We need to move on digital currency regulation. Fast.

Regulation could turbo-charge investment into the crypto sector, writes EJF Capital’s Neal Wilson, helping investment and competition.

Image source: Pexels/Tima Miroshnichenko

Luna was the digital currency that wasn’t supposed to collapse.

While we’ve become accustomed to wild swings in assets like bitcoin, as a stablecoin, Luna was designed to offer stability, quietly tracking the US dollar. But in just a few days, its value plummeted.

The sudden crash had severe consequences, not only for Luna’s investors, but the entire digital currency ecosystem. It caused widespread contagion within the market as bitcoin’s shedded 17 per cent in the five days following Luna’s descent. The sell-off in digital assets that followed sent further shockwaves, mounting financial pressure on the likes of Celsius Network, a large cryptocurrency lender.

Regulation will help not hinder

As U.S. Treasury Secretary Janet Yellen pointed out, the cautionary tale of Luna illustrates that there are risks to financial stability and we need an appropriate framework. It’s encouraging to see a similar approach being taken in the UK. 

In April, City Minister John Glen MP made clear that the Government’s ambition is for the UK to become a central hub to start and scale digital currency companies, with a suitable regulatory framework for the industry to thrive. And, as announced in the Queen’s Speech, HM Treasury (“Treasury”) has committed to begin regulating digital currencies in its upcoming Financial Services and Markets Bill. 

The Treasury is wise to maintain its embrace of digital currencies despite the recent market volatility. In fact, Treasury said it will look to move quickly on regulation than previously expected, outpacing the EU’s efforts. 

I’m very encouraged by this, as the UK’s move on digital currency regulation could benefit the entire ecosystem. 

Regulation for consumers will provide a tacit endorsement of the technology and offer peace of mind that digital currencies can be used safely. In turn, this may encourage greater adoption and spur competition by lowering barriers to entry and increasing access to sophisticated products.  

Greater adoption for companies means access to a larger market. It also means more opportunities to innovate. I believe entrepreneurs and technology companies that are facilitating the transition to the digital ecosystem of the future, as well as financial institutions that adopt solutions, can benefit from this adoption enabling seamless transaction integration for consumers and retailers.

For the market, regulation could also turbo-charge investment into the sector, which would benefit the entire UK digital currency industry by triggering further innovation and development of sophisticated products. 

But regulation can and should go further

It’s great to see the Treasury start moving on the digital currency regulation necessary to unlock these benefits. But there’s further to go.

To allow stablecoins to meet their full potential, I believe we need to see the implementation of an accommodating, yet prudent model, which would require issuers to hold sufficient underlying assets. These assets could be sold quickly, to meet payment obligations, in the event of a sudden economic shock. 

We also need to see mandates for backing assets, capital reserves, and liquidity requirements. The lack of clarity around these details might prevent market participants from moving forward with new projects in the UK. For example, it is worth noting that Circle, one of the largest US stablecoin issuers, recently announced the launch of their Euro Coin.

Detail around regulation of other digital assets, such as exchange tokens, DeFi and NFTs, has yet to emerge. While it makes sense for the regulators to prioritise stablecoins as low-hanging fruit, it is important to establish a comprehensive framework for the entire digital currency ecosystem.

Only by embracing these steps can we incentivise stablecoin issuers, as well as other market players, to expand operations in the UK. This could, in turn, benefit the entire digital currency ecosystem.

The views and opinions expressed are not necessarily those of AltFi.