Cryptocurrencies, with a market capitalization of over $200 billion, can no longer be dismissed as just a fad. While still making up only a tiny fraction of overall global financial markets, they have matured from the ranks of fledgling startups to being leveraged by large enterprises for use cases ranging from global payments, asset-backed tokens for metals and commodities, fiat currency-equivalent digital coins, the Internet of Things, decentralized cloud storage and more.
Earlier this year, JPMorgan Chase announced its United States dollar-equivalent JPM Coin for business-to-business payments; a consortium of large banks announced Fnality International, which aims to facilitate cross-border payments across five major currencies; and Facebook introduced Libra, targeting retail payments.
Several central banks are closely monitoring cryptocurrencies to both determine regulations to protect investors as well as explore their benefits in the context of central bank digital currencies. Let us look at both these aspects.
The need for regulation
Cryptocurrencies today lack the regulatory safeguards that financial institutions and markets have, such as third-party audits, financial reporting and disclosure, prevention of insider trading and a proper security infrastructure — all of which pose risks for the retail investor when unestablished.
While many crypto proponents argue that cryptocurrencies should not be regulated, as the technology is decentralized (some are designed to be censorship-resistant), many aspects such as exchanges, governance around issuance of new tokens, and marketing are highly centralized in nature, requiring standardized oversight to prevent and punish impropriety. If left unchecked, their volatility could pose a risk to the health and stability of the economy, especially for smaller developing countries.
Further, concerns over misuse of the technology to fund terrorism, trafficking and drugs makes it imperative for regulators to step in and…