Cryptocurrencies: what regulation could change

Investors who got into cryptocurrency in 2021 may be biting their fingers right now. After crossing the US$67,000 mark at the end of the year, bitcoin fell below $30,000 in May 2022. There is enough to break into a cold sweat! Given its high volatility, the risk of fraud and the increased systemic danger for the financial community, a major work for the regulation of cryptocurrencies is underway in the United States.

Crypto probably isn’t the safe haven we were hoping for

Bitcoin has already had the wind in its sails. On the other hand, like other cryptoassets, it eat a good volley lately. “Some have argued, as recently as early 2022, that bitcoin was becoming a safe haven. But the markets are in turmoil and bitcoin is not reacting at all as expected of a safe haven,” explains Annie Lecompte, professor in the Department of Accounting Sciences at UQAM.

Safe havens are meant to diversify investment portfolios and provide protection in the event of market volatility. They maintain their value, and even increase it, in times of turbulent markets.

Annie Lecompte, professor in the Department of Accounting Sciences at UQAM.

The beginning of May was particularly turbulent for cryptocurrency investors. The current economic climate is causing many investors to sell their riskiest assets. At the beginning of May, the stable token (stablecoin) TerraUSD, supposed to follow the American dollar, was the subject of a massive sale. Stable tokens are loved because they make it easy to transfer money, allow you to conserve capital and do staking, a way to generate an interest return by lending cryptocurrency. With the May episode showing that even currency-pegged stablecoins like TerraUSD are in no way protected from volatility, the loss of investor confidence has spilled over to the entire cryptocurrency market.

The specter of regulation hangs over our heads

This volatility does not prevent the virtual asset from being gradually integrated into several companies, such as Birks, and products such as various exchange-traded funds (ETFs). “If we want this asset class to become more and more serious, it is inevitable that there will be additional supervision,” says Annie Lecompte. Why and how?

Reduce speculation and protect investors

“Regulation could indeed modulate the volatility of cryptocurrencies, because it could make sure to guide investors more and thus reduce speculation. It would also better protect investors,” continues Annie Lecompte. In a speech at the American University of Washington, Janet Yellen affirmed his department’s desire to ensure that consumers, investors and businesses are adequately protected, particularly against fraud, theft, invasions of privacy and abusive practices. She also stressed the importance of having stable tokens that do not endanger individuals or the financial system as a whole, for example with the collapse of a token like TerraUSD even if her speech was made before. this event).

Challenging implementation

However, there are several obstacles to regulation, starting with resistance from the community. “People who work in virtual currencies try to be supervised as little as possible. One of the criticisms we hear the most is that regulation could hinder innovation, a key factor in the progress of the cryptocurrency market,” explains Annie Lecompte. However, it is difficult to say more without knowing precisely what such a regulation would stipulate.

According to her, there is also a problem related to jurisdiction: who can regulate what, when? On this, Yellen said his department is working closely with international partners to promote consistent regulation and oversight across the globe. Another problem lies in the technological implementation, because “the blockchains on which cryptocurrencies are based were not created so that a regulation could be incorporated into them (‘no regulatory hook’)”, says Annie Lecompte . These technical and legal pitfalls will have to be overcome for regulation to actually take place.

In short, the discussions between the regulatory bodies are still in their infancy and it is not tomorrow that we will see a major change come into force. Beyond strengthening the legal framework for cryptos, the project launched by Joe Biden is exploring the possibility of creating a central bank digital currency. This is an ambitious project! Months, even years, will be necessary before seeing the colors.

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Cryptocurrencies: what regulation could change

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