If 2016 was the year of dead celebrities, 2017 was undoubtedly the year of the ICO. The evidence supported this; of almost 1000 ICOs in 2017, 48 percent were successful, gathering around US$5.6 billion in total.
Perhaps even more important is the number of people who joined the crypto economy in the past year. Experts estimate that more than 50 million people worldwide invested in cryptocurrencies in 2017. By the end of the year, the market value had reached an incredible $750 billion. Although those 50 million people make up less than one percent of the world’s population, it’s safe to say 2017 was the year that paved the way for cryptocurrencies to become mainstream.
On the other hand, these past two years have seen several major scandals, including hacks of crypto exchanges and wallets, as well as several cases of ICO fraud. Two of the biggest scams – Pincoin and iFan – allegedly stole around US$660 million from 32,000 investors. Bulgaria also saw two major ICO scams, with investors losing several million dollars from OneCoin and Benebit. Moreover, during the Coincheck and Zaif exchange hacks in Japan, investors lost almost US$600 million.
These hacks and scams provide a clear sign: We need real, effective cryptocurrency regulation. Without it, cryptocurrency will never shake off its shadowy reputation and reach mainstream adoption.
Current cryptocurrency regulation
Many countries have already embarked on the journey towards cryptocurrency regulation. However, the majority of governments still fear this bold new economy.
China, Nepal, Bolivia, Ecuador, and Kyrgyzstan are just a few of the countries that still have strict policies against cryptocurrency trading. Nevertheless, the situation in the past few months has shown that things are finally progressing. Many countries in Europe and Asia – as well as the United States – are taking steps towards regulating the cryptocurrency market.
Then there are the fence-sitters: those countries taking the wait-and-see approach. While this method is quite passive, it allows authorities to monitor the situation and the state of the market. Once they gain greater insight into blockchain technology itself – and how it can be used in the crypto economy – lawmakers will have a deeper understanding of how to regulate the market.
Regulation could be a good thing
Most crypto enthusiasts accept that cryptocurrency regulation is inevitable, whether they like it or not. Regulation could take many forms, some of which could be helpful for all involved.
Perhaps the best approach to regulation would be sandboxing. That would allow regulators to create a controlled test environment where FinTech startups could work on innovations without being restricted by any current laws or overseen by any regulatory institutions.
The Swiss Canton Zug, also known as “Cryptovalley,” is the best-known example of this approach. Zug’s low taxes and crypto-friendly regulations make it a haven for blockchain innovators and investors from around the world. One of Zug’s most successful tests was the first blockchain-based vote, in which the valley’s residents took part.
Another approach to cryptocurrency regulation would be to follow in the footsteps of Malta, widely dubbed the Blockchain Island. Malta was the first country to successfully set up a regulatory framework for blockchain. In 2018, Maltese authorities proposed three important laws that would further boost the blockchain and crypto economy. Those laws define the duties and responsibilities of the authorities to certify DLT platforms, exchanges, ICOs, wallet providers, and other companies operating on the cryptocurrency market.
Order out of chaos
Bearing all this in mind, there are several reasons why cryptocurrency regulation is crucial for all participants in the crypto economy.
In order for cryptocurrency to become mainstream, the industry needs to build trust. Part of that process involves government regulation and some kind of legal safety net. Because while people like the fact that cryptocurrencies are decentralized and private, they also don’t want to get scammed out of their money. Early adopters may have been willing to risk their money, but the wider public won’t.
The (de)centralization of mining power also needs to be regulated. Today, almost 53 percent of Bitcoin mining power is concentrated between two mining pools. A few crypto exchanges also hold far too much power. Regulation could help spread this power and protect crypto users from market manipulation, such as pump and dumps.
Traditional vs crypto economy
Many crypto enthusiasts talk about fiat currencies as if they’re the greatest force of evil in the world. However, fiat and cryptocurrencies have to learn to coexist. Fiat will not disappear any time soon, and most people will continue to measure the value of their crypto by its dollar equivalent. For crypto and fiat to work together, we need regulation.
There’s one other elephant in the room: Tax. As much as some crypto libertarians hate it, the tax remains an unavoidable part of society, at least in its current form. After all, governments should – in an ideal world – use tax money to improve the welfare of their citizens.
Currently, the cryptocurrency industry pays very little in tax. This will have to change. In fact, blockchain could revolutionize the way we pay tax, making it more efficient and transparent than ever. Of course, regulation will be an important part of that process.
The aim of cryptocurrency regulation should be to earn the trust of everyone involved in the crypto market. Without that trust, we risk losing innovators, investors, and users. That’s why it’s so important to define the rules now, so we can begin the crypto revolution in earnest.