Cryptocurrency needs to be trusted to be adopted. Regulation is the only way to get us there.
As the price of bitcoin surges to highs that we have not seen since January 2018, attention has once again shifted to the prospect of mainstream adoption. But twelve years on from Bitcoin’s launch, cryptocurrency still has a perception problem. Mainstream media is quick to paint it as an ultra-high-risk investment instrument at best and a haven for dark web criminal transactions at worst.
The average person, if not already scarred by the 2017-18 Initial Coin Offering (ICO) mania, still considers cryptocurrency the domain of the tech savvy, while those who have experience with it lack use cases beyond investment and trading.
Usability is often cited as one of the key barriers to adoption, but despite best efforts, the cryptocurrency space still feels like the Wild West. Token prices skyrocket and collapse within minutes, scams proliferate, and exchanges are hacked. Mainstream adoption is nothing but a pipe dream at this point.
Sure, 55 million Bitcoin wallets exist, but the number of active users, aside from those who are trading, is still relatively small. And few merchants accept cryptocurrency as a payment method. According to coinmap.org, the number sits at just north of 18,000.
When it comes down to it, the average person just does not trust cryptocurrency enough to integrate it into their lifestyle. And this is by no means an unfair risk assessment. On the contrary, people trust fiat currencies because their value is backed by the issuing authority. Five dollars is five dollars because the government says so.
With cryptocurrency, there is no such authority. Value is determined by the community. Bitcoin, for example, has value because people with a stake in it say it has value. This is fine for some, but a majority of people would much prefer to place their trust in their government-issued currency. It’s accepted everywhere, comes with deposit insurance, and has other consumer protections.
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The thing about cryptocurrency, though, is that it has the potential to be an evolved form of money. It has features that existing forms of money do not have. Access to global liquidity, transparent and detailed tracking, and asset tokenisation are to name but a few.
To reach mainstream adoption, these features have to be accepted, trusted, and available. Using Singapore as an example, mainstream adoption is when Singaporeans are able to use cryptocurrency and cryptocurrency-based services with the same confidence and utility that they currently do with fiat currency.
This is why cryptocurrency regulation is so important and, I would argue, key to mainstream adoption. It would help mitigate criminal activity, ensure the same consumer protections as fiat currency, and spur government-supported innovation.
All of which add up to increased trust and the introduction of a rich variety of cryptocurrency-based services that people can integrate into their lives.
Combatting criminal activity
It is no secret that cryptocurrency is being used for illegal activity. But the truth is that any currency, fiat or crypto, can be used for illegal activity. Cash is still very much king in that regard. For large-scale money laundering, cryptocurrency is not particularly expedient, despite its pseudonymous nature, for two reasons:
- a complete history of transactions and wallet balances are stored and viewable on public ledgers
- exchanges are needed for conversion to fiat. The exchanges are particularly important because they can implement KYC and AML processes that weed out criminal actors looking to convert their cryptocurrencies to fiat and vice versa.
Cryptocurrencies, aside from the few that are specifically designed to hide transaction data, actually boost AML/CTF efforts because they offer transaction tracing by design. This allows firms such as Chainalysis, Elliptic, and Merkle Science to conduct forensics on any transactions and wallets identified as suspect.
I asked Ian Lee, VP Business Development at Merkle Science about the advantages of cryptocurrency in the context of AML/CTF. He told me, “The great thing about cryptocurrencies is that we can track the movement of value within a single ledger or across multiple ledgers. This is impossible with cash and very difficult with bank transfers, particularly due to bank secrecy laws and silo-ed transaction data. Combined with strict KYC processes on centralised exchanges, blockchain transaction monitoring and forensics is a strong deterrent for money launderers.”
At the same time, exchanges are a logical focal point for regulatory scrutiny. Singapore, Malaysia, and Indonesia have implemented important regulations that hold exchanges to a much higher standard, meaning a safer experience for users.
There is also the “travel rule” announced by the Financial Action Task Force (FATF) that strongly encourages exchanges to pass sender and beneficiary information when making fund transfers. These regulations are a good starting point as a deterrent for criminal actors. Stronger regulation, such as the requirement to connect cryptocurrency transaction history with customer exchange accounts, will go even further.
Consumer protections
All markets have scams. The cryptocurrency market is no exception. The difference is that regulated markets have consumer protections built-in. Deposit insurance exists so that you are protected in case your bank gets robbed; stacks upon stacks of documents are needed to stage an Initial Public Offering (IPO) in order to weed out scams. These same protections do not yet exist in the cryptocurrency space.
Anyone can launch a token and then disappear with the proceeds; if the exchange or DeFi protocol where you keep your funds gets hacked, you may not get your money back. These are real problems that prevent people from placing their trust in cryptocurrency.
Regulation adds a layer of protection because it increases scrutiny on exchanges, protocols, and other services that utilise cryptocurrency. To conduct a token sale, for example, the issuing company could be subject to similar standards as companies looking to stage an IPO. Deposit insurance could be built into decentralised finance protocols to mitigate smart-contract risk. Or stablecoins could be required to pass a stringent vetting process in order to be accepted as legal tender.
Innovation
Cryptocurrency is still a nascent technology. As such, the rate of innovation is high. New products and services are being launched every day. Some bring legitimate value to the space, while others are questionable at best. An argument can be made that the rate of innovation is a result of an uncertain regulatory environment.
If there are no regulations, the argument goes, there is no limit to innovation. And while this may be good for business, the consumer is left to swallow all of the risks.
I would argue that clear, consistent, and fair regulation actually results in better innovation. Regulated markets attract capital and require accountability; unregulated markets attract profiteers. A 2018 study by Statis Group suggested that more than 80 per cent of ICOs conducted in 2017 were in fact scams.
What regulations do is create trust across the entire ecosystem. Investors bring capital, businesses allocate resources, and startups work free of stigma. Singapore is a shining example. In April 2020, there were at least 397 cryptocurrency startups in the country. Entrepreneurs have chosen Singapore because of its forward-thinking approach to regulation. Far from being restricted by regulation, startups know what they are getting and thrive as a result.
Where do we go from here?
Regulation is a difficult balance to strike. It has to be both fair to business and protect consumers. Some countries have chosen to ban cryptocurrency outright. I would not consider this to be regulation. Fair regulation happens at the confluence of cryptocurrency’s value to the future of money and the willingness of consumers to trust it. If countries continue to treat cryptocurrency as a black box, consumers and businesses will lose out.
For cryptocurrency companies, mainstream adoption is not coming simply as a result of better usability or skyrocketing bitcoin prices. Acceptance by large fintechs such as PayPal help, but will only take us so far. Adoption will happen because governments have put in place the frameworks that allow us to trust cryptocurrency the way we do fiat.
The best and most trusted cryptocurrencies and other cryptocurrency-based services will then rise to the top, allowing consumers to choose those that fit their needs best while feeling safe in the knowledge that protections exist.
Source: e27
