In times of market volatility, regulation can restore confidence and public trust in crypto, writes Albert Isola, Gibraltar’s minister for digital and financial services.
The past year has brought major challenges to the world of digital assets as the industry scaled all-time highs and similarly significant lows. A little over a year ago, Bitcoin reached its peak of more than US$68,000, whereas now it is trading under US$18,000 — illustrating the volatility of the market. In May 2022, the crypto market effectively crashed, triggered by a sudden and extended fall in the prices of cryptocurrencies. The estimated loss of more than US$2 trillion worth of market value reflected a period of uncertainty for the distributed ledger technology industry.
Regulation is required to protect consumers’ financial assets as well as make the market a safer place overall. Not only does this instil greater confidence in those trading in the market, but it also increases the attractiveness of the industry, facilitating wider adoption of crypto services. The introduction of clear regulatory guidance would see nations become more crypto-friendly and provide a welcoming environment for growing innovative companies. This, in turn, boosts economic growth for the host jurisdictions. Controllers of digital asset firms see the value in establishing their operations in these well-regulated jurisdictions, which allow them to trade in a safe and certain regulatory environment with clear laws that also serve to protect consumers.
Repairing public trust
The need for digital asset regulation has become more prevalent in the current market downturn. The risks associated with trading in the virtual asset markets have been highlighted over this past year as several major exchanges including Celsius, Voyager Digital and most recently, FTX, have collapsed. Because of a poorly regulated industry, billions of dollars in value of crypto assets have been lost by customers locked out of their accounts or unable to withdraw funds. The mistakes of the past have undoubtedly damaged the public opinion of the crypto industry. To restore trust, it is necessary to introduce regulation that protects people’s assets from a firm’s lack of appropriate corporate governance or, worse still, malpractice. Establishing effective regulatory frameworks can begin to repair the public’s trust.
Financial risk is undoubtedly a major factor that inhibits the widespread adoption of digital assets and while regulation does not remove investment risk, it can provide peace of mind to investors that they will be fairly treated. Market integrity standards play an important part in this alongside effective mandated controls in the segregation of client assets, both of which are inherent elements of the DLT Regulatory Framework that Gibraltar introduced in 2018.
Advances in regulation worldwide
As crypto markets are still in the relatively early stages of development, they are naturally challenging to regulate. This challenge is only amplified by varying opinions from both within and without the industry on what form regulation should take and, indeed, if it should be allowed to continue at all. However, if the everyday use of cryptocurrency is to become the norm, then its regulation must be prioritized. It is expected that the widespread adoption of digital assets will also provide much-needed stability to a largely unpredictable industry.
Political and regulatory figures have welcomed the introduction of regulation in the digital assets sphere. In 2018, Gibraltar introduced well-crafted regulation that looks to cater to all market participants. This year, the European Union has approved the final legal text of the Markets in Crypto-Assets (MiCA) Regulation proposal, which aims to encourage technological innovation within the European Union and ensure consumer protection against unlawful financial loss. Additionally, 2022 has seen an executive order signed by U.S. President Joe Biden, aimed at examining the risks and benefits associated with cryptocurrencies. The recent introduction of the “Comprehensive Framework for Crypto Regulation and Development” aims to transform the U.S. crypto assets landscape. Clear frameworks like these proposed for introduction in the E.U. and the U.S. show leadership and will undoubtedly encourage other jurisdictions that wish to regulate blockchain technologies.
Straightforward and definitive legislation is necessary to create a safe and stable marketplace for all participants as well as to encourage cooperation between governments, regulators and digital asset firms. The aim of such legislation should be to nurture innovation while creating a safe environment for all those who trade in it. Those without legislation should follow in the footsteps of the jurisdictions that are already frontrunners in the space.