Cryptocurrencies are well-known for their decentralized nature and lack of centralized authority in charge. The financial independence component is a significant advantage, knowing that no one can freeze your account or take control of your funds. As cryptocurrencies become more common and extensively used, various organizations have begun to develop legislation to exert some control over the system. Many people see these rules as a hindrance to the “freedom” component of the crypto sector.
Who is Behind Crypto Regulations?
While no single entity has complete authority over cryptocurrencies, governments have taken issues into their own hands and began developing and enforcing crypto rules. While many early adopters detest the restrictions, enacting restrictions may have some long-term advantages.
Recently, as countries adopt new restrictions, investors are rushing to acquire and sell various digital assets to maximize gains and minimize losses. Obviously, this has an impact on the price of different assets, as a major sell-off would lower the value while a significant purchase would raise it.
Why and How Can Regulations Benefit the Crypto Industry?
1. Regulations create binary virtual asset ownership
Regulations such as the FATF's Recommendation 16 and FinCEN's MSB and BSA traveling regulation requirements will eventually divide crypto assets into regulated and unregulated areas.
The crypto sector will be able to clean up its act by connecting the real-world identities of crypto owners to virtual assets moving via certified Virtual Asset Service Providers (VASPs). Exchanges and authorities will distinguish between clean virtual currencies and those polluted by ML/TF and other forms of criminal activity. As more confirmed real-world identities begin to illuminate the blockchain, all stakeholders will be able to trace the source of crypto. This will push criminals to underground markets, where their virtual assets will either exist in a legal gray area or be clearly illegal. Unregulated investments will become less fungible and hence less valuable as a result of this uncertainty.
2. Regulations make virtual assets easy to categorize and understand
Crypto-friendly financial institutions and banks are now scarce. This is due to the long-term legal ambiguity surrounding virtual assets and the time-consuming and expensive AML/KYC compliance systems that are necessary, which is impeded even more by a lack of technical understanding and confusing laws that can be issued at any time.
Financial institutions may only begin to shed light on gray areas and categorize assets using a long-term perspective based on their legal position with better regulatory guidance. This assists financial institutions in avoiding risk as long as they adhere to transparent guidelines and rules outlined in financial legislation.
3. Regulations give financial institutions the green light to invest
Regulation makes it simpler to identify and comprehend innovation. Before aggressively embracing and promoting a new asset class, financial institutions must have a thorough understanding of the landscape in which it functions, as well as the risk concerns connected with it. This is not probable under the current conditions. While blockchain-tracking businesses are doing an outstanding job of tracing illegal cash flow, it is insufficient. Financial institutions cannot operate or develop financial instruments in a market where the origins and long-term legality of the underlying assets are unclear.
4. Regulations put an accurate valuation on a cryptocurrency's worth
A regulated market, where authorities can link actual names to illegal activity, produces a more fair playing field for all crypto investors. Fake purchase and sell orders and collaboration to produce the "pump and dump" movement will be more challenging to get away with. Cryptocurrencies will be evaluated by the market on their own merits and will be subject to more pure supply and demand economic processes. A larger investor pool will generate stability by providing liquidity, which will reduce volatility in favor of more consistent long-term price predictability. Growth will be natural, and shareholders will be able to identify the underlying worth of virtual assets using business fundamentals more correctly.
5. Regulations will make virtual asset ownership more secure
For virtual asset custodians and owners, clear and actionable legislation will pave the road for a much-needed control layer. If law enforcement can demonstrate criminal conduct or intents such as human trafficking, VASPs will be able to reject unwanted or suspected transaction requests, freeze irregular transmittals in route, or even reverse harmful transmittals after the fact.
6. Regulations encourage investment into research and development
The predicted flood of financial institutions into a regulated cryptocurrency field should provide the whole sector with a tremendous "brain gain." Financial institutions will offer some of the world's most qualified individuals in banking, FinTech, and cybersecurity, as well as mature, enterprise-ready systems and infrastructure that have been battle-tested and iterated many times to assure dependable stability, security, and overall performance. In conventional finance, AML compliance is also far more mature and sophisticated, and VASPs will have no shortage of AML expert organizations to consult with to uncover illegal actors worldwide.
6. Regulations improve the efficiency of virtual asset trading
Compliant virtual asset transmittals will be future-proofed by regulated crypto markets, allowing them to be transmitted to nearly any regulatory-compliant location in the world. Users of VASP will likely no longer be forced to complete time-consuming and inconvenient KYC registrations each time they register an account. Instead, people can construct a global virtual asset profile that is linked to their actual identities. Investors will have much less need to diversify risk and will be more inclined to maintain a larger portion of their portfolios in cryptocurrency rather than paper money, as less price volatility, better security, and digital currency, regulated stable coins will provide them with the same level of protection as physical currencies.