Investors and experts such as Timur Tillyaev and Kenneth Rogoff call for regulation to enable crypto to fulfil its potential and protect against future shocks

The latest crash in crypto prices has spooked investors and regulators across the world. In May, the implosion of the ‘stablecoin’, TerraUSD, wiped out over $300bn of value in one week. Bitcoin has also dropped more than 60% in value over the last seven months.

On June 30, Three Arrows Capital, a cryptocurrency-focused hedge fund, fell into liquidation, deepening the crisis surrounding cryptocurrency. The Singapore-based company was one of the best-known investors in the crypto sector.

Meanwhile, Bloomberg reported in late June that the market for nonfungible tokens, or NFTs, had sunk to its lowest levels in a year.

But some experts have pointed out that this latest crash could have a positive effect: rapid introduction of regulation to protect crypto from further shocks.

Writing in Finance Monthly, sustainable investor Timur Tillyaev called for “effective, global regulation implemented to take full advantage of the benefits of this emerging technology.”

Kenneth Rogoff, professor of economics and public policy at Harvard University, argues that “One reason why advanced-economy regulators have been slow to act is the view that as long as cryptocurrency-related problems mainly affect the rest of the world, these problems are not their concern.”

Rogoff highlights how developing countries have seen crypto become a significant vehicle for avoiding taxes, regulations and capital controls. However, the latest crash suggests that much of the world now views crypto as a problem closer to home and is introducing regulation accordingly.

In early June, Japan became the first major economy to introduce formal regulation on stablecoins, legally defining them as digital currencies.

US financial regulators at the Treasury Department and the Securities and Exchange Commission are signalling a potential crypto crackdown this summer.

On 29 June, the EU reached a provisional agreement on transparency of crypto asset transfers. The new agreement is designed to enable the EU to “deal with the risks of money laundering and terrorist financing linked to these new technologies, while reconciling competitiveness, consumer and investor protection, and the protection of the financial integrity of the internal market.”

Morocco is another country reportedly working on a cryptocurrency regulation framework bill.

China has gone much further, banning all crypto transactions over its alleged role in financial crime. The move was applauded by American billionaire businessman Charlie Munger who called for similar steps to be taken in the US.

However, other investors like Timur Tillyaev have warned against radical knee-jerk attempts to regulate cryptocurrency, arguing that this would only drive the market underground or into jurisdictions where its negative uses would thrive.

Overall, consensus is growing that considered regulation is needed to halt the Wild West environment in which cryptocurrency operates today. This is to protect nation states from criminal activity and ordinary investors from fraudulent schemes and volatile prices.

As Tillyaev concludes, “the latest crash in the global crypto market should serve as a serious warning for governments, investors and the fintech sector to bring in comprehensive regulation. We must learn from past mistakes in order to realize cryptocurrency’s full potential and protect our financial system from a crisis.”