitcoin as a commodity, while ensuring the currency is not used for money-laundering. But the number of countries in which bitcoin is banned or is scheduled to be banned remains large. Such lack of global coordination in regards to a stance towards cryptocurrencies is causing further problems, constraining liquidity and preventing any meaningful growth in the markets.

Those challenges do not mean that cryptocurrencies cannot be regulated. Rather, they mean that the approach to regulating them should be different.

The opportunities

Although regulating cryptocurrencies may require effort, and even innovation, on the part of governments (an area in which they consistently underperform), it does carry with it lots of opportunities. The benefits of regulating such currencies are not only economic, but they can also entail the welfare of societies. This is true for developed and developing countries alike. As economies move slowly away from cash towards digital payment methods, cryptocurrencies are bound to gain popularity over the long-term—this may not apply to all cryptocurrencies but is still a valid assumption. Such large adoption decreases costs and increases efficiency of transactions.

Many African countries are already using cryptocurrencies as solutions to their international payment needs. Zimbabweans are sending transfers to their families from abroad using bitcoin to counter the hyperinflation in the country. People from other countries are using peer-to-peer transfer apps for the same purpose. The trend may continue, with people moving towards the first century’s version of money, and regulating this area offers great surpluses to societies and the world at large due to sizable efficiency gains.


While the debate remains alive regarding the advantages and disadvantages of cryptocurrencies such as bitcoin, there is more agreement on the advantages of the technology behind them: the blockchain. This technology has a disruptive effect on most industries, and regulating it on a global scale can be the starting point for regulating cryptocurrencies. The need for regulating cryptocurrencies is pressing, not only to protect investors’ security but also for the welfare of societies.

There is also a need for adaptability; with the proliferation of cryptocurrencies, the current monetary-policy tools used by central banks will become obsolete. The first step towards regulating those currencies would be to develop more advanced economic models and legal frameworks that can capture their sophistication and tackle their risks.


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