Cryptocurrencies and blockchain technology offer many benefits to consumers and businesses. However, the complex nature of these new technologies makes it difficult for regulators and legislators to grasp their potential impact on financial markets or for legislators to develop coherent responses. As with any asset class, clear regulations must be in place to help manage market volatility, protect consumer rights and reduce crime.
A new study by the World Economic Forum emphasizes how balanced cryptocurrency regulations can assist financial inclusion, drive innovation and save the environment.
According to the whitepaper, The Macroeconomic Impact of Cryptocurrency and Stablecoins, crypto and stablecoins should be included in the economy with proper regulations. This is the best way to promote the benefits of innovation while limiting potential downsides.
“Cryptocurrencies and stablecoins have significantly grown as economic facilitators. The time for regulatory ambiguity is over,” says Matthew Blake, Head of Shaping the Future of Financial and Monetary Systems, World Economic Forum. “Effective regulations must mitigate the risks associated with digital currencies while realizing the benefits.”
Experts say that the primary focus areas for regulation would be the areas within payment and banking procedures where fiat systems serve as a bridge to crypto. Therefore, regulations should be based on the following premises:
- Require cryptocurrency exchanges to apply the Travel Rule, which requires virtual asset providers to gather and disclose user data for transactions over a specific limit.
- Make it mandatory for crypto exchanges to identify their corporate counterparts.
- Conduct transaction monitoring on cryptocurrency exchanges over a specific level
- Implement sanctions compliance procedures for cryptocurrency exchanges in line with the US Treasury Office of Foreign Assets Control (OFAC)
What’s next for crypto?
Going forward, the value of cryptocurrencies and stablecoins will be determined by how rules are developed and implemented. Common definitions for various forms of digital money will be a critical component of this law.
Other initiatives which authorities may take right now include working with other countries, including crypto and stablecoins in monetary financial data, and incorporating economic predictions into rules when they become more available.
By allowing to play a regulated role in the economy, governments can expect significant macroeconomic effects
- Better access to the financial system: One of the reasons why cryptocurrency is so attractive is because it allows users to participate in an economic system that they have traditionally been excluded from. Cryptocurrency is accessible regardless of income level, meaning it can help those who may have been excluded from traditional banking systems afford to participate in the economy. The current banking system is expensive and time-consuming, which can be a barrier to entry for many people.
- Combat Illegal activities: Cryptocurrencies can be a force for good in the world, depending on how they’re regulated. The FATF and the Financial Crimes Enforcement Network (FinCEN) have already addressed some of the risks and vulnerabilities of cryptocurrencies, but 50% of countries are behind on meeting AML and combating the financing of terrorism (CFT) requirements for virtual asset service providers.
- Ensure environmental sustainability: Cryptocurrencies alone cannot tackle climate change, but they can be a part of a solution. Cryptocurrency can provide market incentives for renewable energy power generation and grid decarbonization. There are opportunities for regenerative finance (referred to within the crypto industry as ReFi) and carbon-negative blockchains, in which cryptocurrencies could assist climate objectives.
Ultimately, the governments will create the right conditions that allow cryptocurrency to thrive. And with this inevitable growth and increased attention, regulations are inevitable. Perhaps the most critical aspect of any law is consumer protection – how do we protect consumers’ investments and ensure consumer safety? How do we ensure cryptocurrency has a right and level playing field with other monetary instruments? Regardless of how these regulatory questions play out, cryptocurrencies will have a role to play in the economy going forward. Sooner or later, we will have to decide how to treat them as such.