Why Is Regulation So Important for Crypto?

The cryptocurrency market is the youngest financial asset market in the world. It’s just under 15 years old and a considerable portion of it is legally unregulated, which carries much uncertainty and risks for both crypto users and businesses that deal with digital currencies. In a market environment without strict regulatory rules, all parties are exposed to various unnecessary risks.

In our latest blog post, we’ll explore how crypto regulations work and why are they so important for the blockchain industry.

 

Without Regulations, Crypto Is the Wild West

Unregulated financial markets are highly hazardous to investors because if there aren’t any set rules, malicious market participants can take advantage of the lack of regulations to profit from shady, semi-legal, or even illegal activities. A lack of regulatory certainty essentially opens the road to all sorts of investment scams, such as rug pulls and Ponzi schemes designed to steal investor assets. 

Regarding cryptocurrency exchange platforms, the absence of regulatory rules means that the business models and operational mechanisms of non-regulated exchanges aren’t subject to any type of institutional control. In short, such exchanges can do whatever they want when it comes to which coins they want to list, what services they want to provide, and what type of safety features they use to protect platform assets.

Many non-regulated crypto exchanges support hundreds of cryptos, along with a multitude of additional features such as high-yield staking, leverage trading, and futures trading. While these added features might seem quite attractive for users, they actually carry major risks. Listing less popular coins with unverified developer teams may potentially give users exposure to scam projects, while the advanced features we listed are considered extremely risky and may lead to major losses. 

 

How Do Crypto Regulations Work?

No investment is risk-free, but it’s definitely far riskier to deal with non-regulated financial assets and services, as opposed to those governed by a clear set of legal rules. Since cryptocurrencies are highly volatile assets, regulations are even more important to help decrease uncertainty and the potential dangers.

Lawmakers in different parts of the world are attempting to regulate local crypto markets during the last couple of years, with special focus on customer protection, tax regulations, and introducing a framework for institutional crypto adoption. Also, regulators are setting unified rules on how cryptocurrency exchanges should operate to minimize security risks, as well as implement anti-money laundering measures to prevent such activities with the use of crypto.

 

The Key Benefits of Crypto Regulations

Regulating the crypto industry bring massive benefits to all market participants, from crypto exchanges, developer teams and blockchain startups, all the way to the average crypto investor looking to safely trade digital currencies.

Let’s look at the key areas in which crypto regulations provide major benefits.

 

User Protection

User protection is one of the most important benefits of crypto regulations. When using a non-regulated trading platform, users have no true protection in case the platform suffers a hack, goes bankrupt, or turns out to be a scam. With clear regulations, all crypto trading platforms need to fulfil a strict set of requirements to obtain an operating licence and work as a legitimate crypto trading business. 

Regulated exchanges are under legal obligation to comply with a wide range of rules regarding informing users of potential risks and providing them only with verified, trustworthy services. Some of the services provided by non-regulated platforms are so high-risk that they are more similar to gambling than investing. That’s exactly the type of risks users are protected from when choosing a regulated platform.  

 

Prevention of Money Laundering

Since the launch of Bitcoin in 2009, scammers and criminal groups are actively trying to use cryptocurrency as a means for laundering money acquired from illegal activities. Because of this, regulated crypto exchanges implement strict anti-money laundering (AML) protocols to prevent criminals from using their platforms for illegal activities. 

One of the key aspects of AML protocols is the Know Your Customer (KYC) process, through which regulated crypto exchanges gather detailed personal information about each new user before they can start trading on the platform. The procedure requires users to verify their identity and provide proof of residence among other details. This measure is designed to discourage users from attempting to use a trading platform for illegal activities. Non-regulated exchanges mostly don’t have any anti-money laundering measures, which often makes them an ideal tool for exchanging funds from illegal activities.

 

Higher Safety Standards

Hackers represent one of the biggest dangers for crypto exchanges, DeFi platforms, and individual crypto users alike. In 2022 alone, hackers stole 3.8 billion USD worth of crypto by hacking various crypto exchanges and DeFi protocols. What most of the hacked platforms have in common is that they aren’t regulated and don’t adhere to any strict set of safety standards to prevent platform breaches. 

Crypto regulations can bring a unified security standard to crypto trading platforms, which means that companies that don’t meet the prescribed safety standards can’t get an operating licence. Of course, hacks can sometimes happen even in these cases, but it’s a lot less likely, when using a regulated exchange.

 

Institutional Adoption of Digital Currencies

The uncertainty and risks associated with digital currencies are among the key barriers for mass, institutional adoption of crypto. Many institutions view crypto as a largely non-regulated market and extremely risky market, but thanks to the growing number of regulations around the world, the situation is changing.

Crypto regulations create a legal framework for the institutional adoption of digital currencies by payment service providers, banks, retailers, and other traditional businesses. Institutional adoption is the key prerequisite for a mass global adoption of crypto among the general population.