If regulators only see crypto as a challenge, they’re missing huge potential of its underpinning technology

Cryptocurrencies – like the internet – were almost an unconceivable concept for many when they were invented; we had lived in a paper-based world with country borders for so long, it was all we knew

This is why when the crypto ecosystem came about and essentially broke down those borders, it presented a new test for regulators. As cryptocurrency is still a fairly young concept compared with longstanding traditional financial systems, it is difficult at this stage to grasp the full scale of the risks that come with it. This in turn makes building a regulatory framework to mitigate these risks difficult. These unknowns, coupled with the lack of regulation and pressure from traditional embedded financial institutions, inevitably lead to governments clamping down on crypto.

The cost of ‘crypto-ignorance’ We have seen this in countries such as South Africa, which has banned cross-border transfers, and in countries such as China, Tunisia, Egypt, among others, who have banned it entirely. The fact that some still think crypto is a tool for money laundering shows just how large the knowledge gap is. Gone are the days when most people using crypto were doing so for nefarious reasons, such as money laundering and buying and selling illegal items.

But it’s becoming more and more evident that crypto isn’t a fad, it’s en route to becoming a fundamental part of the global marketplace, and regulation to protect investors is an essential piece of the puzzle for crypto to be successful in its journey to the mainstream. The current approach to regulating crypto unfortunately leans more towards serving the interests of the traditional financial system, rather than investors. If regulators don’t take the time to understand it, it will leave end investors in an even more unprotected position. This also stifles innovation and misses the fact that, while crypto regulation is a challenge, the blockchain technology which underpins crypto has proven to be an incredibly powerful tool that can be used by regulators.

Uncovering powerful tools and potential

When you think about the key characteristics of blockchain – one of the main benefits is transparency. Because it is more transparent than the traditional markets, single transactions can be easily traced back to the crypto wallets they came from. This means blockchain can actually be an incredibly powerful compliance tool.

To outline a recent example, in 2016, a hacker managed to drain 3.6 million Ether from its crowdfunding mechanism, which is still the largest theft to date and would be worth around $9billion. The identity of the hacker has remained a mystery for those in the space. However, earlier this year it was reported that a powerful blockchain-based forensics tool by Chainalysis successfully traced the stolen funds to the point at which they were cashed out – allegedly unmasking the hacker after 6 years of mystery.

This is only one example that demonstrates the huge potential of blockchain, and regulators should seek to learn more to see how it can help alleviate longstanding issues.

Since Bitcoin’s inception just over a decade ago, cryptocurrencies and blockchain have gone through a tremendous journey towards solidifying their place as a legitimate and impactful alternative to the traditional financial system. If regulators prioritise understanding rather than fear, they will not only ensure consumers are protected from any potential crypto scams, but also could uncover a tool which could create a more transparent, easier to monitor financial system and other limitless benefits.

About the Author

Tristan Roozendaal is CEO at Centralex. Centralex is here to facilitate the bridge between CeFi and DeFi with the vision and mission to create a one-stop digital asses platform with greater usage of cryptocurrencies as an alternative form of payment by providing an online hybrid digital asset exchange. We are a globally registered and licensed company with affiliations with the finance industry. Our exchange platform is designed for both retail customers and professional traders.

Featured image: ©Fotomek