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By Peter Eberle, President and CIO — Castle Funds
After reaching an all-time high in 2021, crypto prices suffered a significant hit in 2022 and most of 2023. However, prices have been on the rise for major cryptocurrencies since the end of 2023, inspiring optimism for the future of the crypto market. Much of this optimism is due to recent developments in BlackRock’s application for a Bitcoin ETF, representing a significant step towards increased regulatory clarity for the crypto market.
In the past, many called crypto the “Wild West of finance” due to its decentralized and largely unregulated nature, but the past few years have shown that this lack of regulation is unsustainable. Lawmakers and leaders in the crypto industry have struggled to find a way to balance the decentralized nature of the crypto market with the need to protect consumers and their interests.
The pros and cons of crypto regulation
High-profile failures in the crypto market have led to increasing calls for regulation in the crypto market. For example, the collapse of popular crypto exchange FTX had negative effects on the price of crypto in the short term as well as on public trust and goodwill towards the crypto market in the grand scheme of things. Proponents of regulation hope that increasing the regulatory clarity surrounding the crypto market will restore the public’s faith in it.
That being said, critics have expressed concern about the increase in regulation of the crypto market, worrying that governmental interference could cause the crypto market to lose sight of its decentralized origins. Still, there are already regulations in place that are designed to encourage legitimate activities on the market, not impose unnecessary restrictions. For example, major trading platforms, such as Coinbase, are already required to comply with Know Your Consumer (KYC) and other anti-money laundering regulations to prevent the use of the crypto market for illicit means.
How regulation will affect the crypto market
The proposed regulation regarding the crypto market is designed with one critical principle in mind: clarity. Although risk will always be involved in any form of investment, these regulations will provide additional clarity on how this risk should be approached and managed. By clearing up this regulatory uncertainty, jurisdictions can attract more institutional investors, who may be drawn to the earnings potential of the crypto market but have been put off by the lack of clarity in the market.
Ideally, this increased institutional interest could have powerful trickle-down effects for individual investors because Bitcoin and other cryptocurrencies operate with a strict maximum supply, meaning a set number of coins have been (or will ever) be created. As such, as the demand increases with the greater institutional interest, so will the price of the limited supply. This means that the investments of individual investors — many of whom already participate in the market, as they are less averse to uncertainty than their institutional counterparts — will also increase in value.
One of the most obvious benefits of increased regulation is that, when implemented on a global scale, regulation can inspire harmonization that will increase market stability. Under the current framework, many different jurisdictions have unique restrictions for crypto and some countries have even instated outright bans on the crypto market. The lack of global standards makes international crypto trade difficult because the trading parties may be under different restrictions and regulations.
However, there will be some consequences to the implementation of more robust regulation surrounding the crypto market. Compliance measures required by the new legislation being enacted cost money, most of which comes out of the pockets of firms and exchanges that are required to strengthen their security standards. Examinations, licensing processes, and fees can all add up quickly, not to mention the expenses associated with enforcement action and fines.
How crypto regulation in the EU sets a precedent for regulation on a global scale
A great example of the level of regulation necessary to facilitate international crypto trade is the European Union’s Markets in Crypto Assets (MiCA) regulation, which establishes the EU as the first major jurisdiction to introduce comprehensive rules for the crypto market. Based on (but not a carbon copy of) existing and accepted regulations on securities trading, MiCA establishes tougher compliance standards while also incentivizing the growth of the European crypto industry. While the legislation is not perfect — few first attempts at legislation are, after all — it is a crucial starting point for the future landscape of the crypto market.
If other jurisdictions follow suit and introduce comprehensive crypto legislation like the EU, we could be on our path to a brighter future for the crypto market. Developments like the Sam Bankman-Fried verdict, BlackRock’s Bitcoin ETF, and the introduction of MiCA have done a lot to restore the public’s confidence in the crypto market and digital assets in general. We must remember that the purpose of regulation is not to impose restrictions on the market but to protect consumers.
Author Bio
— Peter Eberle is the President and Chief Investment Officer of Castle Funds. Peter has extensive experience in portfolio management, derivatives trading, and risk management. For the past 10 years, he has been the Managing Member of 3 private investment funds that invest in equities, options, exchange-traded funds, and commercial real estate. He began his career as an options market maker for Group One Trading LP and, a few years later, became a partner at Oppenheimer, Noonan, Weiss, LLC (“ONW”). Peter was instrumental in negotiating the sale of ONW to SLK-Hull Derivatives LLC, which was subsequently acquired by Goldman Sachs Group, Inc. (“Goldman”). At Goldman, he served as the Co-Head of Trading on the Pacific Exchange and was a U.S. Equity Derivatives Risk Management Committee member. Peter has an MBA from the University of Pennsylvania’s Wharton School of Business.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.