State of anarchy or freedom? Why Cryptocurrencies Need Regulations by DailyCoin


State of anarchy or freedom? Why cryptocurrencies need regulations

2020 brought critical changes in the decentralized monetary space. Institutional adoption has permanently changed the landscape, generated multi-billion dollar investments, pushed leading currencies to new highs, and most importantly, created more trust around digital assets. The decentralized finance (DeFi) space thrived accordingly, witnessing nearly 40-fold growth in 12 months. Non-fungible tokens (NFTs) tripled in value last year and are said to be the hottest stars of 2021. The decentralized industry is buzzing like an autonomous chorus, with a number of new voices constantly onboard. For more than a decade, this choir operated without central authorities or governing bodies. Is this a state of anarchy crying out for regulation? Or is it a precious space of pure freedom where innovation can flourish? The Choir Without a Director After an incredible bullfight, many other altcoins have also made a comeback. Major currencies like (ADA), Polkadot (DOT), (LTC), Chainlink (LINK) have experienced recent price spikes. The GameStop (NYSE 🙂 saga sparked the phenomenon of powerful retail investors who can squeeze the pros if they join. Multiple social media channels emerged, initiating cryptocurrency-centric price pumps. Dogecoin (DOGE) may be the best known example here. In times of historically low interest rates, decentralized finance (DeFi), one of the most active blockchain sectors, sees the launch of hundreds of new projects every year: from crypto lending, yield agriculture to decentralized exchanges, payment networks or crypto insurance platforms. Many of them are still under the radar despite the enormous potential. Shilling In the environment of fierce competition, marketing (and especially the shilling) becomes a fundamental tool to publicize the project and, without a doubt, its price. The shilling or simply speaking, advertising or product endorsement is currently the most popular method of spreading messages and achieving goals. Active promotion arouses the excitement of users and, as a result, causes prices to rise rapidly. The problem here is that price pumps lead to price bubbles. At some point, they explode, prices drop, and thus general investor confidence. This happens when the project founders are more interested in pumping and pouring than creating sustainable investments. FUD (fear, uncertainty and doubt) is another popular tactic for spreading false or misleading information to change investors’ views and create mistrust in competing projects. It is aimed at the reputation and income of a certain organization and is not an ethical or marketing technique. Since the crypto market is primarily based on market sentiments, it is very vulnerable to manipulations. The FUD can wrap partial truth in general false information, which is enough to create doubt and mistrust in a given project. Scams Not to mention the ethics of hidden endorsements and so-called “honest” promotions, the much bigger problem is paying for scams. The crypto space is heavily flooded with Ponzi schemes, fake ICOs, fake crypto exchanges, fake gifts, celebrity impersonation scams, and many other scam methods (including malware) that defeat the general trust in new projects. In 2020 alone, crypto scammers took nearly $ 2.7 billion worth of cryptocurrencies, though a year earlier, they created much greater damage, accounting for nearly $ 7 billion. Consequently, there are over 1550 dead coins at the time of writing. Cryptocurrencies are speculative assets. It’s all about trust. But considering pumps and dumps, scammers and con artists, it’s no wonder the crypto space is in a bit of chaos. Not to mention money laundering, terrorist financing, and other forms of financial crime. The industry faces many challenges and the need for legal clarity becomes paramount. The stance towards regulations However, different countries apply their own rules, making the young crypto sector even more fragmented. There is still a lot of regulatory uncertainty in many parts of the world, including the United States. The European Commission published an ambitious proposal in 2020 to regulate digital assets, which aims to set global standards. If approved by EU governments and the EU Parliament, the law establishes a clear classification of digital assets and a regulation of their issuers and service providers. While the EU openly disclosed its ambition to lead the way in global regulation of cryptocurrencies, regulations on cryptocurrencies remain inconsistent around the world. Asian countries, including China and India, have restrictive attitudes towards digital assets. The United States deals with the different laws between its different states. While keeping a positive outlook on digital assets, the federal government has not passed unanimous laws. The country’s current Secretary of the Treasury, Janet Yellen, criticized cryptocurrencies for terrorist financing and money laundering. She officially supports the need to regulate institutions dealing with digital currencies. This year, President Biden‘s administration suspended controversial crypto wallet rules, which were intended to regulate transactions in private digital asset wallets. How could regulations benefit the crypto industry? With institutional investors and governments opening up to cryptocurrencies, it is no longer a niche space for nerds. Too many billions have been invested in it to ignore the need for a legitimate and regulated environment and legal protection. The controlled environment is the opposite of chaos. Regulations establish order, which means that any sector can operate more safely and with predictable results. In a regulated ecosystem, digital currencies can be seen as assets whose risk can be better managed and protected. As in any other industry, regulations set the rules of the game and provide a safer environment for investors and users. Investors must have a clear understanding of the environment in which a new asset class operates. They need to know the risk factors associated with the market before actively participating in it. The existence of clear rules increases confidence in a given market, attracts new capital flows and makes the entire sector grow. As seen in 2020, institutional investors are looking for alternatives to allocate their capital in times of historically low interest rates. Traditional wealth managers and multiple corporations included cryptocurrencies in their investment portfolios as a new asset class to hedge against inflation. The applicable rules make it possible to simplify the process for entrepreneurs and give legal certainty to those who issue new digital assets. This means the legal guarantee that any recently issued coin meets certain criteria and is not created simply for quick scam purposes. Consequently, regulations can make the ownership of digital currencies more secure. In recent years, malware and hackers attacks on crypto exchanges and digital asset portfolios have caused millions in losses. A more controlled environment could contribute to a higher level of security, making third-party encryption service providers (especially encryption custodians) more accountable when operating under clearer conditions. The regulated environment encourages the development of innovations. Companies are more willing to invest in research, hire highly trained professionals, and build infrastructure when they see long-term stability and security in the field. Finally, regulations can pave the way for wider adoption of cryptocurrencies. There are several people around the world who haven’t entered it yet, and for crypto usage to grow even more, you need more trust and better access to it. Digital currencies can achieve this if they are perceived as reliable, safe, and readily available assets. On the other hand, privacy issues and capital flight. Regulations require transparency, which means that tracking cryptocurrency transactions becomes much easier for governments and law enforcement institutions. Decentralized digital currencies are still used massively within the darknet and as an unguarded payment method to support human rights and freedom fighters under authoritarian regimes. A barrier to innovation. Critics fear that regulatory authorities could abuse their power, create unbeatable barriers, and put an end to innovations and evolution in the crypto space. For example, decentralized finance (DeFi) is a critical driver of innovation. Cost increase. The change in applicable laws may increase the costs of operating companies and make them a less attractive investment. The crypto space, and especially the DeFi sector, is a driving force for innovation. It has a lot to offer and, consequently, a lot to deprive it of. Financial fraud, asset bubbles and market manipulations are some of the risks that any investor faces in an unregulated environment. There is a fine line between the advantages of clear regulatory rules and the freedom to adopt innovations. However, regulations result in a more stable and therefore more mature market that operates more consistently, safely and with predictable results. The benefits of regulation should outweigh its long-term weaknesses. Continue reading on DailyCoin