In January 2020, The Financial Conduct Authority (FCA) announced the Temporary Registration Regime to monitor existing crypto assets firms. According to the regulating authority, all businesses had to comply with Money Laundering Regulation and register with the FCA by 10th January 2021. 

Last year’s ruling demonstrates that regulatory bodies are taking steps to control cryptocurrency transactions. 

Cryptocurrency emerged in the 2010s and grew in popularity as an investment instrument because it could transfer value instantly between people or organisations. This has seen the value of cryptocurrencies grow at incredible rates. Bitcoin, for example, which is considered by investors to be the original cryptocurrency, is valued at $65,598, having grown by over 300% since May 2020, and is expected to grow to $73,000 in 2022. 

Investors, so far, have driven this rate of growth in light of the tantalising prospects of a high ROI; the drive for huge gains, however, has led to several issues that have prompted concern from regulators, such as the FCA. 

If cryptocurrency is to remain a reliable investment tool for the financial industry, regulators have to step in to exercise a degree of restraint and tackle industry-wide problems without stifling its characteristic flexibility and innovation. 

Why is it important to regulate cryptocurrency transactions?

Chief among the many concerns in the crypto industry is online fraud and scams. Driven by the prospect of high returns, investors often fall for various ruses in which cybercriminals set up a currency, promising high returns to dupe investors. 

These pump-and-dump schemes have become commonplace with initial coin offerings (ICOs), even though they are illegal with other tradable assets, such as securities.

A lack of regulations and standards, combined with the frenzy for huge returns, has created an environment that sets investors up for plenty of financial risks. 

Beyond just defrauding investors, however, cryptocurrency, when unregulated, has the potential to be used as a tool for money laundering and other financial crimes. In the past few years, alone, there have been numerous incidents demonstrating how billions can be funnelled for illicit activities. A Russian hacker once used the digital currency exchange to launder more than $4 billion to facilitate a range of crimes from drug trafficking to computer hacking. 

Regulating cryptocurrency, therefore, can ensure that digital currencies aren’t a conduit for money laundering and other criminal activity. 

As of 2021, there are over 6,000 cryptocurrencies traded on the market. The sheer number makes it difficult to categorise them, creating an uncertain environment in which investors aren’t certain about which currency is safe to invest in and which is not. 

Most regulators are also uncertain about how best to categorise cryptocurrency; is it a security or a different type of tradable asset?

This uncertainty has prompted leading regulatory experts to compare cryptocurrency to the “Wild West” because of the lack of organisation and structure in the industry. 

Regulating it can lend it these missing qualities, benefiting investors that are involved in the trade of this wildly popular digital asset. 

Securing cryptocurrency with robust—and responsive—financial regulation

Today, regulating cryptocurrency with an eye on the market can lead to a more secure trading environment that benefits multiple stakeholders.

This, in turn, can boost business confidence and create an ecosystem where growth arises from genuine trading value instead of fraudulent activity that damages investor confidence in the short and long run. 

Moreover, responsive and effective regulations that don’t stifle investors and encourage greater innovation can support the tracking of transactions and necessitate the fulfilment of key prerequisites prior to trading.

If done well, this can lead to greater long-term growth because it erases several erratic elements that prompt regulators to compare cryptocurrency to the Wild West. 

With better regulation comes better taxation policies because regulators can tax transactions, preventing shrewd investors from using it as a tax haven. 

Despite these boons, however, there are certain concerns investors associate with greater oversight and regulation. 

For example, many cite a dearth of growth and innovation in this sector as a result of greater regulation, which could drive investors away from a once flexible and rewarding investment asset.

This highlights the fact that while regulation is necessary, it must be implemented in a way that supports investors instead of stifling them. If executed intuitively, industry regulations may be able to help more investors uncover greater financial benefits without running the risk of major losses. 

With governments passing regulations on cryptocurrency assets, knowing the latest rulings can help you plan business operations in the future. But meeting regulatory requirements is a challenging process for several organisations because new rulings are passed. 

However, our webinar – Transforming horizon scanning with innovation and RegTech – explains how you can resolve this problem by leveraging RegTech solutions to turn compliance into a more agile process so you will have an easier time keeping up with the latest regulatory updates. Visit our page to get more details.

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