The cryptocurrency market and the whole Web3 environment has been a free and unregulated space ever since its inception. But in recent times, it has captured the attention of governments around the world after investors started to lose money. Whether it was due to market swings or outright fraud, they are taking this as a signal to regulate the crypto industry. In its recent insider trading case, the Securities and Exchange Commission (SEC) classified nine crypto tokens as securities.
Through the newly filed bill called the Responsible Financial Innovation Act, the Senate is pushing for the Commodity Futures Trading Commission (CFTC) to oversee the regulations of both bitcoin and ethereum, which were classified as commodities; not securities. Many crypto backers are against limiting and putting regulations in the crypto space, wanting it to be a free decentralized market, independent of any centralized organization.
While some crypto users argue that regulation destroys the fundamental decentralization of Web3, there are benefits to Web3 regulation for users and “investors”, and also for crypto players such as wallet providers, exchanges, token issuers and Decentralized Finance (DeFi) companies. Let us zoom in on the particular benefits that both users and companies can get from a good set of standards fit for Web3 and the crypto market.
Clear cut rules can reduce or remove bad actors and fraudulent efforts in the crypto industry. While an unregulated and decentralized market is good for those who know what they’re doing, it can be a breeding ground for scammers and opportunists, taking advantage of the public in an already complex technology that can easily confuse many people. Clear and custom-made rules for crypto will reduce risks in the market, protect its participants and traders, as well as educate the people wanting to use the technology or invest in crypto assets.
The Senate’s crypto bill defined bitcoin and ether as “decentralized commodities” to be under CFTC, and other cryptocurrencies as “equities” under the jurisdiction of the SEC. This attempt to make sense of who handles what is just the beginning, and it has not yet covered the basics and the entirety of the industry.
Many analysts and former government officials think that although the bill might be the first step in crypto regulation, it is still vague and does not define the clear boundaries of what makes a digital asset securities or commodities. Crypto tagged as securities must have their own set of rules suited for the industry, and not be subject to traditional SEC rules applicable to conventional security instruments.
The bill only covered digital currencies as “intangible” and “fungible” assets, but what about non-fungible tokens or NFTs? Policymakers need to come up with NFT rules as the SEC has made statements before that they are not securities. There should also be clarity and fairness in setting the standards for digital wallets, crypto exchanges, DeFi companies and other crypto players. Policymakers need to also craft clear rules to detect fraud and the corresponding penalties or consequences for damages.
A balanced set of rules shall foster certainty, safety and protection for all participants in the crypto space, as well as transparency and accountability in crypto companies. Clarity can be the gateway to an improved blockchain system. Clear rules can guide the industry on what kind of products and services they can create and innovate to serve the crypto public better.
A good set of crypto rules can also champion “financial inclusion”, which means giving decentralized banking services to nations and communities with historically low access to traditional finance. The rules can support blockchain products and services in these areas, bridging the gap and solving a global problem in the banking and finance sector. There is also the most common benefit, which is consumer and investor protection.
Rules are there to primarily protect users and investors from illegal and exploitative activities. It can also protect Web3 companies from partnering with fraudulent entities and falling victim to hackers and individuals trying to take advantage of the system. Furthermore, Web3 companies can be guided on their offerings – to responsibly educate the public on crypto, and to make for a safer crypto environment even for younger audiences.
Good legislation in place can level the playing field for market participants and promote fair competition among Web3 companies. It can feel limiting at first for crypto companies to abide by the rules. But in the long term, the rules will improve the market as there can be equal opportunities for everyone to succeed, along with the growing number of potential audiences and users.
Decentralized technology has played a big role in transforming the finance sector globally, and making banking and finance accessible to everyone through DeFi companies. People, businesses and organizations can borrow directly from DeFi lenders, without third parties, to finance their ventures and projects.
But certain rules must be enforced to stabilize this segment of blockchain and make it more reliable for more people. Safeguards in place can help in sustaining this technology to continue to service communities and to contribute to global economy in the longer term.
Complementary rules promote productive innovation and efficiency among crypto companies, which can result in ground breaking offerings for crypto users. Innovation not only brings forth industry growth and better crypto products and services, but it can also have multiplier effects that go beyond the industry.
For example, with innovation, there can be creation of new jobs, especially home-based jobs. Gains from crypto assets can trickle down to the real-world economy. Ingenious blockchain-based offerings can be solutions to real-world problems, and so on. Web3 and crypto regulation has a lot of benefits for everyone. There might be pessimistic views on crypto regulation, thinking that the whole technology is just a phase. But the fact that it is happening and creating a lasting impact right now on how we do things, as well as becoming the focus of governments around the world, means that it is here to stay for good.
As the World Economic Forum said, the creation of a complementary set of rules to improve the crypto world will provide diverse financial instruments and market infrastructures which will enhance choice and offer new ways to meet current and future payment and financial needs. Since we are still in the earlier phases of crypto regulation, it will be wise for future coin issuers to assume the worst, or a stricter regulatory environment where they can be actively policed. The industry will have to monitor the development of the events on crypto regulation as they unfold. A lot of crypto registrations are still on hold at the SEC since they are still waiting for the final consensus on crypto rules.
At present, companies may have to limit risk, and think about how their offerings won’t suddenly become illegal tomorrow. But “the worst” must not be adopted in crafting crypto rules and regulation. The government – Senate and Congress – must be fair and balanced for the protection of users and industry players.
They must look to work with the crypto industry, different countries and governments, and the business and technology communities to form a globally coordinated set of standards custom-made for cryptocurrencies, coins, and tokens to foster a dynamic and safer environment around the blockchain technology.