Cryptocurrency regulation is a work in progress, and many institutions are vying for control. The Biden administration is planning to launch a government-wide strategy on digital assets, and is asking agencies to submit proposals. It is unclear if the strategy will ban the use of cryptocurrencies. Key regulators include the Federal Reserve, the Department of the Treasury, and the Securities and Exchange Commission.
Bitcoin is in crisis mode
The Bitcoin community has recently gone through a period of crisis, revealing its limits in forming consensus and discrepancies between the project’s stated goals. The underlying consensus structure is overly centralized, which is in direct contradiction to the decentralization ethos of Bitcoin. The project has become too popular amongst technocratic elites, despite being designed to be a decentralized payment system.
The Bitcoin network has suffered several problems this year, largely due to the Mt. Gox incident, which led to the loss of 774,000 bitcoins worth over US 450 million. In addition, you can read more about cryptocurrency best buys now, top 10 cryptocurrencies. Most of these issues were not caused by flaws in the protocol itself, but by ill-intentioned individuals, centralized platforms, or poor security measures.
The Bitcoin market is extremely volatile, and panic among investors can deteriorate market conditions. Recent studies have shown that the level of investor sentiment is one of the main factors affecting the price of Bitcoin. In a study by Bukovina and Marticek, they showed that the sentiment exhibited by investors correlated with the level of volatility.
Despite the crisis, the Bitcoin project continues to grow in popularity. The project has a market capitalization of nearly $7 billion. In spite of the lack of a public face and a single institution to represent it, many people still use it, contribute to the protocol, and rely on its technical infrastructure.
Ethereum completed its merger
The Ethereum Merge is a significant milestone in the blockchain industry. The Merge allowed the network to grow to thousands of transactions per second with a large block size and high block frequency. It also allowed the network to be censorship-resistant and trustless. As the first step in a five-part process, the Merge also drastically reduced Ethereum’s energy consumption.
According to Justin Drake, the Merge reduced global electricity consumption by about 0.2%.
The Merge also makes Ethereum (https://en.wikipedia.org/wiki/Ethereum) much more energy-efficient and scalable. The merge essentially replaces Ethereum’s proof-of-work (PoW) consensus with a proof-of-stake (PoS) consensus system, which requires significantly fewer resources.
While the Ethereum merger has avoided any significant problems, the new network is likely to present other challenges for institutional investors. The new merged system is likely to introduce new roadblocks in the market, and institutions should be prepared to work around these. Another major roadblock is the unwinding of large-scale speculative positions and selling pressure by miners.
Regulation of cryptocurrencies is still a work in progress
As the market for cryptocurrencies continues to grow and become more popular, there are many questions about how to best regulate them. The key to a sound regulatory framework is global coordination between governments and regulators. This is important for a number of reasons. For example, the implementation of a uniform AML standard, which you can learn about here, across jurisdictions has proven to be effective.
Although some jurisdictions have begun to take steps towards regulating the crypto industry, regulatory bodies continue to face a number of challenges. Each jurisdiction has different philosophies, processes, capabilities, and biases. Nevertheless, the U.S. is making efforts to develop a coordinated approach to the industry, and agencies like the Department of State and Treasury are working on issues relating to crypto and the financial system.
As the cryptocurrency landscape continues to evolve, regulators are grappling with how to best regulate the space. Some suggest that the Securities and Exchange Commission should change its current rules to account for the unique nature of crypto operations. Others are trying to develop an ecosystem-level legal framework.
The SEC is putting increasing emphasis on protecting investors in digital assets, and it announced on 3 May that it would double the size of its Crypto Assets and Cyber Unit. The SEC’s director of enforcement recently noted that the industry’s recent growth has been driven by abuse and risk, especially for retail investors.