The outlines of regulatory clarity are starting to show in many different parts of the world, much like a ship emerging through fog, even though the US is not one of them. The laws and regulations governing cryptocurrencies, digitalized real-world assets, and stablecoins are beginning to take shape in places like Dubai, Japan, and the EU.
Legal issuance of various digital assets is anticipated in the future, and the ensuing legal and regulatory framework will lower risks and spur massive investment in the field.
It is worthwhile to consider now what the boundaries of regulatory clarity will entail. Let us begin with something basic, such as cryptocurrency. Undoubtedly, regulatory clarity will lessen or completely eradicate the possibility of cryptocurrency exchanges stealing your digital assets. The chance that someone will purchase an asset one day only to discover the next that it is illiquid and illegal will also be eliminated.
Regulatory clarity will also increase public trust in stablecoins by reassuring them that they are regulated by securities or banking authorities and supported by real money or government bonds. A lot of stablecoins are already noteworthy for having currency backing one for one and having a lower risk profile than a regular bank deposit that can be re-loaned to other individuals. Similar regulations are being implemented for a broad range of asset-backed coins, including currency, gold, and other commodities, by the upcoming MiCA regulations in Europe.
What regulation can’t do
The one thing that regulation cannot do is shield individuals from making poor financial decisions. In a world of digital assets, the opportunity to do so is almost limitless. Consider something simple, like cryptocurrency. A digital asset such as Bitcoin operates on the basis that it is superior to gold. An algorithm controls the release procedure, and the overall supply is restricted.
There is no limit to the number of bitcoin clones and variants that exist. Literally, thousands of them exist. Most of them will eventually lose all of their value. What obligation, if any, do regulators have to stop people from investing money in dead ends, and how can consumers distinguish between all these conflicting claims?
Beyond cryptocurrencies, there is an entire class of digital tokens that resemble stock in corporations. These are frequently marketed as “utility tokens, which can be used in a new protocol and have the features of payments and investments, and they are frequently pitched to buyers as investments that will increase in value.”
There are currently a number of protocols in use that have full-time management teams and produce transaction fees with the goal of (someday) funding those teams as well as possibly providing token holders with dividends. Even more, token holders have the ability to propose and vote on management ideas. That definitely sounds and looks like how a lot of businesses or business alliances run.
Just to be clear, this is not at all problematic. Conversely, It could not be more thrilled about the kinds of innovations that these protocols will support and enable to grow.
A whole slew of new digital goods and services are being funded and paid for by means of these company-like structures, complete with ecosystem tokens. While some of them are merely entertaining, others are bold attempts to completely rethink how we handle storage, processing, and even physical assets. There are enormous benefits for the businesses and individuals engaged, as well as for society at large if we improve our management of limited resources. These projects are funded by token sales, which are a type of crowdfunding. Since startups are able to raise money for these kinds of projects off-chain, there is no reason why they cannot also in a well-regulated on-chain market.
Regarding the amount of risk involved, we do need to be upfront. Because it’s so risky, purchasing shares in startup companies is typically prohibited unless investors can demonstrate that they can afford to lose their money.
Over 90% of brand-new businesses fail. For the organizations and protocols developed during the initial wave of initial coin offerings (ICOs) in 2017 and 2018, we at EY discovered an even higher failure rate. During the years, a large number of ICO and cryptocurrency investors have lost a significant amount of money on high-risk transactions, frequently without ever understanding the protocols being suggested.
Historically, professional investors and high net worth individuals have been the only ones allowed to invest in startups in the U.S. and other countries. These individuals are believed to have sufficient funds to absorb any losses, or to fully understand the risks involved. There is ample scholarly evidence to suggest that average consumers who attempt to play this game perform poorly. A random number generator performs better at selecting stocks than the typical retail investor. Risks are not always understood just because they are disclosed.
There are a lot of opportunities despite all that risk. Not only for investors or businesses looking to raise capital, but also for the development of a regulated advice and asset curation ecosystem as a whole. For established financial institutions that are accustomed to selecting investments for their clients from the wide range available, this might be the greatest opportunity available. There will always be risk associated with blockchain and cryptocurrency, but there may also be much greater opportunity and reward in the near future.
