On 8th March 2022, the Commodity Futures Trading Commission (CFTC) filed a federal civil enforcement action against four individuals solicited over $44 million from investors through a Ponzi scheme.
On the same day, the Securities and Exchange Commission charged two people with defrauding thousands of investors from $124 million through a fraudulent operation by offering securities through ‘Ormeus Coin’.
While the two incidents refer to actions taken by American regulatory organisations, it provides a compelling case for why regulation is needed in cryptocurrency.
In 2021, crypto scams were 12 times higher in 2020, and the total funds lost increased by over 1000%.
However, despite growing concern about scams, regulation in this area remains limited. For example, the UK government stated that cryptocurrency exchanges must be registered with the FCA and must comply with AML/CFT compliance obligations.
However, there are no specific cryptocurrency laws because they are not considered for legal tender and exchanges.
Given that scams are growing, we feel that having a regulatory framework could benefit investors.
How can regulation help investors in cryptocurrency?
Here are some of the ways that regulation can help crypto investors
Create a safer ecosystem
Cryptocurrency is seen as the ‘Wild West” due to a lack of regulation in the industry.
The lack of laws, policies, and regulations has been responsible for the massive growth the industry has enjoyed over the past few years.
However, the absence of regulation has also seen widespread fraud, scams, and market manipulation, generating significant losses for investors.
In 2021, scammers took $14 billion worth of crypto, which is more than double the $7.8 billion taken by scammers in 2020.
However, regulatory frameworks can create a safer ecosystem for investors to navigate.
At the moment, there are over 17,000 different altcoins that are highly speculative, putting investors at great risk.
Regulation can enforce standards that cryptocurrency has to meet before they are ready for investors, or they must provide evidence that they are taking all measures necessary to protect from scams, ensuring that fraud is not common and reducing the risk to investors.
Increase investor protection and confidence
At the moment, crypto investors have very little protection in the market because most of the transactions taking place within the ecosystem are not monitored or approved by federal authorities.
While this could, in theory, allow for a flow of financials from one party to another, it also places investors at greater risk.
Eager to look for the next Bitcoin, most investors could find themselves investing in cryptocurrencies that are, at best, highly volatile, or at worst, fraud scams.
The high-risk nature of cryptocurrency makes a powerful case for regulation. A regulatory framework can protect investors by reducing the blowback from investment through protections that make the market less vulnerable.
While it wouldn’t change the risky nature of their investment, it would eliminate fraud scams, converting cryptocurrency from an uncertain frontier filled with scammers into a rewarding investment tool that has its risks.
A shift to stable investment patterns
At the moment, the high-risk, high-reward nature of the crypto market prompts investors to take on more speculative investment strategies, focusing on short-term gains over long-term benefits.
While this strategy can benefit certain investors, it makes the market unappealing to others who prefer a long-term approach.
Moreover, it leads to a volatile market focused on delivering the newest currency that offers quick returns instead of something that can grow over a long time, effectively turning the cryptocurrency market into a volatile one focused on short-term gains.
Having regulations in place would encourage a change in investment patterns from pursuing short-term profitability to fostering long-term growth, encouraging a more stable market.
While there might be a short-term knee-jerk reaction from certain investors, in the long run, the market would even out by trading high growth and extreme losses for long-term growth and stable progress.
The future of cryptocurrency and financial regulation
While it’s still early years, cryptocurrency shows tremendous promise as an alternative instrument for a decentralised platform that can facilitate the exchange of funds.
However, with the market alternating between high growth and losses, there is a lot of concern over its stability.
Hence, when exploring the best strategies for risk management in cryptocurrency, regulation needs to be part of the conversation.
This is because implementing regulation can promote stability within the market can promote long-term growth, creating a more stable market and making it more enticing for long-term investment.