Emerging Fintech

The normalisation of cryptocurrency

It seems that over the last year, the media interest in cryptocurrency has been increasing to the point where even the BBC are writing articles about it regularly.

Whether caused by, or a causal factor of this, global regulators are turning their eyes towards the space and in many countries have placed outright bans on crypto activity. Even Google has banned crypto ads.

This action assumes that all crypto activity is bad. That everyone in the space is a criminal, out to scam the person on the street and to launder money or finance crime. This simply isn’t the case and there are many legitimate businesses that have been unfairly tarred with this brush. The problem goes beyond a purely reputational one. If legitimate businesses are prevented from operating freely, they will cease to function – no business can survive without customers – and this will effectively create a crypto market that fulfils the fears of the regulators. Criminal businesses do not respect regulatory authority or national legislation and so will continue to operate, eventually replacing the legitimate businesses that have been killed off by regulations intended to prevent criminality.

Time for crypto to come out of the shadows

Clearly regulators need to think carefully about how they approach the crypto space and ensure it isn’t regulated out of existence. That said, this shouldn’t be a one-way thing. Crypto businesses can’t simply carry on as normal and hope that regulators come down on their side. That regulation is coming is certain. Institutional money is waiting in the wings, exchanges in the US have already started trading crypto derivatives and large asset managers are investing in the space. It’s only a matter of time before this activity is regulated.

Crypto businesses have not historically been particularly vocal nor have they consistently engaged with the traditional financial services system, but in order for them to survive, they now must. The majority of crypto businesses are run properly – they have business plans, conduct the proper checks on customers and stay within the law. It’s essential that they communicate this to the wider market, to potential customers and begin to separate themselves from the criminal element present in this space. They must also start to engage with regulators – not all of them are anti-crypto and some are simply acting out of a lack of understanding of the space. Far easier to ban something and forget about it than to try and understand the subtleties. If crypto is to survive, however, regulators and the wider financial services market need to understand the subtleties. It’s up to crypto businesses to help with this education and, in turn, help to shape regulation. In short they must learn to communicate.

 Learning lessons from the past

Parallels can be drawn with the gradual acceptance of hedge funds into the traditional financial services space. Pre-2008, hedge funds were seen as money launderers and criminals operating in offshore tax havens making billions of dollars a year. As with cryptocurrencies now, both regulators and financial institutions started taking an interest. The institutions wanted some of the profits and the regulators wanted to curb the free for all. Hedge funds realised that in order to get investment from the institutions they needed to run themselves as proper businesses. Proper compliance functions, risk controls and capital adequacy were needed. Regulators realised that if institutions were investing then the space needed proper regulation.

A dialogue resulted in the creation of legislation that allowed legitimate hedge funds to keep operating while putting safeguards in place to protect investors.

The financial services space is at a critical juncture for many reasons and the “normalisation” of cryptocurrency is a major part of this. The crypto market faces a choice – accept whatever regulations are passed and descend further into the shadows, or engage with the wider financial services space and create an environment where the market can mature and thrive. It would be tempting to think that this challenge is a unique one but history shows us otherwise. Crypto firms would do well to learn from that lesson and have a hand in shaping their own future.

Written by Daniel Lowther


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