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September 19, 2018

Regulatory Reforms for Bitcoins

The shilling coins. Photo/Elkana Jacob
The shilling coins. Photo/Elkana Jacob

Since the year started in January, 2017 has been a terrific one for bitcoin enthusiasts. Opening the year at just above USD 1,000 per bitcoin, the value of this particular cryptocurrency has appreciated almost 400% to hit a record high of USD 4,477 per bitcoin by mid-August. While the value of the digital currency has slightly depreciated since then, institutional analysts forecast that it may yet hit the 7,000 dollar mark by the end of the year. While these forecasts may be overly ambitious, we must note that from its inception in 2009, no one expected bitcoin to make the strides that it has made today.

A major factor leading to the rapid rise of bitcoin, especially in the current year, is increased regulatory support and consumer awareness. Particularly, growing adoption and institutional investor interest, coupled with an agreement on a mechanism to speed up transactions – known as the Bitcoin Scaling Agreement – and regulatory steps targeted at helping the asset broaden its reach, have bolstered the value of bitcoin. This has necessitated a number of financial regulatory institutions, for example the Japan Financial Services Agency and the US Commodity Futures Trading Commission, to change tack, in an effort to tame the bitcoin movement, and in effect get a piece of the pie. Notably, as a result of recent regulatory reform, Japan is now the first country to officially recognise bitcoin as a legal method of payment.

However, despite the above, the adoption of bitcoin, other similar cryptocurrencies and attendant cryptoservices have remained relatively limited, with about only 10 million people making use of digital currencies globally. Arguably, the largest obstacle facing the mass adoption of digital currencies is regulatory uncertainty. While a few pioneer countries and financial institutions are making the bold stride to introduce bitcoin into the mainstream markets, there is still quite a lot of push back from risk-averse countries and financial institutions that view digital currencies as too risky to venture into

Particularly, banks have evidenced a trend of approaching bitcoin with caution, citing volatility and regulation as the major roadblocks preventing bitcoin’s mainstream acceptance. In terms of regulation, a multitude of hurdles face digital currencies, of note being tax policy, anti-money laundering (AML) laws, and securities regulators.

In order for bitcoin, and in extension digital currencies, to truly thrive and consequently gain mainstream acceptance, these roadblocks need to be tackled. Ideally, regulation, as a tool of creating an environment tasked with protecting investors, reducing systemic risk and ensuring fairness and transparency within the market should be promoted. However, this also carries the risk of stifling the innovation necessary for the growth of the cryptocurrency economy; a balancing act that is indeed no easy task.

 

 

 

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