2021-03-23 14:00:00

Regulators have to front up to the cryptocurrency challenge as Bitcoin goes mainstream

The recent surge in the value of Bitcoin has drawn attention to cryptocurrency from all quarters. Supposedly now at tipping point, the recent billion-dollar bet by Tesla added momentum to cryptocurrency’s growth and duly pushed the valuation past $1tn.

Individuals and corporates are all diving into the world of Bitcoin. It’s not just Tesla; companies like MicroStrategy and Square have also purchased billions worth. Goldman Sachs too has recently decided to restart its cryptocurrency exchange desk, with others in Wall Street (like JPMorgan) reportedly close to adopting and offering the currency to clients and employees.

The digital currency is clearly hitting new highs in 2021 from both value and marketing points of view. So, will it remain as volatile as ever and, as seen in the past, end in a dramatic sell-off, or will the surge continue? At this point it is hard to tell, although momentum for further growth seems irresistible.

Regardless, anyone considering dipping their toes into this murky water should proceed with caution. 

Serious concerns around the financial stability of cryptocurrency have been raised by regulators across the globe for years. 

Fair and equitable enforcement of good public policy around Bitcoin is needed to keep citizens, businesses and governments safe, as well as to stimulate innovation within proper legal parameters. Already, Bitcoin has figured in significant criminal and national security threats, with illicit uses of cryptocurrency associated with criminal financial transactions, money laundering, and shielding of legitimate activity from tax, for example.

On Wednesday last week, the European markets regulator claimed that despite the total market capitalisation of crypoassets now valued at more than €500bn, the prices of non-regulated cryptoassets reaching such highs “imply significant risks for investors”. Interestingly, the European Commission published a legislative proposal in September 2020 in the aim to address the regulatory risks of bitcoin, but this has not yet been passed into law. 

And across the pond, the US Department of Justice published its enforcement framework in October last year. This pointed the way in terms of how generally existing approaches would be applied to the new world – recognising the financial crime and sanctions-busting risks in particular.

More recently, Janet Yellen, the new US Treasury Secretary, has publicly highlighted the risks associated with what she considers to be a highly speculative asset, putting the public and corporates on notice. 

We should clearly all take note of the advice of regulatory bodies, who are becoming increasingly vocal on this topic. 

As Bitcoin becomes even more sophisticated, additional regulatory challenges will be presented.

For example, there is still some ambiguity around NFTs (non-fungible tokens), or scarce digital content represented as tokens, given that they’re becoming a larger and more nuanced market than DeFi (decentralized finance) applications, the existing technology platform in place behind Bitcoin – which allows entities to have access to transaction history and expands the use of blockchain to complex financial use cases beyond simple value transfers.

In contrast, NFTs are driving a new wave of crypto adoption with its advanced usage of the Ethereum open-source blockchain. NFTs are popular in the digital arts industries, content production, and gaming. It is also set to be big in tokenization and online banking. And, it’s looking like bitcoin will see a rise in confusion and contention with respect to taxation and property rights, which will generate disputes. 

Amidst significant and rapid innovation, regulatory bodies are facing an uphill battle to keep up with the pace of change. 

With corporates and international banks betting on Bitcoin, the future of cryptocurrency has arrived, and it’s vital we know exactly how to regulate it to avoid unwarranted financial crime.

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