With cryptocurrencies rapidly evolving from a class of fringe alternative investments into mainstream assets, several governments around the world have discussed regulating them in the same ways as traditional securities. Although there may seem to be some sense to this approach, the truth is that subjecting cryptocurrencies to the same regulations as securities would likely prevent both growth and innovation. Here are a few of the reasons that securities regulations will have negative effects on cryptocurrencies.
Cryptocurrencies Are Predicated On A Free Market Ecosystem
When they were first invented, cryptocurrencies were meant to be the ultimate in free market monetary products. By floating freely among networks made up of decentralized participants, cryptocurrencies are able to find their natural valuations over time. If the cryptocurrency ecosystem is subjected to heavy regulations, however, this exclusive balance of supply and demand could be irrevocably disrupted as fewer people and institutions are allowed to participate in the cryptocurrency market.
Securities Regulations Don’t Translate Well To Decentralized Assets
Up to now, regulatory agencies have only had to regulate assets that are issued and controlled by centralized entities, such as corporations. In the context of cryptocurrencies, however, the regulatory approaches that are effective for these centrally issued assets simply don’t fit well. Because no central authority is in charge of issuing many cryptocurrencies and very little control can be exerted once a currency has been created, there is no single point of regulatory action for agencies to target. This fact means that regulators must either be ineffective or overly aggressive if they are to implement the same kinds of regulations that have historically applied to securities in the cryptocurrency trading marketplace.
Cryptocurrencies Are Less Relevant Than Blockchains
One of the points that governments planning to regulate cryptocurrencies most often miss is the fact that regulation would be better aimed at the particular blockchains that make them possible. The blockchain used to create a cryptocurrency will determine many of its characteristics. By enforcing blockchain regulations, regulatory agencies can also establish more systemic rules within the cryptocurrency market, as opposed to pursuing ad hoc actions against individual currencies. Even in this context, regulators must be careful as to what regulations they choose to implement since blockchains are very different from securities and require their own specific sets of rules.
Although it is almost certain that governments will eventually try to regulate the cryptocurrency market, the ways in which they choose to do so will determine how successful the new regulations are. If care is not taken, the result could be a general collapse of the entire crypto market under regulatory pressures, rather than an efficient market that operates under a uniform set of sensible rules.
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