The cryptocurrency sector has seen a massive level of growth throughout the past few years. What was, at one point, a niche technology that only the most hardcore technology enthusiasts supported, has now become adopted by mainstream investors as well. Today, some of the biggest exchanges in the world have millions of users who are buying, selling and trading cryptocurrencies on a regular basis.
However, from the standpoint of investors, cryptocurrency regulation is also just as important as all of the lucrative opportunities for profiting out of the volatility of the cryptocurrency market has. With the right kind of regulations implemented, the cryptocurrency marketplace can be a safe environment for just about everyone. The team at DXONE, a research-based crypto trading platform, provides an overview of the implications of regulation and how it makes cryptocurrencies safer.
A licence for a cryptocurrency exchange entitles the owners to operate the exchange of cryptocurrencies. All of the other applicants that intend on providing payment services are also interested in obtaining these licences. The main reason why licencing these companies is mandatory is to ensure the legal functioning of the exchange.
Cryptocurrency exchanges can be divided into two categories. There is the classic cryptocurrency exchange, which allows users to exchange cryptocurrencies with one another exclusively, and then there are the FIAT currency exchanges, which allow users to exchange FIAT currencies for cryptocurrencies, and the other way around.
This means that there are multiple licences as well. There are specialised crypto-licences that are implemented by authorised bodies, specifically as a means of regulating operations regarding the exchange of cryptocurrencies. Then there are traditional licences, which regulate executing financial operations, and operations with cryptocurrency, which are indirectly subject to them.
There are many cryptocurrency exchanges currently available on a global scale. However, not all of them will be licenced. Typically if an exchange is licenced, you will be able to easily find such information.
Coinbase, for example, is a public cryptocurrency company that has seen a user base up in the millions, and as such, it is on the radar of a lot of regulatory bodies, so it has to ensure that it lives up to all of the required regulation in order to operate within specific jurisdictions.
Another smaller licenced cryptocurrency exchange is DXONE exchange, which ensures that every single cryptocurrency investor can trade cryptocurrencies in a safe environment.
Anti-money laundering (AML) manages the activities that any financial institution ends up performing as a means of achieving compliance with legal requirements as a means of actively monitoring for and reporting any suspicious activities.
Know Your Customer (KYC) is a set of standards that have been designed to protect financial institutions against fraud, corruption, money laundering, or any terrorist financing. This involves several steps, including establishing the identity of the customer, understanding the nature of the customer’s activities, and qualifying that the source of funds is legitimate.
This means that both KYC and AML compliance is critical when it comes to the process of preventing fraud, money laundering, or any other financial crime which might occur. Regardless of the industry in question, and this means that cryptocurrencies are included here, if a business or service enables customers to move money, they could be a target for money laundering and, as such, has to adhere to these standards and procedures.
The main drivers behind the appeal of cryptocurrencies are anonymity as well as centralisation, and as such, they initially lack any concentrated regulatory power, which is contradictory to the idea of centralised regulation. However, these might be the same reasons why cryptocurrencies could potentially facilitate money laundering and other crimes and, as such, are required to be regulated. Regulation, if done properly, can stabilise the market and reduce some amount of risk for cryptocurrency investors.
Cryptocurrency regulation makes the market much safer. While investing in cryptocurrencies is still a risky investment, with protection for investors, it is less likely that the market will be able to face much outside manipulation. This leads to overall public confidence, which means that the interest, as well as the price of cryptocurrencies, could increase over time.
This means that regulation provides numerous benefits, such as creating binary virtual asset ownership, making virtual assets easy to categorize and understand, and providing financial institutions a green light to invest. This is due to the fact that financial institutions cannot really operate and create financial instruments within a market where they cannot clearly determine the origins and clear the long-term legality of the assets. Additionally, regulation can also put an accurate valuation on a cryptocurrency’s growth.
Centralised stablecoins essentially provide a digital option that has the backing of a traditional currency. They may not be an investment opportunity similar to other, more volatile cryptocurrencies, but they are specifically developed as a means of keeping their prices stable and not letting them soar in value. Many stablecoins are tied in value to the U.S. Dollar, which means that they always aim to maintain $1 in value throughout their entire existence.
What this means is that centralised stablecoins are typically FIAT collateralised off-chain, and these are connected to a third party, such as a custodian or a bank. In centralised stablecoins, the stability is achieved through a 1:1 backing of token liabilities with the corresponding asset. These are tokenized IOUs deployed onto a blockchain, and the centralised stablecoins balance the supply and demand through minting and redemption mechanisms.
The technical aspect of various cryptocurrencies makes it extremely difficult to bring them within the existing tax rules, and this is also the case even for tokens that are specifically designed to deal more generally within the digital marketplace. The US, UK and Australia have all started to offer guidance on these topics. However, moves by regulators and tax authorities will tighten cryptocurrency regulation and require a lot more reporting from exchanges as well as other financial institutions, which could lead to crypto activity needing to migrate to different jurisdictions, which further complicates these tax issues.
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John Kiguru is an astute writer with a great love for cryptocurrency and its underlining technology. All day he is exploring new digital innovations to bring his audience the latest developments.
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