Cryptocurrency, a digital asset that operates without a central authority and is prone to market volatility, must be regulated to prevent financial instability. This is because cryptocurrency is available for trading 24/7, making it susceptible to significant overnight fluctuations. Additionally, the involvement of large institutions in crypto transactions can quickly mobilize market conditions, leading to instability. The decentralized nature of cryptocurrency, combined with a lack of legal entity regulation, also results in a lack of consumer protection within the crypto market. This makes it crucial for the government to provide oversight to protect consumers and maintain market stability.
The volatile nature of cryptocurrency, with its constant surges and crashes, can also have a ripple effect on the broader financial market. This is especially concerning as speculative bubbles can form, further exacerbating the instability. For instance, in just one year, the value of Bitcoin increased by $5,000 in March 2020 and reached $60,000. However, this crypto-boom was soon followed by a crash, partly due to the fear surrounding the Ukraine conflict. The resulting heightened inflation and increased interest rates made asset investment riskier and less appealing, leading to the decline of crypto assets.
To mitigate currency risk, some cryptocurrencies, known as stablecoins, are fixed to conventional currency values. This allows users to cash out of risky assets and protect their money in a safe space. However, stablecoins are not immune to crises, as seen with the collapse of Terra Luna in May 2022, resulting in a $50 billion loss in valuation. Additionally, the speculative behavior of investors in the crypto market, driven by the belief that limited supply will lead to higher prices in the future, further adds to the volatility and risk of crypto assets.
Currently, blockchain technology is used as a public ledger to record and transfer crypto assets. However, there is no authority or facilitator to regulate these transactions. This lack of oversight has made the U.S. Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) call for greater regulatory measures. SEC Chairman Gary Gensler believes that cryptocurrency assets are vulnerable to fraud and scams, with the FTC reporting that 46,000 Americans have lost over $1 billion since 2021 to such schemes. Additionally, the lack of transparency in the use of blockchain technology can provide a breeding ground for fraudulent transactions.
Economist Stephen Cecchetti argues against government regulation of cryptocurrency, stating that it would grant legitimacy and drain government resources that could be used for other productive activities. However, the use of crypto in illegal markets and its volatile price values, along with risky investor behavior, pose a threat to market stability. Therefore, it is essential for the government to impose regulation to protect consumers and investors from the dangers of cryptocurrency’s volatility and fraud.
