The regulatory environment of cryptocurrencies has made significant progress over the past months. Especially this year, there have been a number of events that prove that the regulatory interest, a positive interest, in the space is growing, especially from Central Banks around the globe. Despite these developments, the threats of anonymity and a lack of transparency in the market are still major reasons for institutional investors to maintain their reluctance towards digital assets.
Recently, the Federal Reserve Bank of St Louis, one of only 12 regional Reserve Banks in the United States, has started to officially recognize cryptocurrencies. Specifically, Bitcoin, Litecoin, Bitcoin Cash and Ethereum were officially added to the Federal Reserve Economic Database (FRED). As FRED is a highly recognized economic database, there is a clear underlying legitimation of those cryptocurrencies under scope.
However, encouraging the move by the St Louis Fed, in other parts of the world Central Banks have yet to give their final blessing for cryptocurrencies, as there is still an ongoing learning and familiarization process going on within these institutions. One clear example of this is the fact that several European Central Banks, from Sweden to Germany and Switzerland have internal projects in place to assess the issuance of digital currencies. Essentially, a seal of approval would without question be a huge step towards the legitimation of digital assets.
Lack of coordination as well as the presence of different levels of understanding among Central Banks and regulators have created a jurisdiction nightmare when it comes to digital assets and the way different countries classify them. In March this year for example, a Dutch Court decided that property rights are applicable to Bitcoin, officially making the cryptocurrency a transferable value in the Netherlands. On the other side of the balance, the United States considers digital assets as commodities, while in Japan they are recognized as legal currencies.
Regardless of the vast differences in terms of classification, for a number of countries already, cryptocurrencies have started to be legitimated. Countries like Singapore, Switzerland, and Malta have taken a proactive approach when it comes to drafting regulatory standards. At the G20 summit it was also noted that the Financial Stability Board (FSB) does not consider cryptocurrencies as a threat to the global financial system.
Despite the challenges, the industry itself started to take steps to self-enforce best practices. Strict anti-money laundering (AML) rules are already a step in the right direction, enabling governmental agencies to prevent crime in the space. Enforcing clear Know your customer (KYC) processes are another way to make the space a safer environment for investors.
Intelligent and pragmatic approaches to regulation are needed to increase the professionalism of the space and increase its long-term sustainability. Barriers of entry for scammers and fraudsters need to be raised. Better to have a market with fewer, high quality projects, that are driven by innovation and value. Today, there are more than 1800 tokens available for purchase at a variety of exchanges. However, more than 80% of the market capitalization was created by only 10 of these tokens, which are included in the BITA 10 Index (see below).
There is an incredibly large number of projects that have failed to attract new investors, despite large ICO fundings. Only once a professionally and pragmatically regulated environment is established, will a new type of investor be able to join and participate in the crypto market. Those who are still resisting to allocate larger amounts of money into the digital asset space — the institutional investors. Definitely, with regulation and a more transparent ecosystem, cryptocurrency projects will gain the legitimacy that is needed for institutions to join the game.
