As Bitcoin takes flight, better rules should follow
Regarding any emerging asset, there are two issues that regulators need to grapple with: Will individuals and institutions be safe when investing in it, and can transactions be monitored to prevent its use for illicit activities?
Due to the decentralized nature of cryptocurrencies, it is incumbent upon regulators around the world to convene and provide regulatory clarity. A multilateral framework and clearly defined national and global rules will be a boon for healthy development, especially given cryptocurrencies’ rapid growth in importance.
In just two years, the price of Bitcoin, the world’s leading cryptocurrency, has increased nine-fold, dwarfing the growth trajectory of every other financial asset. Only Chinese stocks experienced a comparable bull run in the aftermath of the financial crisis, according to analysts at Bank of America.
On January 8, the total market capitalization of Bitcoin also reached an all-time high of $758 billion, for a while exceeding the value of companies like Facebook and Tesla. Is the digital asset worth more than some of the best-known companies? Or, as suggested by JPMorgan and Tyler Winklevoss, is Bitcoin’s sight set on a far loftier target?
It’s been suggested by many that Bitcoin, like gold, is perceived as a hedge for inflation, which erodes the value of household and institutional wealth. The total stock of value for gold, the traditional safe haven asset, is $17 trillion, according to the World Gold Council. Bitcoin’s current market capitalization is just above 4% that of gold.
Bitcoin is playing an equally important role as a way for civil society actors to conduct transactions and as an alternative to national currencies in markets hammered by hyperinflation. In places like Nigeria, where citizens protesting police brutality find their financial activities scrutinized, Bitcoin has seen surging adoption. Meanwhile, according to the Washington-based Cato Institute’s Troubled Currencies Project, more than 80% of all transactions utilize dollars in Venezuela, given the worthlessness of the bolívar. Media reports indicate the proportion of cryptocurrency-based transactions is increasing when dollars are in short supply.
Due to such growing uses of cryptocurrencies, firms are rushing to go public to secure the capital necessary to build a new financial architecture. Should Gary Gensler, the former chairman of the United States Commodity Futures Trading Commission, be appointed as the new chair of the Securities and Exchange Commission (SEC), crypto firms in the United States will also get a potential ally in one of the leading regulatory bodies of the world.
Meaningful developments by local and international bodies will soon be required so that individuals and companies dealing with cryptocurrencies don’t unwittingly fall foul of laws, and can rely on adequate protections. Banning cryptocurrencies has simply not worked, as it unfairly penalizes the vast majority of users and pushes them into the embrace of illicit actors.
Expect domestic regulators like the SEC and international counterparts like the Financial Action Task Force (an international watchdog issuing the rules governing cross-border money flows) to issue clearer regulations this year. Not only are individuals and companies looking for clarity so they can access, store, use and convert cryptocurrencies, they need to know the ground rules to govern a growing cryptocurrency economy.
The genie is clearly out of the bottle. Cryptocurrencies are a part of the solution to many of the world’s problems.
Concerns over Bitcoin’s volatility is understandable, and few disagree that it may yet take a while for the best-known cryptocurrency to stabilize. But for an asset that has benefitted a world mired in economic disruption and ravaged by a pandemic, such concerns should not prevent regulatory bodies from establishing necessary rules.
The article is contributed by Ben Zhou, Co-Founder & CEO of Bybit.