Could Crypto Regulation Boost Its Reputation?
It’s been over a year since China decided to totally rid itself of Bitcoin trading and mining. Several official agencies including the central bank and foreign exchange regulators took this stand together, following the May prohibition on financial institutions facilitating crypto transactions, and similar moves back in 2017 and 2013. The People’s Bank of China (PBOC) said their aim was “To safeguard people’s properties and maintain economic, financial and social order”. Unsurprisingly, the reaction from the rest of the world was of shock and disappointment, with United States senator Pat Toomey going so far as to criticise the Chinese government for depriving their citizens of “the most exciting innovation in finance in decades”.
Although the USA was not to follow in China’s footsteps, the truth is they were also very much concerned about certain issues in the industry, for instance the potential of losing control of the financial system, the possibility of facilitating crime, and the danger of financial traders finding themselves burned. This is why President Biden insisted in March 2022 that the Securities and Exchange Commission (SEC) “Aggressively pursue investigations and enforcement against unlawful practices”, and why, in September 2022, the White House indicated laws on illicit fund transmission might be tweaked to impact crypto service providers.
The new regulation is on its way, and, although there isn’t a universal agreement on how to feel about that, there seem to be some potential benefits on the way for the sector. One of the chief benefits is expected to be increased institutional investment, and, in this article, we’ll take a deeper look into how regulation could affect crypto’s appeal and how that might affect prices going forward, especially when it comes to CFD crypto trading
The Road to Regulation
Many people wonder why, indeed, no solid regulation has been made in the crypto trading sector by this time. “Policies haven’t been devised yet, because there’s no precedent to blockchain and crypto, so it’s a hell of a task”, explains Tally Greenberg of Allnodes. Those who oppose the idea of regulation do so from their conviction that the decentralized spirit of crypto would be compromised by regulation, and that new ideas in the field might be quashed. But others say that carefully-made regulations could put the brakes on impetuous retail trading in the market, which could boost confidence on the part of institutions, who might then make long-term plans in the sector.
It’s not exactly that there is no regulation in the industry at all. The Gemini and Coinbase crypto exchanges make sure to follow certain rules stipulated by officials, but this doesn’t measure up to the regulation on, say, a public stock exchange. “Investor protection is much, much weaker on these big exchanges than it is in our securities markets or our futures market”, says Timothy Massad of the Commodity Futures Trading Commission. Massad says fraud in this area needs to be targeted and there’s a need for new “standards on conflict of interest”. Even after regulation is tightened up, crypto will remain a risky asset, at least on the level of a particular company’s shares.
Many financial institutions put crypto into their portfolios after the pandemic’s arrival in order to offer their clients exposure to the burgeoning industry. The data reveals that, even now, there remains strong consumer interest all over the globe in the sector, and mostly in cryptocurrency trading as a financial instrument. Last year, crypto hedge funds controlled $4.1 billion, which was an 8% increase over 2020. Generally speaking, though, these funds put quite strict limits on their digital assets, as do most retail traders. One interesting trend is that some hedge funds are changing their strategy and using derivative financial products to try to generate earnings even when the market slumps.
The question arises of what the effects of new regulation might be, but that depends on whether the US government decides to go stringent or lenient. (We are speaking here of the long-term effect, because the short-term effects are likely to be fired by emotion.) Aaron Klein of the Brookings Institution answers, “Even if it doesn’t bring more people in, it may change people’s current behaviour”.
The first digital assets to be brought in for repairs by regulators could be stablecoins. These are supposed to present traders with the benefits of cryptocurrency while reining in the volatility, which they do by pegging themselves to an asset like fiat currency. In the case of the most popular stablecoin, Tether, the peg is a one-to-one connection with the US dollar. Regulators’ concerns about these kinds of digital assets have to do with the way they’re managed, so regulation could come sooner than later.
“Slowly but surely”, says Tally Greenberg, “we are not only being massively adopted as an industry, we’re also stabilizing more or less”, and many people tend to agree with her, especially as aggressive regulation in the US paves the way for institutions to feel safe in the crypto space. In the business of CFD crypto trading, it’s always a good idea to keep up with news on the regulatory front, which should start coming in steadily as the months progress, and take note of how any type of regulation shows up in a crypto trading price.