Tighter cryptocurrency regulation is on the horizon, but what does that mean for investors?

Key takeaways

• Recent conversations on Capitol Hill suggest it’s not a matter of if further cryptocurrency regulation is coming, but when. Stablecoins will likely be the target of the first few rounds of regulations.

• Experts say government regulation has the potential to protect long-term investors, prevent fraudulent activity within the crypto ecosystem, and provide clear guidance to allow companies to innovate in the crypto economy.

• Fed’s most recent interest hikes revived discussions of regulations, as the volatile macro-environment most felt by traditional markets also spilled over to the crypto-ecosystem.

Crypto’s increasing popularity in the last few years has elicited the attention of another key market player: the US government.

Founded on principles of decentralization, the crypto market might be thought of as inherently at odds with sovereign oversight. But the industry’s boom in recent decades, the more speculative environment it operates in and the chain of cyberattacks on exchange platforms, have challenged the idea that it should forever remain the wild west of alternative investments.

Experts in the field note that new regulations could also mean new heights for investors, either looking to break into the digital investor marketplace or expand their share of assets. Recent volatility in the trading levels of prominent crypto coins – which are mimicking the trajectory of stocks amid a bearish market – has fired up the movement calling for more regulations, with a range of voices from the industry now demanding a speedier transition.

Some regulation is inevitable and can provide long-term benefits to investors

Despite anti-regulationists arguing that decentralization is a fundamental value of blockchain technology, recent events on Capitol Hill suggest cryptoregulation is not a matter of if, but when. President Biden signed off on the long awaited Executive Order on Ensuring Responsible Development of Digital Assets in early March, committing the White House to take part in “the regulatory framework for digital assets” which was followed by the Federal Reserve releasing a report on the pros and cons of a government issued digital currency in January.

Many also believe a round of regulations is specifically imminent for stablecoins, so called because of their relatively stable pricing. Unlike other cryptocurrencies, the stablecoin is also pegged to a commodity or a fiat currency, making it the primary target for government oversight, as it has the potential to undermine traditional financial systems.

There’s some consensus among analysts that upcoming regulations for cryptocurrencies stand to benefit long-term investors.

“Government regulation has the potential to protect long-term investors, prevent fraudulent activity within the crypto ecosystem, and provide clear guidance to allow companies to innovate in the crypto economy,” Aaron Klein, the Senior Economics Fellow at the Brookings Institution told NextAdvisor.

While the riskier nature of cryptomarket is no secret, mitigating its risks is a top priority for investors. The “get rich quick scheme” associated with crypto-trading has deterred many long-term investors from taking a serious interest or expanding in the cryptomarket, which could reverse if the market was more stable, Klein argued.

To curb this volatility, regulators propose targeting cryptocurrency marketplaces. Exchange platforms such as Coinbase and Gemini aren’t subject to the same regulations as the public stock exchange despite the high volume of activity and the relatively large value of the transactions. A more stringent regulatory environment could reduce the number of cyberattacks these platforms experience and potentially ensure recovery of assets in cases of thefts. Moreover, a clearer guidance on cryptocurrency trading could offset some of the speculation in the market and further bolster investor confidence.

Recent crypto events revive interest in regulations

Following a tumultuous few weeks for the stock market, which is responding to interest rate hikes and general bearish sentiment, many of the crypto coins are currently experiencing high volatility. Investors were spooked in mid June when the crypto lending platform Celcius froze user accounts amid a mass sell-off, plunging the company into a liquidity crisis.

The reaction to Celcius snowballed off the earlier collapse of the Terra/Luna coin, with many headlines rushing to declare disaster for the whole sector, with some investors increasingly weary about their future prospects. However, analysts in the space have long been warning of unwarranted panic.

Alkesh Shah, the Global Head of Crypto and Digital Assets Strategy at Bank of America talked of the crypto industry undergoing a market correction in late May and argued that “skeptics become louder when share prices are down.” He also dismissed “hype” over crypto facing an existential crisis, drawing heavily from the currency’s track record and how each downfall in the past was a learning point for the 13-year old market. 

“The applications that are being built on [these platforms] are not going away. They’re real and people have true use cases for them: supply chain efficiency, FEMA claim reduction, things to power the metaverses of the future. That’s why this sector isn’t going away,” he said.

Other analysts spoke specifically to fears of crypto surviving a bearish market, arguing that “bitcoin’s long-term value proposition remains intact.”

Economists agree that as with traditional markets, the volatility in crypto was largely a function of the Fed tightening its monetary policy. So it was starkly apparent when the government was absent to deal with the aftermath. State regulators investigated parties responsible for the Celcius freeze, but the event unraveled with little federal oversight.

This led to some backlash and a range of voices have since coalesced to call for tighter regulations, as well as accelerated efforts in implementing them. 

“We are seeing the consequences of regulators failing to provide clarity,” said Perianne Boring in June, who’s founder and CEO of the Chamber of Digital Commerce.

In reference to Celcius, she said “I am hopeful that recent events will accelerate efforts to deliver clearer policies to the industry and certainty to those who invest in digital assets.”

In the same week, U.S. Treasury officials declared that recent events in the cryptomarkets underscore an “urgent need” for a regulatory framework. 

Meanwhile, a vocal industry advocate for more regulation has been Sam Bankman Fried, the CEO of the prominent crypto exchange platform, FTX. When asked how to guard against trading platform crises, he tweeted in support of regulations, saying they can  “help.”

(Bankman-Fried was recently in the news for bailing out crypto platforms BlockFi and Voyager amid balance sheet struggles. He later stated that the move stemmed from a desire to protect the “digital asset ecosystem and its customers.” You can watch a short video explanation of the event here. )

On his semi-annual pilgrimage to Capitol Hill this week, Federal Reserve Chairman Jerome Powell also addressed the matter and said regulatory ambiguity is one of the biggest challenges facing the cryptocurrency sector.

“Who really does have authority over this? That’s something that Congress would need to clarify,” he said.

He also called stablecoins, the initial target of Congress’ regulatory plans “new and emerging” but without the “fit-for-purpose regulatory scheme that [they need].”

Any new regulation could inspire knee-jerk investor reactions in the markets – initially suppressing trading levels –but it’s clear that regulators, industry participants and investors agree that the upcoming changes could also set a new tone. 

Yieldstreet and crypto 

While crypto isn’t fully insulated from today’s macroeconomic pressures, it has historically come back stronger after each downturn. Moreover, blockchains – the underlying technology of cryptocurrencies–  are viewed as groundbreaking, with the potential to reshape our future. While Yieldstreet hasn’t entered the blockchain market yet, it does offer an Enhanced Crypto Fund, which gives investors index-like exposure to up to 10 of the largest cryptos by market capitalization.