Various countries are developing and implementing standardized regulatory frameworks to protect the interests of consumers, exchanges, and governments

Blockchain technology is fast becoming a familiar term to all and sundry. Whilst many only associate it with Bitcoin, the technology has created a myriad of frameworks and solutions to business processes in various sectors, e.g. digital identities, digital assets, decentralized gaming and many more.

Amongst the various solutions blockchain technology has succeeded in creating, a platform for the exchange of digital assets (a digital representation of physical assets or currencies on the blockchain completely decentralized) is one its foremost technological breakthroughs. The decentralized and distributed ledger framework provides a means for digital assets to be exchanged online based on market value.

Blockchain heralded an era of decentralized peer-to-peer electronic cash system that completely eliminates the need to depend on a trusted middleman (which is often the point of risk/failure). The advent of Bitcoin has given rise to lots of other digital assets, which inspired the need for decentralized exchanges.

These exchanges make it possible to trade digital assets like bitcoin and ethereum based on their various market values. They allow users to buy, trade and sell hundreds of various types of digital assets. While some exchanges allow for the trading of digital assets for other digital assets, some allow trade of digital assets for fiat currencies and vice versa.

Although the global digital asset market has experienced immense periods of volatility in recent years, reports show that the market, which was initially valued at about US$800 billion in 2017, is expected to reach about US$3.6 trillion by 2025. This growth invariably could be linked to the rise in the demand for digital payments and transactions.

Regulatory challenges

There are currently over 300 exchanges facilitating the trade of digital assets globally. However, despite these and the market worth, the majority of these exchanges do not have proper regulatory frameworks. Thus, the protection of traders and institutions in the market is not fully guaranteed.

This may be owing to the fact that the industry is relatively new, and as such many governments aren’t up to date with the developmental speed of digital assets exchanges.

However, the regulation of exchanges currently varies from country to country. While countries like China and India consider the exchanges illegal, other countries like Malta, Switzerland and Singapore consider them legal.

A country like the United States, however, has varying regulations depending on the state of operation. For example in areas with regulation, late last year, the Security and Exchange Commission (SEC) fined EtherDelta — a digital asset trading platform — US$388,000 for operating as an unregistered exchange.

The clamour for a global standard of regulation is rightfully warranted as traders on these platforms need a high degree of protection and guarantee that funds invested are not lost to scam setups. It should be noted that the lack of regulations has its contributions in discouraging potential investors in the market and perhaps the volatility of the market.

Towards Standardized Regulatory Frameworks

Clear regulatory frameworks define strict rules that will decrease fraud and grey-area legality issues. In addition to protecting existing customers of these exchanges, it will also set a new foundation for new exchange users. This is quite important to help facilitate the mass potentials the digital assets industry can bring forth.

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Bobby Lieu, co-founder, UDAX, speaking on the need for regulations says, “The crypto market is primarily categorized as volatile and having a regulatory environment in place provides the stability the market needs and increases the confidence of crypto-enthusiasts and investors to put their money in this market. It may also encourage banks to accept crypto into the mainstream markets.”

A number of government bodies as earlier mentioned, have already implemented or begun implementing regulatory frameworks for these exchanges. Southeast Asia, in particular, has been taking action to protect consumers on digital assets exchanges.

For instance, the Securities Commission in Malaysia is already making positive moves in facilitating exchange regulations. The commission published a list of digital asset exchanges which were permitted to continue their operation for a transitional period from 15th January until 1st March 2019.

A total number of 22 companies submitted their respective applications to the SC which are now on the SC’s official list of permitted exchanges. The remaining 21 out of the 43 existing exchanges who failed to submit their applications have been instructed to cease their operations in the country. According to the statement released by the regulator, “Companies which did not submit their application to the SC by March 1 are required to take the necessary steps to cease their business and return all clients’ assets by March 15.”

In the wake of the new regulations, Lieu remarked, “While some crypto exchanges view regulatory framework from government bodies as a threat for the industry going forward, UDAX welcomes crypto regulations and recognises the importance of crypto exchanges working with government bodies as they implement regulatory framework for exchanges.”

The regulatory approach by the government is a welcome development as this will once again restore a level of confidence in the digital exchanges and in the market as a whole.

Relevant moves like these further make the market attractive to potential investors and ultimately allow customers to safely buy, sell, and trade digital assets under trusted exchanges that comply with SC regulations.

Despite the relative novelty of the digital assets market, it’s becoming obvious that various countries are developing and implementing standardized regulatory frameworks to protect the interests of consumers, exchanges, and governments.

Lieu believes regulation is inevitable. According to him, “most countries will be regulating the cryptocurrency industry in the near future if they haven’t done so already.”

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It is his perspective that regardless of the development of the regulatory environment worldwide, adaptability and ensuring compliance will be paramount for crypto exchanges. Time and resources are required for both government bodies and exchanges to implement regulating framework and be compliance-ready respectively. “It may be years from now before the regulatory environment worldwide matures and stabilize”, he says.

To ensure a sustainable framework for growth in the blockchain industry, it is indeed paramount that adequate regulatory measures are implemented. Also, this will not only bring some level of stability to the market but in the long run, attract more investors and increase reliability and assurance in the market.

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