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Just a few years ago, most people thought cryptocurrencies were a joke or a Ponzi scheme that tricked naive, wanna-be investors into losing huge sums of money. Today, cryptocurrencies operate in a multi-billion dollar market. Despite the volatility of assets in various cryptocurrencies, businesses and investors see this trend as the future of trading and global economics.
Cryptocurrency transactions are only regulated on a federal level under special circumstances:
Sale of security (property that is given or pledged to guarantee the performance of an obligation (Like a deposit, or a mortgage)) under state or federal law (Cornell Law School).
Money transmission under state law or conduct otherwise making the person a money services business (MSB) under federal law.
Earlier this month, President Biden introduced an executive order to enforce some new federal regulations on cryptocurrency trading that his administration hopes will accomplish the following:
Protect U.S. consumers, investors, and businesses
Protect U.S. and global financial stability and mitigate systemic risk
Mitigate the illicit finance and national security risks posed by the illicit use of digital assets
Promote U.S. leadership in technology and economic competitiveness to reinforce U.S. leadership in the global financial system
Promote access to safe and affordable financial services
Support technological advances and ensure responsible development and use of digitial assets
Explore a U.S. central bank digital currency (CBDC) (source: techcrunch.com)
There is plenty of speculation and trepidation about the future of crypto markets due to their extreme volatility. Values of cryptocurrencies can change like the wind. And whenever there are talks of government regulation in any sector of the economy, there is inevitable backlash. Arguably the most attractive part of crypto investments is the fact that the blockchain works on a decentralized platform, meaning that control of assets lies with the vast community of users instead of a centralized organization. They argue that government intervention could stunt innovation and create a slippery slope towards strict government crackdowns.
There are arguments that suggest some regulations on a state/federal level could be a good thing for long-term growth. Minor regulations could usher in more stability in what seems like a hazardous market defined by huge gains and losses. Some regulations could prevent fraudulent activity, increase confidence in long-term investments, and give clearer guidelines that ensure safe and fair innovation.
Regulatory guidance could reduce volatility and draw in more investors who previously feared the catastrophic ups and downs of the crypto market. Regulations will ultimately make trading safer and reduce the risk of hackers and ransomware. Scammers seized $14 billion in cryptocurrency assets last year alone.
However, new regulations also pose the risk of short-term losses. When China banned cryptocurrency transactions in September of last year, losses were felt in every sector of every crypto market. In the long-term, though, regulations could spur stability and therefore create steady growth in profits.
This stability will build more confidence in crypto markets over time, therefore drawing new and larger investments.
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