TThe cryptocurrency winter has brought a stark light to the fragility and value of Bitcoin and other digital assets. They are not as vulnerable to inflation or immune to interest rate changes like other high-risk assets. While stocks have taken some serious beatings recently, the impact of the cryptocurrency crash was even greater. Bitcoin’s price has dropped by around two-thirds since its peak in November 2021. The total market value for all cryptocurrency has plummeted from $3 trillion to just over $1 trillion. Stablecoins, which are cryptocurrency that is supposedly backed by dollars and other assets to help maintain their value, were not able to withstand the economic downturn.
Do you think this means the end of crypto revolution? Most likely not. The sector might actually benefit from the crypto shakeout by helping to reduce some of its speculative side and focusing on the benefits of the technology. Can government regulators who are already closely monitoring crypto, and will likely redouble effort in the light of recent events, stop innovation? This sector could benefit from regulatory oversight if it is done right. It would provide greater stability, legitimacy and credibility.
It promised that the cryptocurrency revolution would democratize finance. This meant that large financial institutions such as banks, could be reduced and access to financial products and services can be widened to allow more households to benefit. However, many of these benefits are still not realized.
Products have never been seen before thanks to the new technology. This includes digital products such as meme cryptos and nonfungible tokens. There are some good ones, such as smart contracts which allow financial assets to directly be purchased and sold without any intermediaries. This would, at minimum, decrease costs and make it more efficient by eliminating entrenched institutions.
The downsides of the cryptocurrency revolution have been made abundantly clear in recent months. Many investors found the lure of investing in cryptocurrency enticing. Many crypto assets were quickly concentrated in the hands of wealthy investors. This could lead to a widening gap in wealth. It is not just wealthy and sophisticated crypto investors who are able to handle volatility; it has also affected unsophisticated investors who were not aware of or unable to deal with the risk.
Financial disruption is still possible, but it’s not likely. The new technology is being used by big banks and traditional institutions to strengthen their control. A consortium of banks using blockchain technology for more efficient transactions among themselves could disadvantage small banks and limit competition.
What’s the future of cryptocurrencies?
In the first place, there will be more regulation that is focused on protecting investors and transparency. We also see limits to investor risk taking. It is still a challenge to be financially educated. Retail investors have the right to choose how they want to invest their savings, but they must be aware of what is happening. It is important to be cautious about the hype of high returns and low risks made by crypto promoters.
As the technology becomes more mature and is allowed to operate within the regulatory frameworks it will be able to play a part in the improvement of the functionings of the financial sector. Particularly, technology can make some elements of finance (including payments) more efficient.
Customers and small businesses in developing countries have easy access to digital payment services at low prices. This is especially true for those where the currency of their home country may not be trusted. The cost of international payments is becoming less expensive and faster, which helps exporters as well as importers. This also allows economic migrants to send remittances home. While some of these developments were already happening through the use of simple mobile payments apps, others are now being facilitated by blockchain technologies. This technology allows for access to cryptocurrencies and other cryptocurrencies in places where the national financial system does not meet the requirements of businesses and consumers.
Get better domestic regulation and coordinate international regulation to ensure these payment channels are beneficial for households and businesses, and not just used as conduits for illegal activity like money laundering or drug trafficking.
Regulating cryptocurrencies is essential to prevent financial instability. Even stabilitycoins which were supposed to facilitate payments across and within national borders have proven financially insecure. Although they aren’t regulated like money market mutual fund or deposit-taking institution, stablecoins can be compared to them. They are concerned about their collateral quality and the amount they have. This could lead to them being subject to collapse if they receive too many redemption requests.
These innovative products could be helped by regulatory clarity. This could reduce the risk that they can cause financial instability and facilitate illegal transactions. Regulators should not limit innovation in payment and finance, but they have the right to safeguard financial safety.
If it moves quickly, the U.S. government can set standards in this sector and guide international cooperation. Also, it is crucial to promote financial and digital literacy in order for investors who could be easily swept away by the technology to become more aware of the potential risks. Instead of shrugging off risks, the industry will have to admit them and work with regulators rather than merely trying to control itself. To limit illegal financial transactions, stablecoin issuesrs should accept to be regulated as financial products issuers rather than payment service issuers. The technology might be given legitimacy by regulators, which could allow it to really disrupt the current financial system and fix its many inefficiencies.
A well-designed dosage of Big Brother might be the perfect tonic for an industry designed to bypass the government.
Here are more must-read stories from TIME