A digital representation of value that serves as a medium of exchange, a unit of account, or a store of value is referred to as a digital asset, also known as a cryptocurrency. However, these assets typically lack the legal tender status of traditional currencies. Both the intrinsic value and the underlying investment of digital assets are zero.
Digital assets’ value is determined by supply and demand market forces, making it more erratic than the value of traditional currencies. Investing in digital assets is risky, and trading in digital assets entails a number of risks, such as the possibility of fraud, theft, market volatility, market manipulation, and cybersecurity failures, including the possibility of hacking, theft, programming errors, and unintentional loss.
Any organisation that currently accepts digital assets as payment does not guarantee that it will continue to do so in the future. Digital asset prices are prone to volatility and unpredictability, which can result in significant and immediate losses. A position in digital assets might not be able to be sold off quickly or for a fair price.
Many people, including business owners, government representatives, investors, and members of the general public, are still intrigued by cryptocurrencies. Recent public discussions about cryptocurrencies have been sparked by the sharp price swings of cryptocurrencies, claims that the market is a bubble with little underlying value, and concerns about regulatory and legal supervision evasion.
In response to these concerns, tighter restrictions or even a complete ban have been proposed. The classification of cryptocurrencies as commodities, money, or something else, the development of cryptocurrency derivatives and credit contracts, the use of initial coin offerings (ICOs), which use cryptocurrency technology to finance start-up projects, and the use of cryptocurrency technologies by central banks to issue digital currencies are some of the other topics that are the subject of additional discussions.
At the start of March, President Biden signed the eagerly awaited Executive Order on Ensuring Responsible Development of Digital Assets, a high-profile acknowledgment of the potential of the cryptocurrency industry.
The White House promises to take part in cryptocurrency research by signing that Executive Order, and it also commits to working with other government organisations to create a regulatory framework for digital assets. There is also a description of a “whole-of-government approach to addressing the risks and utilising the potential benefits of digital assets and their supporting technologies.”
There are 460 cryptocurrency exchanges, 18,142 coins in circulation, and a $1.7 trillion market right now. Every day, $91 billion worth of cryptocurrencies are traded, the majority of which are Bitcoin or Ethereum.
Cryptocurrency regulation is imperative
Here the concerns about potential side effects that could undermine systemic stability are raised by the old financial system’s growing interconnection with the emerging crypto ecosystem.
Diversification has long been considered a benefit of using cryptocurrencies, but things are beginning to shift. According to data, the International Monetary Fund published earlier this year, the S&P 500 and bitcoin are related (IMF). This fuel worries that stock market investor enthusiasm will migrate to cryptocurrency.
The Financial Stability Board issued a warning regarding the effects on the global financial stability of continuing the scale growth and integration of crypto assets with these institutions. Given the numerous data gaps that surround them, a thorough analysis of the macroeconomic impact of crypto-assets is still somewhat elusive.
Additionally, the design of the underlying technology that powers cryptocurrencies makes it possible to conduct cross-border transactions without the aid of any actual or potential financial intermediaries.
The current state of play in regulation
The World Economic Forum’s Global Future Council on Cryptocurrencies asserts that despite international organisations’ examination of risks and development of appropriate policy responses to the emergence of cryptocurrencies, there hasn’t been any globally coordinated regulation of cryptocurrencies.
The world’s central banks and regulators are already keeping an eye on this emerging trend. Despite having the same objective of stabilising their monetary systems and fostering innovation and economic progress, nations from China to El Salvador have already started evaluating and implementing various regulatory solutions.
It will be economically beneficial, protect consumers, and stop the use of cryptocurrencies for illegal activities if a global coordinated strategy that incorporates international cooperation around crypto-asset regulation is implemented.
The Digital Currency Governance Consortium of the Forum, which is made up of more than 80 organisations from various sectors and geographical areas, is working toward achieving this goal.
It has focused its second phase of work on analysing the macroeconomic effects of digital currencies and providing regulatory approaches for the same as stakeholders continue to experiment with these instruments and the adoption of cryptocurrencies, stablecoins, and central bank-issued currencies.