Market Correction and Regulatory Action as A Chance to Promote Institutional-Grade CryptofinanceOther Noteworthy DevelopmentsConclusion
Thursday, 10 June, 2021
The Digital Regulator
Cryptocurrency Markets and Regulators - What to expect
The 12-month period of substantial increases in cryptocurrency values (bitcoin’s value grew by 845% from 14 April 2020 to 14 April 2021) evolved, in May 2021, in a correction that has exposed market conduct, infrastructure, and investors’ protection issues. The US federal financial and banking regulators have teamed up to pursue, rapidly and rigorously, a clear and explicit cryptocurrency regulatory framework. Given the US share in the global economy and the influential role of its regulators, the outcome of the process is likely to shape cryptocurrencies regulation and markets globally. Investors should welcome further regulatory clarity in areas such as market infrastructure, conduct, and investor protection inspired by traditional financial regulation, which will promote the development of institutional-grade cryptofinance in the mid to long term. Cryptocurrencies are not deemed systemically relevant by Central Banks, and a major clampdown can be excluded.
Market Correction and Regulatory Action as A Chance to Promote Institutional-Grade Cryptofinance
Financial regulators have been traditionally supportive of cryptofinance. The regulatory frameworks that have been put in place at different paces and levels of sophistication in various countries—such as Switzerland, several European and Asian countries, and the US—over the last few years have supported the development of cryptofinance infrastructure, which in turn has allowed an increasing number of investors to participate in cryptocurrency markets. The rapid expansion of these markets over the last year has, however, also exposed weaknesses in crypto areas such as market infrastructure, market conduct, and investors protection and led US regulators, in particular, to act. Below, we briefly review these developments to conclude that stepping up the regulatory frameworks governing cryptocurrencies markets is a wise strategy in support of the development of institutional-grade cryptofinance.
The steady growth in the bitcoin price and, more broadly, the cryptocurrency market cap over the last twelve months that culminated in a severe market correction in May 2021 has exposed weaknesses at the level of market infrastructure (operations and governance of crypto exchanges), market conduct (the influence of individuals, headlines, and trading behaviours on prices), suitability requirements, and protection measures for retail investors. Neither the US federal banking and financial regulators nor the European Central Bank European Central Bank link1currently see the volatility in the cryptocurrency markets as a threat to the stability of the broader financial market; thus, a major clampdown can be excluded. The focus of the ongoing regulatory action will, therefore, be investor protections, which will probably take the form of increased prudential oversight and regulation of cryptocurrency markets and their players, particularly cryptocurrencies exchanges. These actions will likely bring the regulation and prudential oversight of cryptocurrencies markets closer to those regimes in place for traditional financial markets. Until clarity on any additional regulation and oversight of cryptocurrencies markets is available, investors are likely to suffer from heightened uncertainty and refrain from acting, keeping the markets in a ‘wait and see’ position. However, investors should welcome the prospect of regulation and oversight of cryptocurrency markets, akin to traditional markets, because it will allow more institutional investors to engage with cryptocurrencies and expand market participation.
Other Noteworthy Developments
Institutional investors see some ease in the conditions required to participate in the cryptocurrencies markets. The positive changes concern Germany and Spain and shall help institutional adoption.
Numerous developments in the CBDC space emphasise the priority Central Banks (CB) are giving to the introduction of CBDCs.
Various cryptocurrencies exchanges have come under regulatory scrutiny in the wake of the market correction, evidencing the focus on this infrastructure by regulators triggered by the correction.
Several new jurisdictions are committed to regulating cryptocurrency markets, which will strengthen cryptocurrencies markets globally.
The significant appreciation of cryptocurrencies values over the last year that culminated in a major and ongoing market correction since May 2021 has exposed weaknesses in the cryptocurrency markets at both the infrastructure level and the participant conduct level; the correction also clarified the need to step up protection for investors. The US regulators have taken the lead in developing a more suitable regulatory framework that is likely to extend key features of traditional financial market regulation into cryptocurrencies markets. There is consensus amongst the major central banks that cryptocurrencies are not systemically relevant. This view should exclude any major clampdown on the cryptocurrencies industry. While the ongoing regulatory action leaves market participants under heightened uncertainty and the markets in a “wait & see” position, investors should welcome additional regulatory clarity for cryptocurrencies markets because it will create additional stability and allow more participants to engage.
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