Crypto transparency and regulation

Jul 6, 2018 Written by Gavin Pannu, MSTA, CFTe

Some claim more crypto regulation will mean greater transparency and institutional acceptance. Others claim it will undermine its value and decentralised character.

Which claim will win out – and which cryptos look likely to do better in a tighter, more regulated environment?

Cryptocurrencies have now emerged into the mainstream of financial markets as a new asset class. It has been tradable on an exchange since 2010 but only caught the general public’s eye and news media’s attention last year, as prices sky rocketed with some cryptocurrencies making a 1000% price move. This is largely due to the revolutionary technology behind it, known as blockchain. The most important aspect of cryptocurrencies is the use of a decentralised database which requires consensus from its accountants, known as miners, to maintain the ledger and provide a transaction process.

Central banks and regulators have been monitoring the price of cryptocurrencies, along with conducting their own research into defining a framework which can be catered by them. It is clear they view the blockchain technology with some importance, along with the potential cryptocurrencies have of a fast global transaction process.

The Canadian government has produced a white paper of creating a cryptocurrency which will co-exist with the Canadian dollar. Venezeula has been one of the first nations to accept cryptocurrencies with the Pedro, which is backed by their oil and gold reserves.

Regulators have begun to investigate and crack down on illegal activities before determining the path of regulation for cryptocurrencies. Regulators have the important role to filter out the downside to cryptocurrencies, with price manipulation taking place where few investors have a majority ownership of a cryptocurrency, and with new crypto start-ups known as Initial Coin Offerings (ICOs) allowing fraudsters to take advantage of investor’s capital.

Ultimately, regulators are conducting investigations and taking the correct precautions required for the introduction of a framework, which will allow for global acceptance. Governments and Central Banks will continue to evaluate conditions to determine the path of cryptocurrencies. Each cryptocurrency offers different features; some provide higher levels of security, while others provide greater speed of transactions.

A recently-introduced cryptocurrency, known as Ripple, has proven its concept with the Bank of England, who are currently testing its main feature which is instant cross border payment process. It is clear that Central banks around the world are beginning to recognise the potential of cryptocurrencies. It is only a matter of time before they are involved in providing a structure for cryptocurrencies, but only once regulators have fully understood the risks involved, and implemented measures to mitigate this risk.