The overwhelming market decline over the past month can be attributed to a combination of multiple factors, one of which is the fear of market regulation. Massive selloffs have ensued on multiple occasions due to news of regulations stemming from countries like China and South Korea, and the crypto community has an overwhelmingly negative outlook on regulation.
Following news reports that South Korea was planning on banning crypto trading on January 10th, Bitcoin rapidly shed 21% of its price within only hours of the reports being released. Although it was found that these reports were wildly inaccurate, the negative sentiment remained and produced downforce on the markets that lasted for weeks. Of course, an outright ban on cryptocurrencies is worthy of being feared, but it is also unlikely and impractical. In democratic countries, like the US and South Korea, a ban would raise tremendous questions as to the legality of these actions, reserving outright bans to countries with highly restricted freedoms, like Afghanistan.
Looking at the very realistic outcome of future regulations of cryptocurrencies in countries like the US and South Korea, it is important to understand how these will both affect the long-term and short-term health of the crypto economy. Short term, it is clear that the prices will drop across the board due to fear, as they have done in the past, but long term, regulation is necessary to herald steady growth and widespread adoption.
Firstly, regulation will increase investor confidence, allowing for both the stability of current investments as well as an influx of new money into the markets. Many traditional investors find the lack of regulation to be a roadblock for them to invest in cryptocurrencies, and people who are currently invested in cryptocurrencies will feel less afraid of investing in scams, like Bitconnect, and will likely pour more money into the technologies they believe in. Regulation will also eliminate fear of market manipulation, which can have negative effects on the markets health. Take, for instance, the unfolding situation with Tether. Many people believe that Tether and Bitfinex have been artificially inflating the price of Bitcoin, and some reports claim that Bitcoin’s price could fall anywhere between 30-80% if the concerns are proved to be true. At this point, the implications of Tether’s actions are purely speculative, but the fear surrounding the results of a Tether implosion have had a negative effect on the markets. Regulation will eliminate the fear of manipulation that is currently hindering market growth.
In addition to allowing for more money to enter the cryptocurrency markets, regulation will help to provide stable growth. This stability will lead to both an increase in institutional investments, as well as the introduction of more traditional investment vehicles, like ETFs. Recently, the SEC denied requests from Wall Street trading groups to set up ETFs that track Bitcoin and other cryptocurrencies due to the high volatility of Bitcoin. It is reasonable to assume that the SEC will reconsider this stance under more stable market conditions, which would allow traditional investors and investors trading with standard brokerage accounts to access the crypto markets in a simple and straightforward way.
Initial Coin Offerings (ICOs) would also greatly benefit from governmental regulation. In their current state, ICOs are seen as risky methods of acquiring exponential gains on initial investments. The risk is that many of these ICOs have either disappeared after fulfilling their fundraising goals, or never pursue getting listed on major exchanges. The inherent risk of an ICO is what dissuades many from investing, and unfortunately damages the success of ICOs with solid technologies. If governments regulated ICOs in the same way they regulate IPOs, people would be able to invest with greater confidence which would allow for more successful ICOs and less “scam coins” being introduced to the markets.
Another source of fear in the cryptocurrency world is the risk of storing and trading currencies on exchanges. The recent news of the Coincheck hack led many to question the security of the exchanges that they store their coins on, and justifiably so. Recently, the South Korean government fined 8 major exchanges for lacking adequate cyber-security measures. If governments enforce proper security for these exchanges, people will feel safer utilizing them which will only contribute to the health of a growing crypto economy.
In a world of laws and regulation, an industry can only be successful so long as it adheres to, and molds itself around, the rules. The cryptocurrency markets will blossom if they accept regulation as an inherent outcome and adapt to it. If the markets are thrown into a tailspin each time governments take inevitable actions to regulate the exchanges and markets, how can anyone expect them to continue growing?