According to a number of digital asset specialists, government regulations can only help the cryptocurrency industry. An investor who feels protected is more likely to stay active and increase their crypto investments.
Investor Protections
1. More Stability in the Market
Regulating cryptocurrencies could be a healthy development for the industry, at least where everyday investors are concerned. Greater regulatory guidance, if well targeted, could help reduce speculation among crypto assets. Less speculation can lead to higher investor confidence, which could draw in more long-term investors who have so far said no thanks to a highly speculative, volatile crypto market.
“Even if it doesn’t bring more people in, it may change people’s current behavior,” says Klein. Enthusiasts claim there are a lot of benefits cryptocurrency has over fiat currency and other asset classes, but those benefits can only come to full fruition “if an appropriate regulatory framework is put into place,” according to Klein.
It’s hard to predict how the price-sensitive asset class will react to regulation over the long term, since it’ll depend on whether the U.S. government takes a more lenient or stringent approach. In the short term, any new regulation could inspire knee-jerk investor reactions to the markets, suppressing the trading values of cryptocurrency. For example, when China banned cryptocurrency transactions in September 2021, cryptocurrency markets dropped. But over the long term, regulation may have the potential to stabilize the market and reduce some risk for cryptocurrency investors, says Greenberg.
To be clear, new regulation could slow the roll of those trying to get rich quick by predicting the next coin that goes “to the moon,” she says. But that’s a good thing for long-term investors.
“Slowly but surely, we are not only being massively adopted as an industry, we’re also stabilizing more or less. Regulation will stabilize the market even further,” says Greenberg
2. Increase in Investor Protection and Confidence
Crypto investors currently have little to no protection in the market, as there is no regulatory framework in place to ensure protection of assets.
Some exchanges maintain compliance with evolving federal and state regulators in the United States. This includes many established, high-volume U.S.-based exchanges, like Coinbase and Gemini, but they’re not regulated similarly to public stock exchanges or alternative trading systems. That can be problematic, according to Timothy Massad, former chairman of the Commodity Futures Trading Commission and a senior fellow at the Kennedy School of Government at Harvard University.
“Most of the trading that goes on in the crypto world today is not regulated by any federal authority, and that’s a big gap,” says Massad. “That means that investor protection is much, much weaker on these big exchanges than it is in our securities markets or our futures market.”
That’s why regulation is needed to make the market safer, says Klein. Crypto will still likely be a risky investment, like individual stocks, but investor protections could make the market less vulnerable to outside manipulation. Safer markets can lead to more investor confidence, which often means greater value over time.
“[Regulation] is important for investor confidence. It’s important for basic fairness, and ultimately it’s important for the industry to grow,” says Klein.
3. Safer Crypto Ecosystem
Crypto has been described as the “Wild West” by SEC chair Gary Gensler due to lack of regulation in the industry. The lack of laws and policies over this burgeoning area has created an opening for widespread fraud, scams, rug pulls, and market manipulation.
“Crypto isn’t subject to requirements to prevent fraud manipulation. It’s not subject to standards on conflicts of interest,” says Massad. “My point is simply that we don’t have the same kind of standards that we have in other markets. Today, that means buyer beware, essentially.”
Crypto crime has grown tremendously over the last two years. Scammers took $14 billion worth of crypto last year, a record compared to the $7.8 billion taken by scammers in 2020, according to a report by blockchain data firm Chainalysis. And there are more than 17,000 altcoins, which are typically even more volatile and speculative than Bitcoin, and come with a higher risk of crypto scams and frauds. Even the most advanced and enthusiastic cryptocurrency experts understand there are many new and evolving risks in the world of crypto right now.
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Crypto Regulation & BTC
MicroStrategy CEO Michael Saylor believes crypto regulation could help attract traditional finance investors to Bitcoin (BTC).
In a new Fox Business interview, Saylor says large investors would get involved in Bitcoin if the government offered regulatory clarity.
“I think it’s an immature asset class that is maturing and I think that any form of regulation is going to be good.
[Whether] it’s the SEC [Securities and Exchange Commission], the CFTC [Commodity Futures Trading Commission], the FASB [Financial Accounting Standards Board], the FDIC [Federal Deposit Insurance Corporation]. If any of them give guidance, the OCC [Office of the Comptroller of the Currency], it’s all going to be good for Bitcoin…
Many people take their cues from the government, like it or not. And so if the government clarifies the difference between a commodity, a security, a currency and how you can use these things, I think that opens up a much easier path for institutional investors, mainstream investors and corporations to get involved.”
After investing 100 hours we all come to realize that #Bitcoin is 100x bigger than the next best digital commodity network and utterly unique. I take the long view in my cheerful, constructive conversation with @cvpayne as we talk BTC & debunk the critics.pic.twitter.com/YeqzfVd8xB
— Michael Saylor?? (@saylor) June 21, 2022
According to Saylor, the level of risk exposure when investing in Bitcoin depends on the time horizon and the motivation.
“Bitcoin’s gone through three boom-and-burst cycles in the last two years since we got involved. If you are a short-term investor, this is a high-risk, high-beta, high-volatility asset.
But if you have got a 10-year time view, if you are a long-term investor, it looks like a low-risk store-of-value asset.
So it all comes down to what your time horizon is and what you are looking for out of the asset.”
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