Why Regulation Is the Best Thing for Crypto

When we hear about holders of crypto being tracked down by the Internal Revenue Service, or that imprisonment is being considered for anyone using crypto in India, it conjures up a disconcerting image of what regulation might entail. 

It’s part of crypto’s DNA to be unregulated, some might say. It falls outside the scope of government and should remain so for all the reasons it was created in the first place.

But if crypto is the future and there are valid concerns, then surely these should be addressed. If we want crypto to be accepted and become part of our everyday lives, then we need to engage in the debate and embrace reasonable and responsible regulation. Even the most devout supporters, who wish nothing more than to see crypto succeed on a mass scale, could agree that the growth of this industry depends, in part, on the establishment of safe, fair and reliable market conditions. 

Presently, the regulatory climate is still uncertain and fragmented across jurisdictions. However, recent developments seem to suggest that we find ourselves at a turning point. The contours of a global regulatory framework are coming into focus, and we should welcome it.  

An emerging framework


On July 15, the International Monetary Fund (IMF) published a compelling document containing a useful typology of digital money, an assessment of the risks it poses and policy recommendations. It posits that privately issued stablecoins pose a number of risks to consumers and financial stability, citing liquidity risk, default risk, market risk and foreign exchange risk as comprising the primary concerns. 

It argues that digital assets and cryptocurrencies could be attractive and see capital inflows away from fiat currencies in countries with high inflation rates and weak institutions. It furthermore notes that it is hard for virtual asset service providers (VASPs), such as crypto exchanges, to comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations when assets are underpinned by decentralized technology and stakeholders are spread across jurisdictions. 

But it also provides some solutions. Central banks could play a role in providing issuers of stablecoins with access to central reserves. To prevent monopolies from forming and to protect monetary policy, they could consider issuing their own digital currency, such as what is currently being considered in China. However, to drive innovation in the private sector, the IMF document favors public-private partnerships instead. 

Central banks could grant licenses — on the condition of supervision — and hold VASPs accountable for customer screening, transaction monitoring and reporting suspicious activity in accordance with Know Your Customer (KYC), AML and CFT regulations. Industry standards could also be defined for the security of wallets and client data.