As digital currency regulations have become increasingly complex, Todd Crosland, CEO of CoinZoom, writes for PaymentExpert on the challenges involved with the framework for crypto. 

The story so far

The demise of cash, combined with the onset of new digital banking tools, has undoubtedly accelerated the rate of crypto usage. The past twelve months have seen the likes of PayPal, Revolut and Facebook expand their crypto offerings, and in the case of El-Salvador, an entire nation has begun accepting Bitcoin as legal tender. The result is that in 2021 alone, crypto usage rocketed by 881%, with cryptocurrencies becoming an increasingly viable payment option for consumers.

Despite this explosion in retail trading activity, the price of tokens remains extremely volatile. Bitcoin, for example, reached an all-time high of $68,000 in November 2021, but has since fallen significantly. Macroeconomic factors such as inflation and geo-political tensions mean that it has dropped to almost half that value at times in 2022.

The notoriously volatile nature of cryptocurrencies has led the crypto market to become the subject of intense scrutiny from authorities. Official bodies such as the Federal Reserve, Financial Conduct Authority (FCA) and Bank of England have repeatedly warned consumers that they should be prepared to lose money if they invest in cryptocurrencies. While digital assets have undoubtedly grown in mainstream popularity, scepticism from policy makers continues to hamper their widespread adoption.

Regulation is critical to trust in digital assets

Some in the crypto space virulently oppose regulation, arguing that it would hinder innovation and contradict the very decentralised foundations upon which cryptocurrencies were built. In this scenario, financial task forces would take a hands-off approach, leaving the industry to self-regulate.

However, rather than a barrier to innovation, the implementation of a clear and well-developed set of rules will be vital towards integrating cryptocurrencies into the broader financial system. For the industry to continue to grow and become mainstream, customers must have trust in the infrastructure and framework underpinning it – and it starts with regulation.

This trust cannot be founded in an unregulated environment that permits bad actors to roam freely. The UK’s Financial Conduct Authority recently reported a double in the number of alleged crypto-related scams in 2021 compared to the previous year, while the cost of cryptocurrency fraud over the past decade now stands at $19.2 billion globally. This, if anything, should serve as an impetus for introducing the regulation needed to tackle this crisis of trust.

Clear accounting rules are critical to achieving this, not only helping companies shape their crypto strategies, but also providing them with the tools they need to make crypto a safe and orderly marketplace for investors.

What should investors do in the meantime?

Despite the clear need for rules, the reality is that some regulators have been slow to respond, and a lack of clarity continues to act as a barrier towards truly widespread adoption.

While Biden’s recent executive order on cryptocurrencies is undoubtedly a step in the right direction, it is short on policy detail, lacking any new rules for the players and platforms in the crypto space. It remains unclear as to what form regulation would take and how it would be enforced.

With wide-reaching regulation unlikely to be implemented in the near-future, individual traders and institutions alike should seek out exchanges that are reputable and properly regulated in order to ensure their money is protected.

Many exchanges are domiciled in countries that have little or no regulatory requirements related to crypto. The U.S., on the other hand, has the highest standards and highest capital requirements for any country in the world. While these high regulatory standards can be a deterrent, the implementation of these requirements is nonetheless a necessity as more of the world’s largest financial institutions begin to enter the crypto space.

The mainstream adoption of cryptocurrencies will not happen in one ‘big bang’ moment. Instead, the industry needs to be looking at ways to integrate digital assets into the existing financial system. The implementation of regulatory framework will be key towards engineering this transition, providing the legitimacy and trust that cryptocurrencies need to become a widely used, mainstream payment option.