How will increasing regulation affect the crypto market?

A bit of background

Cryptocurrency exchanges haven’t always garnered the best reputation. Since their inception in 2010, they’ve faced some serious controversy thanks to certain high-profile incidents involving hacking.

The now-infamous Mt. Gox was one of the earliest and most popular crypto exchanges, which declared bankruptcy in 2014 after losing 700,000 bitcoin.

Incidents like this, unsurprisingly, led to calls for stricter rules to be put in place. Since then, different jurisdictions have imposed different legislation in order to try and combat the obvious issues faced by crypto exchanges. But it would seem they still have a way to go.

Governments’ recent call for change

In May this year, U.S. Securities and Exchange Commission Chair, Gary Gensler, stated that he would like to see more regulation around cryptocurrency exchanges.

He described crypto as a “highly volatile” asset class and commented that investors would benefit from greater protection against extreme price fluctuations.

Gensler’s comments came just days after the price of bitcoin fell by almost 30% due to the Chinese government cracking down on banks’ use of crypto.

And just days after that, Chinese Vice Premier, Liu He, went one step further and outlined plans to crack down on bitcoin mining and trading, in an attempt to minimise financial risk.

Predictably, bitcoin’s price fell a further 15% following the news, suggesting that regulatory changes can greatly impact the crypto market. Let’s have a look at why that could be.

Increased regulation vs the price of crypto

There’s plenty of evidence to suggest that increased regulation in the industry affects the price of crypto. People tend to panic sell following any new regulatory requirements - either because they predict that everyone else will do the same or because they believe that tighter controls threaten crypto’s decentralised nature.

It’s also been said that governments try to control the price of crypto in the same way they do fiat money.

Billionaire and founder of the world’s largest hedge fund, Ray Dalio, appeared to agree at a recent industry event. He said, “one of the great risks is the government having the capacity to control almost any of them - bitcoin or other digital currencies. They know where they are, and they know what’s going on.”

There are certainly some who believe that stricter regulations are ultimately for the good of the industry and not something to be afraid of. Brian Feinstein and Kevin Werbach, Wharton professors of legal studies and business ethics, believe that fears surrounding the increased regulation of cryptocurrency are unfounded and that it would instead “purge the industry of bad actors and engender trust, which in turn would help it grow.”

Should crypto exchanges self-regulate?

The U.S. Commodity Futures Trading Commission (CFTC) Commissioner, Brian Quintenz, recently called for crypto exchanges to self-regulate. What does that involve? Self-regulation is where an industry establishes a set of guidelines and code of conduct for all businesses operating within it to follow.

Japan and South Korea pioneered the move towards self-regulation in the cryptocurrency sector. But will the rest of the world catch on? And is it more likely to encourage market growth than government-imposed regulation?