The global crypto market was shaken earlier this week after China continued its regulatory crackdown on companies that provide payment services for cryptocurrencies and bitcoin miners.
On Monday, the People’s Bank of China announced more restrictions on cryptocurrencies. In the statement, the regulator declared that “virtual currency trading activities disrupt the normal economic and financial orders, breed the risks of illegal cross-border transfer of assets and money laundering.”
The statement came shortly after the regional government in Sichuan, a southwestern Chinese province, announced that it would close more than two dozen cryptocurrency-mining operations.
The crypto market tumbled. At the beginning of the week, the USD price of bitcoin decreased by approximately 11%. Ether was trading 13% lower, while dogecoin was down by about 25%.
The changes reflect a growing number of regulations looming over the crypto market.
Today, many nations are not ready to put up because national regulators bypass digital assets.
The total number of cryptocurrencies has already exceeded 10,000. The value of these assets is not backed by anything other than the balance of supply and demand, and therefore highly volatile.
Meanwhile, the demand for cryptocurrencies remains high and the entry threshold low. As a result, almost anyone can launch their cryptocurrency by investing several thousand USD.
The lack of a single issuer and guarantees of consumer protection also contribute to the volatility of modern cryptocurrencies.
A ‘wild west’ market
The crypto market remains in a “wild west” state, in which there are still no effective ways to regulate and protect consumer rights. But there are good opportunities to earn for those who are willing to take significant risks.
For most states, and especially the world’s largest economies, this situation is ambiguous.
On the one hand, the boom in cryptocurrencies and the development of blockchain technology indicates the emergence of a new payment method that cannot be ignored. Sooner or later, it will need to be integrated into national economies. On the other hand, the extreme volatility of cryptocurrencies and their frequent use by criminals cause serious concern.
Given the high level of decentralization that blockchain technology offers, the demand for many modern cryptocurrencies is likely to remain high. Still, it will be under growing pressure from numerous regulators.
Last week, the well-known author and investor Nassim Taleb published a paper critical of bitcoin enthusiasts. According to Tale, the latter seriously underestimate the threat that governments pose to cryptocurrencies.
Currently, regulators worldwide are signalling they will continue to introduce more restrictions on the crypto market. This includes rules that would hold banks and exchanges to stricter know-your-customer and anti-money-laundering regulations.
In addition to more regulations, national digital currencies could be introduced, backed by government guarantees.
China has begun trials on its digital yuan. Last year, the People’s Bank of China filed more than 80 patents on the issuance and supply of a digital currency. The EU has also announced plans to create a digital euro.
According to a study conducted in early 2020 by the Bank for International Settlements (BIS), about 20% of 66 central banks worldwide consider introducing digital currencies in the next six years.
Betting on infrastructure
National digital currencies are likely to be used in a similar way to existing currencies, be it the dollar or euro. However, they will make use of the infrastructure already in place for today’s cryptocurrencies upon their introduction.
For example, Coinbase, a startup that allows people to buy and sell cryptocurrencies, went public in April and is now valued at $47 billion. Although investors remain skeptical about modern cryptocurrencies, many are already willingly investing in existing infrastructure, with an eye to the further development of the crypto market.
Integrating digital assets into national legislation, combined with more regulations, will allow better tracking and taxation of funds. This will add stability and transparency to the global financial system, where cryptocurrencies increasingly cannot be ignored.