September 25, 2021
Read Time:6 Minute, 2 Second

The argument about the legality of cryptocurrencies has ended and the winning argument states that cryptocurrencies are here to stay. Although this may not sit well with many central banks and governments, the use of cryptocurrencies all around the world cannot be ignored, not anymore.

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According to coinmarketcap, there are approximately 10,900 cryptocurrencies in existence with a market capitalization of approximately $1.28 trillion. Speaking on the adoption of cryptocurrencies, the market leader, Bitcoin has been passed into law in El Salvador as a legal tender with the sole purpose of banking the unbanked as the country has 70% of its population without a bank account.

Africa, a continent that is believed to be technologically deficient, uses cryptocurrencies as part of everyday life, with Nigeria as the pioneer, transacting over $200 million worth of Bitcoin in the first half of 2021, a figure thought to be highly suppressed considering the government’s ban on official cryptocurrency trading and the existing data gaps.

These facts clearly indicate that cryptocurrencies are widely sought-after, with people consistently using them for cross border transactions, as a means of earning passive income and also for other blockchain associated functions.

Joseph Raczynski, a Thomson Reuters technologist and futurist stated that he expects that by 2025, Bitcoin will overtake fiat currencies. This may be the case because of how quickly individuals are adopting cryptocurrencies. 11 years after they first came into existence, world governments are now racing to put in place some checks and balances for cryptocurrency usage in the form of regulations. The Chinese government has gone a step further to outlaw cryptocurrency transactions within the country.

Compared to previous years, regulators are taking cryptocurrency regulations seriously compared to previous years. We have seen China, of course, outrightly ban cryptocurrencies and mining activities within the country all in a bid to promote its own central bank digital currency (CBDC) which is popularly known as the “Digital Yuan”. Asides from China, many other countries are seen to be taking serious steps to regulate cryptocurrencies. Their approach so far has been to regulate cryptocurrency centralized exchanges. Binance Exchange has been on the news of late as the company has been fighting regulatory issues on different fronts. Countries like Italy, U.K., Germany, U.S.A., Japan, Canada, Thailand and the Cayman Islands have all taken steps against Binance in the form of an investigation, filing criminal complaints or banning the platform from operating within the country’s space. These regulatory crackdowns have affected the cryptocurrency market. The FUD (Fear, Uncertainty and Doubt) caused by the headlines of the regulatory framework surrounding cryptocurrencies is one of the major factors that caused the market crash in May 2021 but investors need to know regulations to cryptocurrencies were bound to happen. The world government cannot just watch a market worth over a trillion dollars exist without any form of oversight. Here is why:

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Need for Control

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Governments control fiat currencies. They use central banks to issue or destroy money out of thin air, using what is known as monetary policy to exert economic influence. They also dictate how fiat currencies can be transferred, enabling them to track currency movement, dictate who profits from that movement, collect taxes on it and trace criminal activity. All of this control is lost when non-government bodies create their own currencies. Cryptocurrencies literally take away financial control from regulatory bodies because it lacks a centralized authority. This is perhaps what world governments are afraid of. If cryptocurrencies become widely adopted, the entire banking system could become irrelevant.

Scam and fraudulent activities

Cryptocurrencies are more or less anonymous payments. Although the transactions are recorded on the blockchain, it does not include the name or details of whom you might be transacting with. It only records the wallet address of the sender and receiver. This makes it difficult to monitor fraudulent activities. The ransomware attack on the colonial pipeline is a good example as the perpetrators requested to be paid in cryptocurrencies. Asides from this, because of how seemingly easy it is to create a cryptocurrency, a lot of individuals have fallen victims to new age scams such as pump and dumps and rug pulls. These scams trick people to invest in a project that seems to have potential and get them to invest in them in the form of staking. Then the owners close the platform and run off with supposedly staked cryptocurrencies. This was the case with DeFi 100 (D100).

Market Volatility

The world government want to put in place regulations to reduce the market volatility that exists in the cryptocurrency world. The cryptocurrency market is known to be one of the most highly volatile markets as they could make or break an investor all in a matter of seconds. Bitcoin, which is considered the flagship cryptocurrency, with a market capitalization of approximately $600 billion, is no stranger to market volatility. Referring back to the market crash in May, Bitcoin lost nearly 50% of its value. Altcoins had it worse as they crashed 50% or more. Many regulators, including the Governor of the Central Bank of Nigeria, Godwin Emefiele, have pointed to this as a problem. Emefiele stated that if one man’s tweet, in reference to Elon Musk stopping bitcoin as a means of payment over environmental concerns, can affect the cryptocurrency market the way it did then it should be avoided.

Environmental concerns relating to mining

In cryptocurrency, there are two ways to verify transactions and maintain network integrity. They are the Proof of Work (PoW) and Proof of Stake (PoS) network consensus mechanisms. The PoW is very energy-intensive because it involves the mining of coins. The bitcoin network runs on this network consensus and reports from Cambridge researchers say mining Bitcoin currently consumes around 110 Terawatt Hours per year. This is roughly 0.55% of global electricity production and more energy than the annual consumption of countries such as Argentina, Malaysia and Sweden.

Because of these worries and ESG investors fear that bitcoin mining is polluting the air, Elon Musk stopped the flagship cryptocurrency from being used as means of payment until there is substantial proof that the network uses over 50% renewable energy. This issue gave birth to the North American Bitcoin Mining Council (BMC) with MicroStrategy CEO, Michael Saylor at the helm of affairs. The group released their first-ever voluntary mining survey report and concluded that bitcoin mining uses 56% renewable energy. Although many critics have argued against the report stating that the method used to survey is not enough as individuals could falsify claims since no one is checking. Due to these concerns and many governments moving towards zero-emission by 2050, mining cryptocurrencies poses a problem to that plan.

What to expect

Many believe regulations to cryptocurrencies are bad and others argue that it is impossible to regulate cryptocurrencies especially with the existence of Peer-to-Peer (P2P) trading and decentralized exchanges (DEXES). Regardless of what one may believe, the thought that cryptocurrency regulations can be avoided is just fanciful. Developers and investors should always consider regulations surrounding cryptocurrencies before making a move to invest or create as world governments are just getting started.

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