The topic of regulation in cryptocurrency is a double-ended sword. On the one hand it could suppress elements of decentralisation within the space, while a lack of action could pose a risk to potential investors.
The UK’s Financial Conduct Authority, meanwhile, has confirmed that “strong and speedy action is necessary,” as it has become “concerned about the potential harm posed by current usage of these often poorly understood crypto assets”.
Two ICO issuers settle SEC registration charges, agree to register tokens as securities https://t.co/Rj1UYpd5ON
— SEC_News (@SEC_News) November 16, 2018
The Colorado Division of Securities has also taken aim at ICOs based in the United States, issuing no less than 18 cease and desist orders in the past few weeks.
Bloomberg also reported on the US Justice Department’s investigation into Tether, which was allegedly pivotal in price manipulation tactics that saw Bitcoin rally to $20,000 in 2017.
How will regulation affect cryptocurrencies?
With an acceleration of regulation seemingly on the horizon, it begs the question: how cryptocurrency will fare in an ever-changing ecosystem.
A regulated framework would allow institutional investors to take a leap of faith in the cryptocurrency markets, which have yielded higher returns than property, stocks and bonds over the past five years.
And while an influx of institutional investment would be undoubtedly bullish, it could be the beginning of the end for a vast amount of ICOs that launched in 2017.
The ICO revolution in 2017 saw an overwhelming amount of new projects enter the blockchain space, many of which sold ‘utility tokens’ that were not designed to be traded on exchanges.
For XRP not to be a security, it will need to be a real utility offer. IF something is exchanged with expectations of profit, it is not a utility token.
XRP is a tradable good that is sold under the expectation of profit. That in itself makes it a security.
— Dr Craig S Wright (@ProfFaustus) November 18, 2018
However, ICO tokens, regardless of their title and intended use, eventually got listed on major cryptocurrency exchanges like Binance and Bittrex, with some yielding up to 3,000% returns in just a matter of months.
Utility tokens fell into a grey area, they didn’t yield dividends like traditional securities, in fact they weren’t designed for investment purposes at all. The ‘utility token’ moniker was more to cover projects from regulatory issues as opposed having an actual use-case.
With hundreds, if not thousands, of ICOs claiming that their tokens are intended solely for utility, the impending regulatory crackdown could have a devastating impact on the altcoin market, which could see Bitcoin dominance rise up to the 80% level once again.
Ultimately, this could be a good move for cryptocurrency. Filtering out the noise and buzz words will allow the projects that hold real value to prevail, much like in the Dotcom bubble when we saw thousands of newly launched websites fizzle away, leaving the likes of Amazon, Apple and Google to lead the technology-related innovation.
Will regulation prevent price manipulation?
Price manipulation is often cited as one of the main reasons why regulation is needed in the space. Bitfinex’s native stablecoin USD-Tether has come under intense scrutiny over the past year, with many claiming that the exchange’s ability to ‘print’ Tether was pivotal in driving Bitcoin’s price to $20,000 in 2017.
Van der Velde, the Tether and Bitfinex CEO, disputed the claims. He said in a statement that, “Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.”
Bitfinex has also faced allegations of insolvency, with reports stating that the exchange didn’t have the assets to cover Tether’s $1.8 billion market-cap. It was quick to deny reports, posting a letter of attestation from its Bahama-based bank Deltec, who wrote: “We hereby confirm that, at the close of business on October 31, 2018, the portfolio cash value of your account with our bank was $1,831,322,828.”
But for many this still wasn’t enough, prompting Deltec’s chairman to confirm that the letter was legitimate. “Tether came public with an announcement and I wanted to make sure you saw it.” he said. “The letter published by Tether is authentic.”
— WhalePanda (@WhalePanda) November 1, 2018
As a result of the allegations Tether fell from its 1:1 peg with the US dollar, falling as low as $0.87 before finding stability at $0.99. Cryptocurrency stalwarts demanded that Bitfinex hire a third-party auditor to audit its portfolio, but co-founder of Gemini Cameron Winklevoss argued that there was no auditing framework available.
Winklevoss said: “There is no financial report framework w/r/t to audit conformity w/ a stablecoin. So you can’t perform an ‘audit.’ You must instead rely on a 3rd party to attest to whether an assertion (that there is a 1:1 peg) is accurate.”
Aside from this, manipulative methods like wash trading and spoofing are also prevalent in cryptocurrency, both of which are banned from legacy markets. Wash trading is where a trader posts a large buy or sell order, only to fill it themselves to mimic volume or ignite momentum.
Spoofing is a manipulative technique that involves posting an order with the intention of cancelling it; this can increase levels of fear and panic in the market, having a notable effect on the price and other trader’s decisions.
With this firmly rooted in the minds of regulators, it’s clear to see why a framework needs to be created to prevent price manipulation and wild-west tactics from being used so regularly in the cryptocurrency ecosystem.
While regulation could initially have a negative impact on the price and value of cryptocurrency, as it will undoubtedly cause angst within the community, in the long-term it is an essential and necessary step to ensure cryptocurrency reaches the masses.
Institutions are itching to get into the market, but there’s simply no framework for them to do so safely. They can trade futures at the CBOE, CME and soon on Bakkt, but there’s not one reliable place for hedge funds and banks to purchase Bitcoin without delving into the curious OTC marketplace.
Regulation will filter out the ICOs who hopped on the bandwagon without real innovation. It will enable the genuine projects to shine in what is an ecosystem that has a tremendous future.
It’s no longer a matter of if regulators will clamp down on the industry, it’s a matter of when. If this industry truly wants to progress, it needs to purge all of the bad actors and disingenuous projects.