In the UK, there is increasing concerns about the security risks involved with cryptocurrency. This is mainly due to the increase of criminal activities happening within the space. Meanwhile, the US also believes that the cryptocurrency industry needs to be regulated to start taxing investors. Similarly, the US also mirrors similar concerns to the UK about criminal activities happening within the industry. Looking at the global context of cryptocurrencies, more regulators are thinking of an approach on how they can regulate Bitcoin and many other cryptocurrencies.
As a cryptocurrency market that is rapidly approaching the $1 trillion market capitalization, it is becoming more concerning that there has been no consensus on the type of regulations that need to be implemented. Perhaps the emergence of the cryptocurrency industry was too fast, and it is growing at a pace that regulators probably cannot keep up with. With the cryptocurrency space being deemed as the Wild West of the digital era, there is an increase in criminal activities that prey on unsuspecting investors.
Cryptocurrencies are built on infrastructure called blockchain which is the public ledger that helps to facilitate any transactions. On top of that, cryptocurrencies are classified as highly speculative investment. This is because they don’t have an intrinsic value. In addition, the growth of initial coin offerings has also been worrisome because the number of fraud has been increasing. People typically create ICOs and run away with the money.
As ICOs can make people overnight millionaires, people are coming up with ideas to scam investors with phony technology offerings. ICO eliminates the need for venture capitalists because there are fewer regulations that they need to follow and it cost a lot less to launch an ICO. Unlike venture capitalists that ask for a high stake and high returns, ICO founders typically only provide a financial return for the investments. Moreover, these ICOs do not offer a stake in a company which is great for founders that want to maintain control within the firm.
Mixed responses over cryptocurrencies
China and South Korea have banned initial coin offerings. However, there is still an urgent need of a coordinated regulatory approach globally. If it is every country to its own, this discourages an unhealthy growth of the industry. Moreover, cryptocurrency and blockchain startups can grow better if there was a cooperation between nations to improve the regulations of the industry. The dilemma between keeping the financial institution within the country intact while also encouraging the growth of blockchain startups is real for regulators. Whatever the decision that they take, it needs to be implemented soon as possible.
In countries such as China, Korea, and Vietnam, there has been an outright ban on initial coin offerings. Meanwhile, the landscape is different in Japan which is a country that has been very accepting of cryptocurrencies. The United Kingdom, on the other hand, is playing the waiting game and seeing how everybody’s going to react towards it. Many investors are anticipating the regulation given by the government as it will determine the future direction of their start-up or investment.
Before getting in an ICO, understand the precise nature of the offering. The context of an ICO is highly important as it can change quickly. The tokens which are issued under an ICO and can be classified as a currency, commodity, security or property. The regulators need to define what these tokens are classified as quickly. The lack of standardization across a jurisdiction can lead to larger problems.
One of the major issues with cryptocurrencies is that they are highly transferable. Therefore, it is difficult to identify the origin of the coin. Today, we are seeing a trend where people tend to trade within exchanges in which the regulatory environment favors them. Hence, it creates a system which enables money laundering.
The role of government
The government plays an essential role in supporting the technology development, especially in the fintech industry. After all, they have the power and financial resources to do so. The potential that blockchain has cannot be ignored because it can change the way that we run our economy as well as the day-to-day lives of consumers. Due to cryptocurrency, a lot of offshore banks are receiving bad press.
There is a lot more that we need to learn about some of the international best practices when it comes to cryptocurrencies. Although it is a long way before we come up with a coordinated regulatory approach, it would be good if the ICO space can be regulated to avoid scammers preying on naive investors.
What will a coordinated global approach to cryptocurrencies look like?
As we have highlighted in this article, it is important to have a standard code of conduct for cryptocurrencies because it avoids investors cherry picking the jurisdictions which are to their advantage. Therefore, not being signatories of this code can leave these companies out of the market. In fact, having a standard code of conduct will establish the legitimacy of an institution that will encourage more investors to use their platform. In the investment community, taking this step will boost the regulation and also improve the innovation.
Moreover, a standardized regulation will help institutional investors to gain more benefits from their investment in startups. Without the support from the government, digital currencies could be a place which is filled with scammers and people trying to make the most of their money.