Leaders of the G7 countries issued a statement regarding worldwide crypto regulations amid rising concerns over the market’s risks to financial stability. According to Kyoto officials, the US, the UK, France, Germany, Canada, Japan, and the European Union will implement a cooperative strategy to enhance crypto transparency, address the alarming financial threats, and boost consumer protections. The summit is set to occur this year in May in Hiroshima.
This plan was driven by the collapse of the crypto exchange FTX, which has brought to light that the industry is poorly governed and something must be done to change this aspect. It also follows two significant bank failures which occurred this month in the US, more precisely, Silicon Valley Bank and Signature Bank.
Crypto vs fiat: key differences that show the need for regulation
Digital assets, or cryptocurrencies, act like alternatives for fiat money, and they can be used either for trading or to pay for goods and services. There are key differences between the two types of currency, which highlight the need to regulate blockchain. To begin with, cryptocurrencies like Ethereum work without central banks, and their value is derived in other ways; for instance, market forces are the ones that determine their price.
Blockchains work as distributed networks, meaning that millions of independent computers verify the transactions before they are recorded on the ledgers. This decentralized nature is another aspect that makes cryptocurrencies different from fiat money which is backed by financial authorities. With crypto, cross-border transactions become possible, allowing users to receive tokens regardless of their location. These transactions are irreversible and transparent, as they are recorded publicly, meaning anyone can trace them.
Some countries have made crypto legal, while others have banned it
While more than a hundred countries have regulated crypto, 42 of them have implicit bans that forbid financial institutions from collaborating with crypto companies in any way. Nine of them have enforced blanket crypto bans: China, Iraq, Algeria, Morocco, Egypt, Bangladesh, Qatar, Nepal, and Tunisia. Due to its immutable nature, crypto is appealing to cybercriminals. It has been associated with different types of financial crime, which is mainly why some governments have seen prohibition as the solution.
But are bans really the answer? Probably not, as shown by China’s experience. The Asian country prohibited Bitcoin mining in May 2021, and a few months later, all crypto-related activities were banned. However, this proved counterproductive as it stifled an industry with a lot of growth potential. Instead, robust regulation in the crypto space would make a significant difference in the industry, as it would translate into more stability, reducing speculation among assets, thus drawing in more investors. Crypto enthusiasts see crypto’s benefits over fiat money; however, these advantages can come to fruition only if a proper regulatory framework is established.
Regulating crypto is necessary to restore public trust and expand the market
2022 was a challenging year for the crypto market, experiencing significant lows and affecting even leading digital assets like Bitcoin. This triggered anxiety among investors who had to make decisions in the face of uncertainty, which once again showed the market’s volatility. Although this has always been the case for crypto, regulation is now more important than ever, as it is needed to safeguard consumers’ financial assets and increase trust in the market, making it safer.
Following the FTX collapse, customers have lost billions of dollars in crypto value, as they could no longer withdraw funds from their wallets. Consequently, many started to worry about the safety of their assets, proving the necessity to introduce regulation. Besides instilling greater confidence in those looking to start their trading journey, regulation can also boost the attractiveness of the crypto sector, leading to broader adoption of digital currencies.
G7 nations’ efforts towards the regulation of cryptocurrencies
Of all the G7 nations, Japan is the only one that regulates cryptocurrencies. However, the other members are also making efforts in this direction. The UK is gradually creating its crypto framework, recently implementing a tax form category for digital assets. Moreover, the UK authorities view crypto as a property, so exchanges must follow specific demands; more specifically, they must register with the FCA (the Financial Conduct Authority) and comply with the reporting requirements related to CFT/AML/KYC. Trading profits fall under capital gains tax.
On the other hand, Canada sees cryptocurrencies as commodities, and regulators in the country have embraced a relatively proactive approach. In fact, Canada was the first one to authorize a Bitcoin exchange-traded fund. While the US is applying current financial regulations to cryptocurrency, a legislative crypto framework is expected in the following months.
But G7 leaders aren’t the only ones pressing for stricter crypto regulations. The FBS, or the Financial Stability Board, has also issued some recommendations on the global regulation of cryptocurrencies. The document pointed out the challenges faced in establishing a comprehensive regulatory approach and highlighted the feasible policy initiative at both an international and jurisdictional level.
Other global bodies have also called for robust regulations, such as the IMF (the International Monetary Fund), which underlined essential elements each country should consider when establishing an adequate guide. The global organization believes that while crypto shouldn’t be approved as a legal tender, banning it is clearly a poor option. Instead, firm and transparent restrictions should be implemented based on domestic policy objectives. Moreover, the IMF promises to work closely to support crypto regulation under the guidance of well-established bodies.
What’s next for cryptocurrencies?
The crypto industry has grown considerably since it first became known to the public. But despite the popularity of the market, global crypto regulation is still an issue, showing that further action needs to be taken so that the industry can reach its fullest potential. That said, global organizations and groups are already making efforts to accomplish this goal, as evidenced by the decisions of the G7 nations that aim to make the crypto industry more transparent, boosting consumer protection. While no one can tell precisely how things will unfold, the future of crypto seems promising, considering that powerful bodies are playing their part in creating a more reliable crypto ecosystem.