Why Crypto Regulation Could Actually HELP the Landscape in 2024

Regardless of how you feel about it, crypto is becoming more regulated. 

For many reasons, you might think that’s a bad thing.

But most crypto adoption has actually been possible because of regulation.

At least 300 million people use crypto worldwide, it's widely adopted in over 50 countries, at least two nations have made Bitcoin legal tender, and thousands of regulated businesses around the globe accept crypto payments.

Since crypto regulation is inevitable, how can we get the most out of it? 

Let's find out.

Regulation in Crypto: A Global Overview

Should crypto have more regulations or fewer rules? The first step to answering this question is to zoom out and get perspective. 

Here's what the legal situation looks like today:

• According to the GLRD report, Bitcoin (and thus all currencies you can exchange it for) is legally recognized in +110 countries, implicitly restricted in almost 40, and explicitly banned in another 10. At the time of the report, over 20 countries still haven't chosen their position on crypto.
• Germany, Portugal, Singapore, and a dozen other countries have crypto-friendly policies. In some cases, they even have no taxes. 
• Belgium, Japan, India, China, and the Philippines are some of the most restrictive in taxes and payments. 
• The best US states for crypto investors are Texas, California, Colorado, Nevada, Florida, and Wyoming. The worst US states for crypto are New York, Arizona, and Rhode Island.
• Almost every custodial platform requires information that can be used to verify the identity of their users. It's part of Anti-Money Laundering (AML) and KYC mandates, as well as being a way to identify users for taxation purposes.
• In countries that legalized crypto, regulators expect users to report crypto as income, and it can be audited because of KYC. Depending on the country and amount, crypto sales incur anywhere between 0% to 40% in taxes. The average for long-term capital gains is around 20%.
• The first Bitcoin ETF came out in February 2021. By October 2022, there were 6 ETFs approved by the SEC and 20+ worldwide.
• More countries are looking into CBDCs as an alternative approach to crypto regulation. Out of 105 researched countries, 9% have launched CBDCs (compared to 1% in 2021), 14% are experimental (24% in 2021), 64% are in research or development (57% in 2021), and 10% are discontinued (18% in 2021).

Is Crypto Under-Regulated?

Like the Internet, the current regulation of cryptocurrencies is irregular. 

While more and more policymakers are recognizing crypto legally, it's not regulated enough to become legal tender. Many think it's unnecessary for traditional purposes and too convenient for illegal ones like tax evasion.

Borderless crypto payments also allow bypassing international sanctions, as has been the case for Russia since 2022. 

But crypto regulation can also reinforce a lacking economy, as is the case in Ukraine (which ranks in the top 3 for global crypto adoption).

Is crypto too regulated? In some countries, you could definitely argue that it is. With the caveat that the actual technology doesn't have border limitations.

Is it under-regulated? You could argue that it is when it comes to unacceptable risks, such as money laundering, tax evasion, scams, and theft.

That’s why regulation isn't a question. Rather, when deployed correctly, it can be the answer to many other problems.

4 Ways Regulation Actually Helps Crypto

Some people dislike regulation for crypto because they fear things will end the same way as in traditional finance. 

But crypto regulation is different from securities regulation. Instead, users typically hold most of the power over how platforms are run.

The truth is that, if governments could entirely regulate crypto, most of them would have already done it. 

The reason they haven’t yet is because cryptocurrencies are decentralized and can never be fully controlled. 

Since regulation can’t kill crypto, here are four ways it can help instead:

1. Regulation Will Enable Mass Adoption

Policymakers and official media outlets are more likely to endorse crypto when it's regulated.

This mass adoption will benefit all crypto, not just regulated networks (like CBDCs). 

When governments are pro-crypto, adoption follows. 

The first country to accept Bitcoin as legal tender was El Salvador in 2021, and over 60% of its population are now Bitcoin users. The Central African Republic followed, and Sub-Saharan Africa soon ranked in the top 20 of the Global Adoption Index.

Pro-crypto regulators can lead adoption across the entire world. People will seek crypto-friendly countries for the same reason that they seek out countries that are friendly to other technologies and industries.

2. Regulators Can Stop Malicious Actors

Crypto is currently too easy for malicious actors to exploit. 

We’ve seen this countless times, with hacks, thefts, scams, and exploits harming everyday traders and sending the crypto market into a frenzy.

Increased standards for crypto businesses would make them harder to exploit.

At the same time, increased penalties for bad actors would be a clear way to stop many of the most common types of crypto scams dead in their tracks.

3. Regulated Platforms Are Liable For Losses

Who's to blame when a decentralized platform doesn't deliver? 

Right now, there is very little that legal authorities can do when platforms fail their users.

Here's how regulators have managed two recent DeFi incidents:

• Axie Infinity was hacked for $625 million in March 2022 through the Ronin bridge. The developer company Sky Mavis responded by June for a $216 million reimbursement of the losses, which is still in process. While the SEC did warn against investing in Axie, no enforcement nor investigation has taken place since the hack.
• In 2021, Anubis DAO allegedly rug pulled 1,097 ETH and then laundered through a crypto mixer called Tornado Cash. Authorities couldn't prosecute the anonymous team and were unable to recover the losses.

Increased regulation could be a way to give authorities more teeth in handling these types of devastating incidents.

After all, holding someone accountable when things go wrong is a tried-and-tested way of increasing the chances of things going right.

4. Regulation Brings Order to Volatile Markets

Once cryptocurrencies are secure and make legal sense, volatility is the next obstacle to adoption. 

Most cryptocurrencies work as a payment method, but are less useful as an official currency for pricing goods and services. That’s largely due to their volatility. 

Even blue chip altcoins, for instance, sometimes change prices by over 20% in a single day.

Regulation can indirectly stabilize prices by addressing the underlying concerns that destabilize the market.

This is especially important as one of the biggest factors that has caused crypto prices to move in the past has been the threat of regulation. Knowing where regulators stand on crypto, once and for all, could take some of the guesswork out of the crypto market.

Crypto Proponents Need Influence Over Regulation

Traditional regulation doesn't work for decentralized technologies like crypto, which means we need to tackle unique regulatory hurdles. 

These include the fact that it’s unclear who crypto should be regulated by.

After all, people generally don't have many good things to say about traditional governments. 

It's broadly believed that governance is manipulated and decisions don't often represent the best interests of their citizens. 

So why would we want to include crypto in such a system?

In DeFi, developer communities already indirectly "regulate" through voting and then enforce these decisions with code. 

The challenge then becomes figuring out which responsibilities fall into the hands of governments and which decisions should be better left to users themselves.

At the very least, crypto proponents and businesses need a seat at the table.

This is already happening in Japan, where we’ve seen the launch of an officially recognized crypto self-regulatory body.

What Does Increasing Regulation Mean for the Future of Crypto?

As crypto adoption continues, countries will look for ways to formally deal with the reality of these digital assets.

A growing number of countries will likely work to enable the innovative features of crypto through forward-thinking regulation. As a result, they will be able to enjoy its economic and technological benefits while helping further crypto adoption.

But governments that try to take too strict of an approach might instead end up shooting themselves in the foot.

We’ve already seen this in China, which banned crypto mining only to lose out on that income to other countries.

No matter what regulators do, they will never be able to truly stiffen crypto. There's simply a limit to how much regulation you can impose on borderless technologies that have no single point of failure. 

Since cryptocurrencies are trustless and decentralized, regulators will have to work with ordinary people rather than against them.

The results, if handled with the correct care and foresight, could mark an exciting new chapter for crypto adoption.