New Market, New Rules
In many nations, government regulations tend to lag behind marketplace innovations. This trend is very apparent in the fast-paced financial markets. For this reason, the financial markets have always had strong, industry-led, regulatory bodies.
This is not quite the case with the crypto markets. This is despite it having a strong emphasis on decentralized finance (DeFi) and it being even more fast-paced than legacy finance. In the crypto markets, industry self-regulation is just getting started. There are a number of reasons for this.
The pace of Web 3.0 and the expertise required might mean that self-regulation could be the primary mechanism to provide legitimacy for the burgeoning asset class Traditional models move too slowly. However, strong self-regulatory bodies working with traditional agencies provide the best path forward for maximum growth and adoption. The balance can be found.
Why Crypto Needs Regulation
A self-regulated industry is essentially one where a group of industry bodies come together and issue guidelines and standards of conduct. Self-regulatory bodies can improve quality standards without the messy bureaucratization and red tape the world has come to accept. They’re strong recommendations without being legally enforceable.
Blockchain is all about putting the risks and the rewards back in the hands of wallet holders, by giving them the choice of what to do. So self-regulation is perfectly aligned with the underlying philosophy of blockchain, an area that prides itself on decentralization and autonomy from third-party interference.
While self-regulation in any market will help to create order, it’s especially true for cryptocurrencies due to the speed of change. The blockchain ecosystem is known to be faster than existing infrastructures by orders of magnitudes. Not merely the applications built on blockchain, but also the rate of change within the industry itself.
It stands to reason that only a team of industry experts and bodies have the capacity to really offer correct guidance. Once self-regulation is in place, it creates many tools to support the government in creating effective regulations. Efficient self-regulation also helps to reinforce trust and gain further support from the public.
The Dangers of Non-Regulation
The rise of the distributed ledger industry is often compared to the rise of the internet. But one of the reasons the internet was successful was due to the lack of regulatory oversight, with developers free to innovate in a vacuum. It took regulatory bodies about two decades to really start regulating the online data industry. The world of crypto, with its ties to finance and the potential to lose funds, does not have this luxury. And we all know the dangers of non-regulation.
There are so many hacks and scams in cryptocurrency that it’s quite hard to narrow down the list. OneCoin reportedly raked in $4 billion. BitConnect around $4 billion. PlusToken around $3 billion. You get the idea. These are the basic Ponzi schemes that proliferate in an industry that is often KYC-hostile. Decentralized Finance also suffers from hacks and scams. BadgerDao recently lost $120 million in an exploit. The crimes continue, mainly due to a lack of regulation.
Aside from the obvious loss of all your capital, there are other benefits of both self-regulation and third-party regulation. Uncertainties, price volatility, and the worry of illegal activities all affect the cryptocurrency markets. There’s no doubt that regulation, of some kind, is required. All these things happen in any financial market, but not to the same extent. The lack of public understanding is holding back crypto adoption. A lack of governmental oversight is also an impediment to wider crypto usage.
The basic fact is that the crypto industry is not regulated. This is enough to deter people from investment and from experimentation. It leads to (potentially unfounded) question marks in the news and media from many politicians and economists. This causes people who are crypto-neutral to shy away from the technology.
Industries and organizations need to come together for self-regulation. This has already happened to an extent. In 2018, the Japan Virtual Currency Exchange Association (JVCEA) was recognized by the Financial Services Agency (FSA) in Japan. The Japanese crypto industry was essentially allowed to self-regulate. JVCEA consists of 16 exchanges and an additional 5 Type II Members (including Coinbase). The trend of self-regulation in the crypto exchange industry has been reflected in some, though certainly not all, nation-states.
But in order for it to work, more than just acceptance of self-regulation will be needed. The rate of growth and innovation within the cryptocurrency industry is lightning fast. AI and Big Data tools like Defy Trends are necessary in order to compute the data and make sense of it, within a short time frame. We are only now getting around to the regulation of Non-Fungible Tokens (NFTs), and it will be years before centralized legislation is passed. But a self-regulatory body can draft immediate guidelines based on data it has immediate access to without the time delay.
With calls for a global crypto regulatory system, the importance of fast and effective data capture becomes even more prominent.
Private crypto firms will need to work with self-regulatory bodies who then work with centralized agencies to create a fully robust and sustainable ecosystem. These cryptocurrency companies will have access to market data using AI and deep analytics to provide insights which are passed ‘up’ the chain of compliance. With the pace of the financial markets, every actor needs to play their role in securing the system.
Self-Regulation: The Best Way Forward
The blockchain world moves too quickly for any centralized body to create meaningful regulations. In many instances, they are rendered obsolete within a year. With NFTs and sophisticated Web 3.0 innovations, perhaps only a consortium of blockchain-focused enterprises can act in time, with meaningful measures.
They can work with traditional regulatory authorities to get the best of both worlds, where the regulations are tailored to market innovations and are truly useful and meaningful in terms of compliance.
Self-regulation is likely to lay the groundwork for a wider role for the crypto sector globally. Over time, governments can leverage the efforts of private industry, and selectively use the tools and techniques that have proven useful.
At its core, self-regulation aligns industry with government, and allows both the public and private sector to set shared goals and move forward with both local and international growth and adoption.