2020 was a tremendously difficult year for countries around the world. While lockdowns forced a decline in economic growth, investors searching for inflation hedges resulted in asset prices taking off like a rocket. As money printing accelerated, crypto prices rocketed to the moon, up from lows of $3800 BTC in the first half of 2020 to $64,000 + less than 1 – a year later.
Governments worldwide have paid attention and are cracking down on cryptocurrency exchanges around the world to protect users, ensure tax revenue, and maintain consistency in the market. Here are 5 things investors need to know about the coming regulations and how to manage their effects on their investments.
Governments Are Regulating On and Off Ramps
For any investor, moving fiat currency on-to and off-to an exchange requires dealing with the traditional financial system.
While much of the cryptocurrency industry has enjoyed the relative freedom of being able to transact without government oversight, this is the first and arguably the most critical aspect of government regulation that is coming.
Regulation of crypto-exchanges means that the government will have access to:-
- User data
- Transaction data
- Investment data
Investors in crypto will already have noticed that players like Coinbase have increased their user identification requirements. In contrast, other exchanges such as Binance have withdrawn from specific jurisdictions like the US, Ontario, and Canada altogether.
To be clear, governments will eventually look at regulating individual cryptocurrency companies where possible, as was illustrated by the SEC’s suing of Ripple, but this will likely be the second step in a long regulatory process of the entire industry. Cryptocurrency exchanges are the first in line for regulation.
Exchanges Will Leave Countries Based On Regulations
Going through the regulatory process in any country is an extremely difficult and time-consuming process.
Andrei Poliakov, the Co-Founder and CEO of Coinberry, a digital currency trading platform, know’s first hand. He led Coinberry to become the first in Canada to partner with a Government Municipality and become one of the earliest platforms in the country to undergo Canadian crypto-exchange regulation.
Although Coinberry is at the tail end of the regulatory process in Canada, the journey has been over 2-years in the making and has required a tremendous amount of time, money, and energy.
This effort and cost in and of itself will lead many crypto-exchanges and trading platforms to withdraw their services from the jurisdictions that require regulation.
Fearing the legal consequences of an angry government is not something an unregulated cryptocurrency exchange will risk. Thus, those who do not opt to undergo new regulations will likely withdraw services and offerings to clients in that country (temporarily or permanently) rather than fight a government power in court.
Investors will thus need to determine:
- If their exchange of choice has started the regulatory process.
- When their exchange of choice started the regulatory process (assume 1.5-3-years for completion).
Both will matter for investors looking to maintain their trading ability.
Do note that if the exchange of your choice has not started the arduous process of regulation, it would be wise to expect a quick withdrawal of services at some point shortly.
Crypto Financial Products Will Likely Be Restricted
As regulation of exchanges comes into effect, expect that exchanges will look to restrict or remove many of the crypto products that have typically had open access. This will be done to comply with regulatory requirements.
The government will be setting the tone of what crypto products are deemed safe for investors in their respective countries. Additionally, different financial products will likely require different regulations. An exchange offering the ability to buy BTC may require lesser regulation than an exchange offering DeFi products or leveraged trading.
So too, might your requirements be altered. Should you want to access leveraged trading services as an example, you may be required to obtain a license, classification, or other based on government regulations. Failure to do so will result in no access.
While not clearly defined, investors may see some of the following offers removed or restricted on exchanges until further notice:
- DeFi products
- Leveraged trading
- Crypto loans
- Certain cryptocurrencies
Time will tell what requirements are needed. Until then, crypto investors should be aware that there may be changes to what they can and cannot engage within the near future.
Ensure Flexibility Between Exchanges
As the regulatory environment starts to shift, crypto investors may need to move from one exchange to another. Naturally, investors will want to get registered on regulated exchanges or are in the last phases of becoming regulated. These are the only exchanges that will be allowed to offer services to users in that region.
Securing this flexibility does mean doing a bit of research, re-registering, and going through KYC, but it will be tremendously beneficial when or if the exchange of your choice is forced to stop providing services to users in your area.
While our Coinberry exchange is close to completing the regulatory process, others may only be getting started. Consider the following in your research:
- Is your chosen exchange already regulated in your country?
- Has your chosen exchange just started the regulatory process, or are they quite far down the process? Expect a 1-3 year time frame for complete regulatory approval.
- Do you have a transfer plan? To move or switch to an exchange that does comply with the regulation in your country?
Cold Storage & Transfer Plans Are A Must
Beyond the security cold storage provides, ensuring you maintain control and access to your cryptocurrency allows you to have the flexibility to move from an unregulated platform to a regulated platform without worry.
The regulatory landscape is constantly changing, and as such, we are all uncertain of when an exchange may exit a country, restrict services, freeze funds, or lock accounts altogether. Controlling your cryptocurrency is not only one of the safest ways to ensure security. Still, it is also one of the safest ways to ensure you can easily transition to approved exchanges when the time comes.
It is worthwhile considering registering for multiple regulatory-approved exchanges in your country to ensure you have constant access to the markets.
The regulatory landscape is shifting quickly. Governments are cracking down on the on and off ramps of the crypto space. Regardless of your feelings about the pros and cons of this regulatory transition, it will have real-world effects on the cryptocurrency landscape.
As we move forward into the future, savvy crypto investors looking to take advantage of the market on an ongoing basis will opt to register for approved exchanges and will take the necessary steps to protect their investments and maintain access to the crypto markets.