Increasing Regulations Around Crypto Currency And What They Mean
Over the past decade, crypto currency has gained attention, with Bitcoin reaching a value of over $60,000 in early 2021. However, the market has faced challenges, with some assets dropping by 75% from their peak. Governments globally are now concerned about potential illegal activities linked to crypto, such as fraud and money laundering. As a result, the USA and the EU have increased crypto regulations, which could impact the market.
Why has there been an increase in crypto currency regulations?
Governments worldwide are tightening crypto regulations due to concerns over illegal activities. Criminals have used crypto to move money across borders, making it difficult for law enforcement to track and investigate. Money laundering and financing terrorism are among the primary concerns. Crypto’s traceability issues pose a significant challenge.
The crypto currency market lacks transparency and investor protection. Unlike traditional financial markets, it is largely unregulated. This means investors may not have the same level of protection. Crypto currency exchanges have been hacked in the past, resulting in the loss of millions. Increased regulations aim to protect investors and provide greater market transparency.
What do the regulations mean for the market?
New crypto currency regulations can affect the crypto currency market. One of the earliest effects is the rise in compliance costs for crypto currency exchanges and other businesses in the market. This can force smaller exchanges to shut down. Consequently, competition in the market is expected to decrease.
Crypto regulations could cause decreased liquidity in the market. Tighter regulations may discourage some investors from investing, leading to lower trading volume and liquidity. Furthermore, an increase in regulations could result in a decrease in new initial coin offerings (ICOs), which would lower the number of new crypto currencies entering the market.
How do regulations differ between the USA and the EU?
The USA and EU differ in their crypto currency regulations. The SEC in the USA has been proactive in regulating crypto currency. It’s issued guidelines on how to treat ICOs and taken action against exchanges violating securities laws.
Additionally, the Financial Crimes Enforcement Network (FinCEN) has issued guidelines on anti-money laundering (AML) and know-your-customer (KYC) regulations for crypto currency exchanges. In the EU, the approach to crypto regulation has been more fragmented. The European Securities and Markets Authority (ESMA) has issued guidelines on ICOs. It has also recommended that crypto currencies be treated as financial instruments. However, there is no unified approach to crypto currency regulation in the EU. Many individual countries have decided on taking their own approach to regulation.
Examples of crypto currency regulations
In the USA, the New York State Department of Financial Services BitLicense regulates virtual currency transactions. Businesses must obtain a license to operate in New York, undergo background checks on executives, comply with AML and KYC regulations, and maintain an auditable trail of transactions. In the EU, the Fifth Anti-Money Laundering Directive (5AMLD) requires crypto currency exchanges to comply with AML and KYC regulations, register with their national regulatory authority, and report suspicious transactions to the authorities.