Cryptocurrencies & regulation: Trust bad, control better

Cryptocurrencies remain a buzzword on everyone’s lips. Whereas idealists see an alternative to the traditional monetary system, critics perceive a classic bubble building. In the view of representatives of governments, central banks and supervisory authorities, Bitcoin et al. are highly speculative, liable to be used for criminal purposes, and pose risks to the entire financial system. Accordingly, it is widely agreed that regulation is needed. At a national level, many regulatory decisions have already been made, extending from warnings to outright bans. And there is also evidence of progress being made on a cross-border basis. Nonetheless, this should not blind us to the fact that there is a huge amount of work to be done here: genuine international coordination is absolutely essential to well-functioning regulation given that “virtual currencies” are not tied to national borders.

The European Union has emerged as something of a pioneer in the area of cross-border cryptocurrency regulation. With the entry into force this year of the 5th EU Money Laundering Directive, a standardized approach to dealing with cryptocurrencies is being adopted by the EU’s (for now) 28 member states. As well as providing a clear definition of virtual currencies, this also involves bringing cryptocurrency exchanges and custodial wallets under the scope of regulation. Due diligence obligations (identification, monitoring of the business relationship) must be complied with, and suspicious transactions reported. Unfortunately, none of this is set in stone yet, as member states have until the middle of 2020 to incorporate the new standards into national legislation.

Coordination at global level still lacking

The G20 is also debating a shared regulatory approach that could be taken by the world’s leading industrial and emerging market nations. However, it is likely to be a considerable while before all parties are satisfied and consider their interests appropriately represented. Quite clearly, there is still insufficient pressure for stronger international collaboration. This situation could well change if cryptocurrencies continue to gain in importance and directly compete with traditional legal tender in the future. The most important step towards long-term regulation right now is therefore ongoing monitoring of the cryptocurrency market in order to gauge its significance for the financial system as a whole. In the meantime, it would make sense to debate aspects such as minimum capital requirements, consumer protection and market abuse directives.

Where the price performance of cryptocurrencies is concerned, stronger regulation is a double-edged sword. On the one hand, opponents of the established financial system among the members of the cryptocurrency community see regulation as a threat to the very basis of Bitcoin and its ilk. On the other hand, it is likely to be difficult to motivate traditional investors to enter this market to any significant degree in the absence of clear parameters. A regulatory approach that is globally standardized – or at least uniformly applied by the key industrialized nations – could therefore fuel hopes of greater involvement on the part of traditional financial institutions and the establishment of a broad spectrum of financial products (e.g. ETFs) in the cryptocurrency segment. Over the last few months, Bitcoin et al. have tended to react to prospects of this kind with price rises.

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