Regulation
How Crypto Regulations Affect Trading
Over the past two years, cryptocurrencies are now widely accepted by the general public and large companies. With increased interest and a larger user base, governments have also focused on cryptos. This manifests itself in more regulations and stricter tax practices.
The US government has become one of the strictest when it comes to regulating crypto, and some crypto companies have abandoned their use as a result. Cryptocurrency exchanges are feeling the effect of the new regulations more than any other business because they are the middleman for investors buying cryptocurrencies.
How do crypto exchanges work?
THE central exchanges for crypto trading operate as a platform for users to buy and sell cryptocurrencies. In this respect, they are similar to foreign currencies or stock exchanges. Centralized exchanges operate under a central authority, meaning transactions do not occur directly between peers. Some of the biggest exchanges, like Binance or Coinbase, work this way.
Crypto exchanges are responsible for keeping user funds and data safe through robust measures. They must comply with regulatory standards, prevent fraudulent activities and maintain transparent operations. Exchanges must also ensure liquidity, fair trading practices and customer support.
Are cryptocurrencies securities?
One area that has come under scrutiny with the new regulations is the very nature of cryptocurrencies. The Securities and Exchange Commission (SEC), which regulates the work of crypto exchanges, does not consider cryptocurrencies to be legal tender. Instead, it treats them like securities, like bonds or stocks.
Opponents of this approach view cryptos as commodities because they are used to store value and facilitate trade. If cryptocurrencies are treated as securities, exchanges will not be able to continue providing their services because they are not set up to operate in this business sector.
Lawsuits
Due to the new regulations, the SEC has already filed lawsuits against several crypto exchanges. The largest exchanges, Binance and Coinbase, have already faced lawsuits. Some crypto exchanges have publicly stated that they also expect lawsuits to be filed against them.
The SEC claimed it violated the law by operating without the right to trade securities. The problem concerns the definition of cryptocurrencies. Since most exchanges allow their users to purchase many different cryptos and use one currency to purchase another, governments will treat this action as purchasing securities rather than exchanging one currency for another one.
Leave the United States
Some crypto exchanges have already decided to leave the United States due to these policy changes. They are heading to the EU or, in some cases, to Saudi Arabia or Hong Kong to find new markets and get away from the United States and its regulators.
Just a few days ago, Robinhood, the California-based investing app, purchased a European crypto exchange, Bitstamp, to move its business to Europe. The purchase was worth around $200 million and included folding Bitstamp into Robinhood services.
Effect on markets
This increased surveillance also has a negative impact on the markets. Since investors cannot be confident in using crypto exchanges, they may be less likely to transact. This can cause values to fall, at least to a certain amount. Uncertainty is generally the worst quality of a crypto market.
Broadly speaking, the cryptocurrency market is doing well, especially now that traditional financial institutions are getting into it. However, rumors about upcoming changes in regulations are also widely spread, and they will increase as the laws reach the courts and some crypto exchanges leave the United States.
Increased costs
New regulations will impose new costs on crypto exchanges. Most of them concern user security and privacy. Measures taken by governments are similar to those used to prevent money laundering, and some may include know-your-customer laws.
Chances are that exchanges that must comply with these laws will pass these costs on to users and investors. In the long run, this will make trading cryptocurrencies a little less accessible.
Market access and geographic restrictions
When cryptocurrencies first appeared on the financial scene, one of their most important advantages was the ability to transact regardless of where you are. Cryptocurrencies do not rely on a central authority, allowing users in countries with strict regulations to make online payments without being detected.
Market access will suffer if countries implement different regulations based on their political and cultural differences. At this point, it appears that European and Asian markets will be more liberal when it comes to regulating crypto exchanges, and the United States is expected to be conservative and restrictive.
Increased regulatory efforts are affecting crypto exchanges mostly negatively. Now, as cryptocurrencies become more widespread, markets will have to adapt to stricter rules. In the long to medium term, this means that trading could become more expensive and somewhat less accessible.