• Tue. Aug 2nd, 2022

We need to move on to digital currency regulation. Quick.

ByHazel R. Lang

Jun 24, 2022
OpinionAlternative loansDigital bankSavings and investment

Regulation could boost investment in the crypto sector, writes Neal Wilson of EJF Capital, helping investment and competition.

Image source: Pexels/Tima Miroshnichenko

Luna was the digital currency that was not meant to collapse.

While we have grown accustomed to the wild swings of assets like bitcoin, as a stablecoin Luna was designed to provide stability, quietly following the US dollar. But within days, its value plummeted.

The sudden crash had serious consequences, not only for Luna investors, but for the entire digital currency ecosystem. This caused widespread contagion in the market, as bitcoin lost 17% in the five days following Luna’s descent. The ensuing sale of digital assets sent further shockwaves, increasing financial pressure on Celsius Network, a major cryptocurrency lender.

Regulation will help not to hamper

As US Treasury Secretary Janet Yellen has pointed out, Luna’s cautionary tale illustrates that there are risks to financial stability and that we need an appropriate framework. It is encouraging to see a similar approach taken in the UK.

In April, City Minister John Glen MP made it clear that the government’s ambition was for the UK to become a central hub for starting and growing digital currency companies, with an appropriate regulatory framework so that the industry thrives. And, as announced in the Queen’s Speech, Her Majesty’s Treasury (“Treasury”) has committed to start regulating digital currencies in its upcoming Financial Services and Markets Bill.

The Treasury is wise to maintain its adherence to digital currencies despite recent market volatility. In fact, the Treasury has said it will seek to act faster than expected on regulations, overtaking EU efforts.

I’m very encouraged by this, as the UK’s decision on digital currency regulation could benefit the whole ecosystem.

Consumer regulation will provide tacit approval of the technology and provide peace of mind that digital currencies can be used safely. This, in turn, can encourage greater adoption and stimulate competition by lowering barriers to entry and improving access to sophisticated products.

Greater adoption for businesses means access to a larger market. It also means more opportunities to innovate. I believe that entrepreneurs and technology companies that facilitate the transition to the digital ecosystem of the future, as well as financial institutions that adopt solutions, can benefit from this adoption enabling seamless integration of transactions for consumers and retailers.

For the market, the regulations could also stimulate investment in the sector, which would benefit the entire UK digital currency industry by triggering new innovations and the development of sophisticated products.

But regulation can and must go further

It’s great to see the Treasury starting to act on the digital currency regulation needed to unlock these benefits. But there is still more to do.

To allow stablecoins to realize their full potential, I believe we need to see the implementation of a dovish, yet cautious, model that would require issuers to hold enough underlying assets. These assets could be sold quickly, to meet payment obligations, in the event of a sudden economic shock.

We also need mandates to support assets, capital reserves and liquidity needs. The lack of clarity around these details could prevent market players from moving forward with new projects in the UK. For example, it should be noted that Circle, one of the largest stablecoin issuers in the United States, recently announced the launch of its Euro Coin.

Details regarding the regulation of other digital assets, such as exchange tokens, DeFi and NFT, have yet to emerge. While it makes sense for regulators to prioritize stablecoins as low hanging fruits, it is important to establish a comprehensive framework for the entire digital currency ecosystem.

Only by taking these steps can we incentivize stablecoin issuers, as well as other market players, to expand their operations in the UK. This could, in turn, benefit the entire digital currency ecosystem.

The views and opinions expressed are not necessarily those of AltFi.

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