How Do Regulations Mitigate The Risks of Cryptocurrencies?

The introduction of decentralised economies and virtual currencies has definitely facilitated faster and more efficient payment options, besides adding new trading instruments that are highly lucrative and profitable.

However, the lack of regulations surrounding cryptocurrencies made them a favourite destination for scammers and hackers, benefiting from identity preservation and lack of disciplinary laws to carry out their schemes.

Therefore, regulations became vital to restore confidence in crypto coins and tokens and promote a healthier market. Let’s discuss some of these regulatory considerations.

Common Security Issues

The fundamentals of decentralised economies entail shared control, vote-based decisions and the development of networks. Blockchain transactions do not require data collection or identity verification, which can protect users’ personal information and preserve it from identity theft.

However, this is a double-edged sword, allowing scammers to benefit from low regulations and identity ambiguity to engage in money laundering, network hacks and operating unfaithfully in the network.

These occurrences deter investors from getting involved in the market, safeguarding their funds with other trading markets and instruments. Eventually, regulations became a must to promote the safety of cryptocurrencies.

Regulations in The Crypto Space

The infamous collapse of the FTX exchange in 2022 and the crash of LUNA crypto coins led to unfavourable outcomes in the crypto market, where most coins and tokens declined, and platforms suffered from paused and withdrawn investments.

Therefore, regulations are necessary to guarantee that previous events do not happen again.

For example, the SEC is now supervising the stablecoin pegging mechanism to ensure a similar coin crash does not happen again. The Securities and Exchange Commission of the US requires cash and treasury backing supporting any newly issued stablecoins.

Additionally, crypto exchanges are now legally required to be registered as broker-dealers in the national bureau, enabling the US regulator to assess transactions and financial conduct and mitigate the possibility of unpredictable crashes.

Downturns of Crypto Regulations

Tight control measures and regulations are fundamentally against the notion of decentralisation, which requires power and control distribution without having a centralised authority.

Crypto communities fear that tighter regulations can make Bitcoin and other tokens similar to traditional payment methods.

Additionally, blockchain fees are not for profit as they are collected to compensate validating nodes and develop the network. On the other hand, centralised financial institutions and banks charge fees to increase profitability and grow wealth.

Conclusion

The regulatory crackdown on cryptocurrency carries positive and negative outcomes to the decentralised world. Unregulated blockchain currencies and platforms can be manipulated by malicious hackers and use the network for illicit activities.

On the other hand, tight regulations can transform cryptocurrencies into a traditional payment ledger subject to state rules and regulations. Therefore, a golden balance must be found to promote the security of DeFi platforms and encourage network innovation.

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