There is a sense that today’s generation of investors is more deterministic and thick-skinned than ever before, particularly given their experience of a volatile economic climate and unpredictable derivatives.
The same may also be said for today’s cutting-edge asset classes, with examples such as cryptocurrency having adapted and thrived in the contemporary marketplace, despite incredible adversity. This is best embodied by bitcoin, which remains the poster boy for digital currency and has enjoyed numerous peaks and troughs since its launch in 2009.
While digital currencies such as bitcoin have survived largely due to their agility and potential applications, an underlying lack of regulation is creating even further volatility and deterring entire groups of potential investors, particularly now that it has begun diversifying into various offerings such as ICOs and Cryptofunds, which are a form of crypto-mutual fund.
What Regulations Currently Exist?
At first glance, one would think that regulation may be detrimental to cryptocurrency, but in fact the opposite is true. To understand this further, one need only look at Bitcoin’s historic price run over the course of the last 18 months, as its value increased from $900 to $20,000 before losing 80% of its value since January.
This volatility is largely underpinned by lack of stringent and uniform regulatory measures, as the market remains extremely vulnerable to manipulation while investors are forced to take on considerable and often disproportionate risks in the pursuit of gains.
Market leading firms have strived to mitigate this to some degree by introducing so-called stablecoins, which are price stable cryptocurrencies that have their value pegged to a more secure asset such as the US Dollar (USD). This immediately creates a narrower trading range and more risk-averse proposition, although it does little to challenge market manipulation and lack of consistent regulations.
Similarly, we’ve also seen social trading platforms replicate proven cryptocurrency funds, which instantly negate risk by utilising successful techniques and combining numerous currencies within a single portfolio.
Despite this, the question that remains is whether any independent regulations exist at present? The UK government and the Financial Conduct Authority (FCA) have certainly been at the forefront of regulating the market during its stint in the EU, having made plans to end anonymity for crypto traders and introduce legislation that would require platforms to conduct due diligence on customers and monitor all transactions.
This remains a work in progress for now, although the good news is that the UK and the EU appear to be adopting a uniform approach despite that fact that Britain is leaving the European Union on March 29th, 2019.
What Does the Future Hold for Cryptocurrency Regulation?
While the UK authorities have taken initial steps to regulate cryptocurrency, there remain significant challenges ahead.
Firstly, the decentralised nature of cryptocurrency and lack of a central authority makes it naturally difficult to regulate, while the variable approach and attitudes of individual countries (which range from those who are welcoming and others who are downright antagonistic) means that it’s extremely hard to envisage a unified regulatory approach being implemented across the globe.
Classification of the asset also remains a concern, with the EU considering Bitcoin as being separate to financial market rules, and some authorities categorising cryptocurrency as property.
2018 is at least set to be the year of regulatory reckoning in the market, so we should see nations throughout the world make initial efforts to take hold of cryptocurrency trading during the next 12 months. This will create a fortified market that is stronger and less volatile than it is now, particularly as stablecoins and cryptocurrency funds enable investors to mitigate their own risk when trading.
The Last Word
Ultimately, regulation is central to the long-term success of the cryptocurrency market, as all but the most risk-hungry investors are likely to be deterred by the type of price fluctuations experienced by Bitcoin in the last 18 months.
Small but actionable steps must be taken to achieve this goal, while uniform regulatory measures should be implemented where possible. It would make initial sense to afford cryptocurrency a defined classification in the financial market, as this may help to dictate how it is treated in the future.
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