Cryptocurrencies: A Regulatory Affair?

At a press conference a couple of weeks ago, Mario Draghi, the governor of the European Central Bank, said that cryptocurrencies were “not mature enough” to be considered for regulation. This decision is ill-advised and, more generally, a lack of supervision of cryptocurrencies will ultimately lead to their destruction. Cryptocurrencies, such as Bitcoin, are based on the concept of blockchain, in which transactions made are recorded chronologically and publicly. The reason why so many people are interested in their use is that buyers and sellers remain anonymous, but the transactions are transparent and transferred at virtually no cost.

The need for regulation is dire as cryptocurrencies are increasingly treated as speculative investments rather than currencies, as shown by the highly volatile price of Bitcoin, which skyrocketed from $1000 at the beginning of the year, to close to $6000 this week. All this speculation and the ever-higher price of the Bitcoin prevents people from considering any kind of cryptocurrency as a mean of payment. Furthermore, as there is no regulatory oversight, no warranty is given to holders of cryptocurrencies, which are not backed by any institution that could, in the event of a crash or anything else, prevent the total loss of capital from investors. However, I understand that this is one of the reason why people wants cryptocurrencies to succeed, because they bypass traditional institutions, but in order for them to be widely accepted, minimum regulations are required. Indeed, that insufficient oversight, creating uncertainty and a certain mistrust, is holding back startups and the growth of financial technology. In addition, the anonymity of cryptocurrencies might be a bit of a problem, as it is increasingly used for money laundering and criminal activities.

The EU and the UK should follow the actions of Japan, in which authorities now require companies involved in cryptocurrency exchanges to apply for licences and are subjected to annual audits and “know-your-customer” requirements. Bitcoin is now even classified as “a payment method”, allowing people to purchase goods and services in more than 200 places around the country. This is the perfect example of how Bitcoin and cryptocurrencies can become valid currencies.

Overall, the challenge is for policymakers to find the balance between addressing the risks posed by virtual currencies without inhibiting innovation, as I firmly believe that cryptocurrencies have a major role to play in years to come.

Latest from Business