Tough regulations are to be expected in the cryptocurrency market, as countries will restrict access in order to guarantee the adoption and success of their own digital currencies.
The cryptocurrency market – which is currently valued at $1.7tn and has 106 million users worldwide, according to a report conducted by Crypto.com – has been used by many investors for speculative investments that would supposedly earn them rapid capital gain due to the asset’s highly volatile nature. In order to execute their trades, investors rely on cryptocurrency exchange platforms such as Binance and Coinbase. But in recent months, these platforms have been dealt some blows.
In May 2021, China banned any financial institutions from performing cryptocurrency transactions. And in the UK, retail banks suspended any transactions towards exchange platforms out of fear of financial crimes. These recent restrictions on crypto exchanges and the cryptocurrency market in general are a sign of tougher restrictions to be expected in the future.
Cryptocurrency transactions suspended
Last month, UK banks such as Barclays, Monzo, and Starling Bank decided to temporarily suspend payments toward crypto exchange platforms due to a growing number of suspicious transactions. These restrictions are meant to be lifted as soon as the banks introduce better checks and verifications on crypto exchange payments.
Along with the popularity that the cryptocurrency sector has gained in recent years, banks reported increasing rates of financial crime related to cryptocurrency transactions. According to a report from Action Fraud, £63m was stolen through fake online investments, and approximately 44.7% of those scams were related to cryptocurrencies investments.
Slow registration by cryptoasset firms
Despite the Financial Conduct Authority’s (FCA) initiative to have all cryptoasset firms registered by July 2021, only five companies are fully registered, and the FCA just announced that it will extend its registration process to March 2022. This means that most crypto exchanges in the UK are operating without FCA rules and thus don’t have any obligation to monitor or report any transactions that would be in violation of anti-money laundering rules.
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Until they are fully regulated, it is up to banks and financial institutions to find solutions to reduce their risk exposure to any forms of financial crime through crypto exchanges.
An international regulation framework is needed for cryptocurrency
The cryptocurrency sector needs an international framework that regulates it. This could be introduced to restrict its usage in all countries. At the moment, countries have a disjointed approach to regulating this sector – if they are even regulating it at all.
Some countries such as Japan passed regulations in favor of cryptocurrencies, recognizing them as legal property, and the sector is under the entire supervision of the Financial Services Agency. Other countries like India are looking to ban this sector; in March 2021, the Indian government was due to introduce a digital currency bill that would have made cryptocurrencies illegal in the country.
China is furthering its restrictions by prohibiting financial institutions from engaging in related transactions. The decision to restrict or ban the use of cryptocurrencies by countries is an attempt to limit the influence that the sector can have on the world economy, as they wouldn’t want to surrender the control of their economy to a decentralized currency.
Stablecoins should expected the same regulations as fiat currencies
In the UK, the Bank of England released a discussion paper in which it explains that stablecoins should expected the same regulations as fiat currencies, in this report it also mentions it is exploring the potential introduction of its own digital currency, the “Britcoin”. And in the case of China, the country is hoping to guarantee the success of its own digital currency, which is currently being trialed in several of its cities.
The growing cryptocurrency sector needs to be regulated to protect users from online scams and prevent it from being used in crime such as money laundering.
In the UK, until the FCA is able to regulate cryptocurrency firms, traditional banks will have to find solutions to protect their customers from online fraud associated with cryptocurrency transactions – or, more likely, refuse to deal in cryptocurrency for retail customers.
The growing popularity of cryptocurrency is perceived as a danger to central banks, as they are concerned about the impact that a volatile decentralized currency can have on their economy. By restricting the adoption of cryptocurrency, central banks can try to transition to their own digital currencies – the regulations we see will likely be highly restrictive to accomplish this.