Reflecting on the events of the last few weeks with the cryptocurrency markets in freefall, then beginning to rally, Dr Paolo Tasca, executive director of UCL’s Centre for Blockchain Technologies, it demonstrates there’s an “urgent need” for regulation.
He says the huge price drop in recent weeks was “largely due to the hash war that started within the Bitcoin Cash community and caused a tremendous sell-off of Bitcoin to subsidise both sides of the ‘battle’ – Bitcoin Cash ABC and Bitcoin Cash SV”.
“No-one knows whether this downhill trend will continue in the coming weeks or months. However, the events have shown that as long as the market remains so concentrated, and big miners remain unregulated, stability is a long way off.”
The story starts almost 12 months ago, he says, when “we reached the market highest pick. Generally, in any market, irrational bubbles give rise to huge market movements when they explode”.
This happened in January 2018, but the market “seems to have not yet recovered from the bearish movement”.
“These last events have stressed the nerves even more,” he says.
“It is difficult to tell people – who may have lost a lot of money on speculative actions or individual and opportunistic behaviours – to calm down.
“Investors in digital currencies need to be aware of the risks borne by cryptocurrencies. Moreover, they are a terrible store of value – think of Bitcoin.
“In addition, if it is true that an emotional mindset is even more detrimental for the market, it may on the other hand serve as a warning for consumers and regulators. It has made it clear that regulation is increasingly urgent.”
In predicting the future state of the market, he points out no-one has a crystal ball and “it has always been difficult to predict the future evolution of the crypto-market”.
“But unlike four years ago, the blockchain ecosystem is now more developed. If, instead of considering daily speculations on tokens, we focus rather on the adoption of blockchain technologies in the production sector, we could definitely say that blockchain technologies are likely to reach momentum in the long-term.
“It is very important to distinguish digital currencies from blockchain technologies. Indeed, we should not focus on the price of tokens, whose market evaluation might be misleading, but should rather consider the technology’s adoption.
“In this respect, there are positive signs, such as the increasing number of institutions, research centres and organisations willing to study and apply blockchain solutions.”
He believes the market drops are “genuinely good” as they cut away all the bad apples from the markets. Projects with no real practical utility “that are there just to get money out of people and investors should not exits”.
They are just distortions of a market at present mainly unregulated and the same could be said of all the illicit activities, he maintains.
“Blockchain is just a tool in the hands of companies and individuals: whether it is used for good or evil will always depend on its users,” he adds.
“And if the general public may be sceptical toward blockchain because of isolated cases of frauds or hacking, one should be reminded that this is a common feature of every technology at its early stage of development.
“Trust in the technology won’t be compromised because of that.”
Need for regulation
Regulation, he says, is “always needed, especially in markets that are moving at a fast pace”. He recently wrote in a contribution (The Regulator’s Job: Ignore, Regulate, Kill, 2018), that having ignored blockchain for a decade, regulators have started adopting a “wait and see” approach.
The Financial Conduct Authority, for example, has issued several “soft law” documents but did not impose any compulsory regulation.
“Given the fact that the market dynamics still need to be explored, regulatory authorities are closely monitoring the situation but are hesitant toward taking any actions,” he adds.
“If consumers are harmed, the risk is that regulators will come out with stringent rules that might end up killing not only the bad apples but also the entire sector.
“Such events as the current hash war do not help in this respect. The private sector should co-operate with public authorities to forge the pillars of future regulation.”
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.