Financial industry compliance specialists have witnessed firsthand the importance of regulation in protecting consumers and preventing financial crimes. As a result, it has become a common theme that the rapidly expanding crypto industry requires more regulation, not less.
While some argue that cryptocurrencies' decentralized and anonymous nature is a selling point, the reality is that it also makes them susceptible to fraud, money laundering, and other illegal activities.
Without proper oversight, bad actors can easily exploit the system, endangering honest investors and consumers.
Top Reasons Why Crypto Industry Needs More Regulation
Here are some of the reasons why the crypto industry requires more oversight:
Financial Crime Prevention
The crypto industry's lack of regulation has resulted in numerous cases of financial crimes, such as fraud and money laundering.
For example, in 2020, the US Justice Department charged two Chinese nationals with laundering more than $100 million in stolen cryptocurrency using 'mixers' and 'chain hopping' techniques to conceal the funds' origin and destination.
Regulation, which requires crypto exchanges and other industry participants to implement anti-money laundering (AML) and know-your-customer (KYC) procedures, can help prevent these types of crimes.
These measures would make it more difficult for criminals to use the crypto industry as a conduit for illegal activities, while also assisting law enforcement agencies in tracking down and prosecuting those who do.
The case for NFTs: How AML and KYC could bolster the NFT market and be key to unleashing its full potential
The NFT industry is booming but its promised winds of revolution are still feeling like a slight breeze.
In fact, given all the potential applications for NFTs, many find it surprising how NFT technology hasn’t seen mass adoption and day-to-day usage yet (other than, of course, for artistic and speculative purposes).
The fact is, AML compliance is perhaps one of the most important elements in building trust amongst investors, institutions, and, in a broader sense, in earning the trust of the general public.
This is perhaps one of the reasons why NFT technology hasn’t gone past the marketplace stage.
While still a nascent industry, NFTs have shown a lot of promise but it’s fairly certain that the industry won’t be able to deliver without being able to prove that it has taken measures to bolster its transparency and the safeguarding of stakeholders’ and investors’ interests.
It’s a common fact that the blockchain, cryptocurrencies, and NFTs were a shout for decentralization, but that very same centralization is inherently pointing to a trustless system. Needless to say, a trustless system might not be correlated with the public’s best interests.
After money laundering and rampant NFT scams are addressed through a solid regulatory framework, KYC processes, and AML procedures, investor confidence will surely be strengthened.
As such, crypto regulation might once again prove quintessential in the development of the industry.
Investor Protection
The lack of investor protection is one of the most significant risks of investing in cryptocurrencies.
Cryptocurrencies, unlike traditional investments such as stocks and bonds, are not backed by any government or regulatory body. This means that investors may lose money if the market crashes or if a specific cryptocurrency turns out to be a scam.
Regulation can aid in investor protection by requiring companies that issue or trade cryptocurrencies to disclose more information about their operations and financial condition. This would allow investors to make more informed decisions about which cryptocurrencies to invest in, while also making it more difficult for fraudulent companies to operate in the industry.
Increasing Market Stability
The cryptocurrency market is notoriously volatile, with prices fluctuating wildly based on a variety of factors, such as news events and investor sentiment. While some investors enjoy the thrill of the ride, others may be put off by the market's unpredictability.
By imposing rules and standards on the crypto industry, regulation can help promote market stability. Regulators, for example, could require exchanges to install circuit breakers, which would automatically halt trading if the price of a specific cryptocurrency fell significantly in a short period of time.
This would help to avoid panic selling and other market disruptions while also making the market more appealing to conservative investors.
Increasing the Industry's Credibility
Finally, more regulation could help boost the overall credibility of the crypto industry. Many people continue to be skeptical of cryptocurrencies, seeing them as a speculative bubble or a safe haven for criminals.
Regulators could help build trust and confidence in cryptocurrencies as a legitimate asset class by imposing stricter rules and standards on the industry.
Of course, there are some drawbacks to increased regulation. Some argue that excessive regulation will stifle industry innovation and growth, while others are concerned that it will drive crypto businesses to operate in countries with more lenient regulatory environments.
However, I believe that the benefits of increased regulation outweigh the risks. We can help unlock the full potential of cryptocurrencies as a revolutionary new asset class by creating a more secure, stable, and trustworthy crypto industry.
Wrapping Up
To summarize, the rapidly expanding crypto industry requires additional regulation to protect consumers, prevent financial crimes, promote market stability, and boost industry credibility. While some may argue that excessive regulation stifles innovation and growth, the reality is that the risks associated with an unregulated industry are far greater.
Regulators can require companies to implement anti-money laundering and know-your-customer procedures, disclose more information about their operations and financial condition, and promote market stability through the implementation of circuit breakers and other measures by imposing stricter rules and standards on the crypto industry. These steps can aid in the prevention of fraud and money laundering, the protection of investors, and the development of trust and confidence in cryptocurrencies as a legitimate asset class.
