Throughout the course of 2021, there has been a slew of indications that the age of “cryptoization” is set to befall upon us, with El Salvador having taken the unprecedented move to recognize Bitcoin as legal tender while on the commercial front, conglomerates such as PayPal and AMC Theaters are leading the way for crypto adoption by accepting certain cryptocurrencies as payment options.
In 2022, there is set to be even more tell-tale signs of the inception of the cryptoization era with more crypto-based businesses being projected to be going for public listings in the year ahead.
As the cryptoization trend forges ahead in 2022, crypto adoption is set to hit top gear, which would result in a greater need to regulate the crypto market. But even where crypto regulatory policies are introduced, they are often shrouded in ambivalence and tentativeness, lacking the courage of conviction and resulting in avoidable legal compliance conundrums and undue economic transaction costs.
Crypto regulation: the whys
In a recent report titled “Blockchain Analysis of the Bitcoin Market,” the U.S. National Bureau of Economic Research (NBER) noted that illegal transactions involving Bitcoin — which is the top cryptocurrency in terms of market capitalization and trading volume — accounted for just 3% of BTC’s on-chain trade volume. It can be surmised therefore that notwithstanding crypto’s bad rap for its vulnerability to being misused for illegal activities, that notion seems more hype than substance.
Perhaps the more pressing problem for the crypto industry is that of market manipulation — particularly by crypto whales — which leads to excessive fluctuations and volatility in the trading metrics of the crypto market. Although any financial investor worth their salt would know that ups and downs are very much part of any financial market, more so a nascent one such as the crypto market as it corrects itself in cyclical patterns in accordance with the prevalent degree of buying and selling pressure in the market, excessive volatility is never a good thing when it comes to ensuring the long term sustainable development of any financial market into a stable and mature one. Nonetheless, in line with the free market theory of modern-day capitalistic financial markets, it would be ironic if regulatory intervention was to be deployed specifically to curb the volatility of the crypto market that is very much part of the market’s early-stage growth and an essential phase in its development curve.
It is in this context that crypto education comes in to offer a solution to safeguard the interests of crypto investors, because at this juncture, most crypto investors are only familiar with the more popular cryptocurrencies — which is why it makes perfect sense for regulators to embark on education initiatives to increase crypto investors’ knowledge about other less well-known cryptocurrencies. Given the fact that one of the main objectives of regulatory intervention in financial markets is to protect investors, particularly retail ones, crypto education could reduce the need for such intervention in the crypto market by equipping crypto investors with the ultimate form of protection i.e. self-protection through the arming of these investors with the requisite know-how to enable them to look after their own interests in the topsy-turvy crypto market.
Crypto regulation: the don’ts
The “Regulation of Cryptocurrency Around the World: November 2021 Update” issued by the Global Legal Research Directorate (GLRD) of the Law Library of Congress noted that there are a total of 51 countries that have imposed an explicit or implicit ban in one form or another on cryptocurrency. Out of the nine countries that have placed outright bans on cryptocurrency, the one that made the most headlines is China, which had in September 2021 declared that all cryptocurrency activities including trading and mining were illegal.
Long story short, in a world where there are 1.7 billion unbanked adults of which 45% are from countries with emerging and developing economies (EMEs), cryptocurrencies offer themselves as silver bullets for the issue of financial exclusion whereby to shut the door on these currencies would be akin to shooting oneself in the foot.
Crypto regulation: the hows
In a recent blog post, the International Monetary Fund, after making the trite observation that “crypto’s cross-sector and cross-border remit limits the effectiveness of national approaches,” issued a clarion call that “global crypto regulation should be comprehensive, consistent and coordinated.”
Having been a pro-regulation crypto advocate in Indonesia since 2016, I couldn’t agree more with the IMF’s discussions in its blog post, though I have to say that at this point in time, the approaches of the regulators from countries around the world range widely from “wait and see” to selective regulation to total prohibition. In many ways, the divergence in the approaches towards crypto regulation by governments around the world is primarily due to the cross-border nature of cryptocurrencies, which allows them to be transacted at the peer-to-peer (P2P) level exclusively through the internet in a borderless manner thereby rendering any efforts that are undertaken in silo to regulate these cryptocurrencies to be rather ineffective if not downright futile.
Nonetheless, a possible push factor in this regard is the coming to the fore of central bank digital currencies (CBDCs), with nine countries having already launched such currencies of their own, whereas the CBDC projects of 14 countries are currently in pilot testing stage with another 16 in the developmental phase. As more and more countries jump on board the crypto bandwagon through their respective CBDCs — and leverage the interoperability of blockchain to build up interlinkages between themselves to form a network of international connectivity — this may pave the way for the development of a uniform set of globally harmonized crypto regulation.
In the same way that fiat money dethroned the barter system more than three centuries ago, cryptocurrency is threatening the dominance of fiat money in the financial world. Over the course of 2021, the crypto domain has made a resounding statement that crypto is not a fad but instead is a financial democratization movement that is fuelling digital technological innovation at a rapid pace through cryptoization, which has pervaded almost every sector of the financial industry including retail banking, payment settlement and financial investments.
Cryptocurrency has defied all odds to come this far, but the ball is now in the regulators’ court as the onus is on them to understand the whys and avoid the don’ts of crypto regulation so that they can implement the hows in a manner that charts the regulatory way forward for cryptoization.