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The goals of transparency, stability, and preventing market abuse put forth by the 2009 G20 Summit in relation to foreign exchange trading clearly echo sentiments circulating in today's cryptocurrency space.

Unregulated crypto exchanges, tokens, and certain third-party services have a fairly well-documented history of dubious behaviour, with the 2014 Mt. Gox fiasco being the most extreme example. Despite their young existence, fraudulent initial coin offerings (ICOs) are also rapidly becoming an issue in many countries, contributing to the already damning narrative surrounding cryptocurrencies as "fake money," or being tied to "criminal activity," as well as the perhaps more accurate criticism of volatility.

Insiders to the cryptocurrency landscape are right to challenge the kind of overblown, "Bitcoin is only for criminals" rhetoric. It is a mistake, however, to conflate the demonization that comes from ill-informed media hype with the fact that unregulated financial markets foster fraud. China's ban on ICOs back in September 2017, viewed by many as a form of "censorship," was arguably a fairly reasonable response to a real threat, particularly considering that the People's Bank of China found 90 per cent of ICOs launched in mainland China prior to the ban fraudulent.

Playing regulatory catch-up

China was late to enter the foreign exchange market and late to impose regulations. As recently as August 2016, Chinese authorities found 192 illegal banks conducting shady forex transactions valued at $30 billion. The State Administration of Foreign Exchange (SAFE) also found instances of companies evading regulations by using false information, transferring illegal assets, and evidence of money laundering via forex trading schemes. Having recently seen first-hand the exploitation that can occur in an unregulated or under-regulated financial market, China's aggressive stance towards ICOs may push the market towards stability and consumer protection rather than be an oppressive crackdown on innovation.

Singapore's MAS has also recently released a statement concerning ICOs, hinting at regulation while remaining ambiguous: "The Monetary Authority of Singapore (MAS) clarified today that the offer or issue of digital tokens in Singapore will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act (Cap. 289) (SFA). MAS' clarification comes in the wake of a recent increase in the number of ICOs in Singapore as a means of raising funds."

Japan has taken major strides towards crafting policies concerning cryptocurrencies, having seen first-hand the damage caused by the collapse of the Japanese-based Mt. Gox exchange. In April 2017, the Japan Financial Services Agency (FSA) passed an amendment to Japan's payment services law, declaring Bitcoin a legal payment method. In doing so, it required all cryptocurrency exchanges to register with authorities by September and apply for operating licenses. In September 2017, the FSA issued licenses to 11 exchanges, while a handful of others ceased operations.

While nobody wants to see another Mt. Gox scandal, questions have been raised about the cost of compliance with Japan's new regulations, questions that are being echoed in other markets pushing for regulation. Notably, Japan's regulatory body will determine which digital currencies can legally be sold, traded, or promoted to the public. Koji Higashi, co-founder of Indiesquare, expressed concern that, "[this] may come with the cost of destroying legitimate businesses who wish to experiment with altcoins or blockchain technology in general and the potential effect to the Japanese Bitcoin/blockchain industry is profound."

The market impact of regulation on crypto

As different nations move to regulate cryptocurrencies in different ways, the short-term impact on the markets will ideally be outweighed by the longer-term stability afforded by consumer protections and the elimination of fraudulent entities and practices. Compliance with an established regulatory framework, if done right, could lead to wider mainstream adoption of cryptocurrencies and greater stability in emerging markets.

However, without participation and buy-in from the cryptocurrency community, heavy-handed regulators may inadvertently create the same issues of consolidating power amongst a few large institutions we have seen in the established forex space. This happens when regulators make compliance inaccessible to smaller companies. It is crucial that voices from within the cryptocurrency space play an active role in developing and negotiating a regulatory framework that reduces fraud while allowing legitimate projects to thrive.

In the US, we have seen elements of this already as different states continue to grapple with regulating cryptocurrencies in different ways, including mandatory minimums and rigorous documentation, with New York's notoriously difficult to acquire "BitLicense" being one of the most stringent examples. Of many applicants, all of which require a $5,000 fee, only three BitLicenses have been issued by the state since 2015, when the regulation went into effect, going to Circle, Ripple, and Coinbase. Conversely, at least ten Bitcoin companies stopped doing businesses in the state as a response to the regulations.

Washington State has also proposed a bill focused on regulating cryptocurrencies which has seen several major exchanges, including Poloniex, cease operating in the state. Coinbase was forced to withdraw service from Hawaii due to what they described as "impractical" regulatory policies, in particular relating to the high level of traditional fiat currency liquidity required to underpin crypto trading there.

If we look to forex for insight into the shape of things to come, the question should not be whether or not the digital asset economy should be regulated, but rather how to foster an environment where compliance actually protects individual investors without jeopardising innovation. The crypto community at large needs to be involved in the regulatory process. If we simply let regulators regulate we, as a community, will be left with regulations that stifle progress and do little to safeguard our client base.

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Kevin Murcko is CEO, CoinMetro and FXPIG.