Cryptocurrencies are digital assets that use powerful encryption technology known as cryptography, to secure transactions and verify them over a peer-to-peer decentralized network. In the last few years, cryptocurrencies have been trending around the world, making the news and leading to several arguments and discussions as to what they are and whether they should even be allowed at all. The crypto market is decentralized, secured and encrypted. Transactions are irreversible, immutable and transparent. But, this lack of central control could also be the bane of the technology. As cryptos moved into the sphere of financial trading, other problems surfaced.
a) High Volatility: The crypto market is highly volatile as the prices fluctuate endlessly. The early investors became millionaires with Bitcoin (BTC) while some investors lost a lot of money within a few days of investing into the same crypto asset. For example, the price of 1BTC rose to $19,783.06 on 17th December 2017. Four days later, it lost over $5,000 of its value and fell to $13,800. By February 2018, the price has plummeted to $6,200. There are no organized entities controlling the prices, activities of investors or exchanges. This is partly the reason for the extreme fluctuations in the price of Bitcoin and other cryptocurrencies.
b) ICO Scams: Initial Coin Offerings (ICO) is a type of crowdfunding used to raise funds by attracting regular people on the street as investors into the project. The hallmark of ICOs is the absence of the red tape and protocols associated with conventional venture capital fund raising. Devoid of rules or oversight, anyone can launch a cryptocurrency or blockchain project, and unfortunately fraudsters have taken advantage of these loopholes to deeply penetrate the market. Stories of people creating a website, announce an ICO and vigorously hyping it over the internet, only to disappear with all the raised funds are rife. Worse still, investors are left in the lurch with no one to turn to for complaints or assistance.
c) Shady Cryptocurrency Exchanges: Several cryptocurrency exchanges are fraudulent. Some of them operate for a while, and then without notice disappear without a trace, citing spurious reasons such as a hack or as in the case of QuadrigaCX, the mysterious death of a top management personnel with sole access to the exchange’s private keys.
d) Fake Wallets: Cryptocurrencies are stored in digital wallets. There have been instances of several fake mobile wallets on the mobile app stores. Once you transfer your cryptos into the fake wallets, they are gone forever.
e) Pyramid Ponzi Schemes: Some crypto exchange and projects encourage the recruitment of new investors to earn more tokens and maximize profits. Many investors have fallen for these fraudulent schemes. After operating for a while and attracting enough money, these fraudsters abruptly shut down operations. At the end, the investors lose their hard earned money. The friends and relatives they introduced into the scheme also lose their money.
f) Impersonators and Phishing Scams: Millions of funds have been stolen through phishing scams and impersonators. The cyber criminals’ design fake websites that look like that of the exchanges, then they use emails links to lure investors to their fake sites. The investors are urged to login and when they do, their login credentials are stolen. Then, all their cryptos are stolen.
Several investors have been scammed and there are many court cases and accusations between investors and exchanges. These have added to the ever-louder calls for regulation of the crypto space, even though this is facing some resistance from different quarters.
Regulation is the process by which a central authority such as the government or its agencies control and direct the activities of a sector. Cryptocurrency regulation will mean that a government agency will stipulate the rules governing crypto ICOs, registrations, activities of exchanges and crypto wallets operators. Even investors will have to be properly identified to avoid identity theft, money laundering and anonymous transactions. Certain government agencies have spoken on the need to regulate cryptocurrencies.
The United States Commodity and Futures Trading Commission (CFTC) stated that Bitcoin and other digital currencies are commodities and therefore the government should regulate them. In 2017, the Chinese government shut down some domestic exchanges and banned ICOs. The South Korean government banned anonymous transactions through local exchanges. The government there has insisted that the name on an exchange account must match the name on the bank account. Japan has recognized Bitcoin and other cryptocurrencies as real world money, and Know Your Customer (KYC) and Anti Money Laundering (AML) procedures have been adopted in Japan. Despite all the statements and actions, there have not been concerted efforts or collaboration by governments to actualize the regulation of cryptocurrencies in the various countries with the exception of a few countries like Gibraltar.
With regulation, everything will change. It will be almost impossible for fraudsters to launch an ICO under a regulated environment. This is because the requirements will be rigorous and stringent. Only registered companies with huge capital, financial experts, tax documentations, etc will be able to meet the requirement. This will screen off ICO and Exit scammers.
Cyber attacks will be greatly reduced if cryptocurrencies are regulated. Exchanges will become reliable and financially capable of handling huge transaction volumes. Digital wallets will be scrutinized and only credible firms will be allowed into the business. All investors will be identified because KYC and AML procedures will be implemented.
With regulation, cryptocurrencies will become legitimate financial investments. The volatility of the market will no longer span to outrageous proportions. This will attract more investors because institutional funds will come into the market. Corporate investors, who hitherto are too scared to invest, will plunge their huge resources into this market. When that happens, the value of the cryptos will increase and investors will make more money.
Some miners, experts and Decentralized applications (Dapps) developers argue against regulation. Some say that the government will only come in to collect taxes from everyone. Others say that the decentralization, which is the heart of the blockchain technology, might be compromised. But regulation of the cryptocurrency market will likely favour everyone except the fraudsters. Exchanges will become secured and reliable. Definitely, the government will control the market and collect registration fees and taxes. They will impose heavy fines on errant exchanges and digital wallet providers. The volatility in the market will be controlled. More investors and more funds will come into the market.
Regulation of the cryptocurrency market should be encouraged so as to protect the legitimate players in the crypto space. It will definitely engender stability, dissuade cyber criminals and attract huge investments from institutional trading firms.