THE wild ride seems to have calmed. Late last year speculators sent the price of crypto-currencies soaring. The value of bitcoin, the best-known, has fallen by half since then. But the momentum behind all things crypto remains powerful. Bitcoin is still worth seven times what it was just a year ago. In the first quarter of this year, according to CoinDesk, a news service, $6.3bn was raised through initial coin offerings (ICOs), a form of funding in which firms issue digital tokens, more than in all of 2017. Last month the Student Loan Report, a website, found that one in five American students it asked had used part of their loan to join the crypto rush.

No wonder regulators want to exert greater control over the crypto-sphere. The chance to raise money via ICOs has attracted as many con men as it has genuine entrepreneurs. The head of Europol, Europe’s policing agency, has estimated that 3-4% of the region’s criminal proceeds are now laundered through crypto-assets. Plenty in the industry think regulation would help legitimise crypto. Yet crypto-enthusiasts are also right to fear that overzealous regulation, like China’s ban on crypto-exchanges and ICOs, could throttle a promising technology. To achieve the right balance, regulators must find sensible answers to three questions: what are crypto-assets? How should day-to-day risks be managed? And what threat do they pose to financial stability?

Today there is no consensus on what a crypto-asset is. Even within countries, authorities disagree on how to classify them. Are they a commodity, a currency, a security or their own, peculiar asset class? In America the Securities and Exchange Commission has hinted that it will treat most tokens issued through ICOs as securities. That would mean onerous disclosure requirements. But a blanket approach does not capture the shape-shifting nature of many digital assets. Better to go the way of the Swiss regulator, FINMA, which in February said it would base treatment on their actual function—ie, whether they are used for payments; as a utility token that gives its holder access to a specific service; or as an investment. This also means a token’s classification can change over time.

Such decisions point towards how to deal with day-to-day crypto-risks, from money-laundering to consumer protection. Criminals were among the earliest adopters of digital currencies. Regulation could help smoke them out by extending existing anti-money-laundering rules into the crypto-sphere (see article). The obvious targets are the exchanges where ordinary money is swapped for crypto and vice versa. Regulators should demand that these exchanges apply similar standards to those of banks. These include requiring identification from all customers and keeping a record of unusual transactions. Several countries, including Australia and South Korea, already do this; earlier this month the EU passed a directive stipulating the same thing. There is a need for a harmonised approach, in order to prevent illicit flows of money to crypto-havens.

As for how much protection consumers should enjoy when they invest in crypto-assets, some advocate restricting the market to accredited investors, on the ground that they may be better at judging risks than ordinary punters and are certainly more cushioned against any losses. But the bar to imposing bans on how people can risk their own money ought to be high. The authorities in many countries issue explicit warnings about the risks associated with crypto-speculation; several are clamping down on the advertising of ICOs. That, allied with existing rules to punish out-and-out fraud, is sufficient.

The third question is easily answered at the moment. Crypto-assets do not yet pose a risk to global financial stability; cumulatively, they are worth less than 3% of the combined balance-sheets of the central banks in America, Britain, Germany and Japan. But the wild swings of bitcoin are a warning that things can quickly change. Regulators must keep a weather eye on the factors that could heighten systemic risk, such as the amount of borrowing done by crypto-investors.

Lassoing cryptos

Regulating crypto-assets is no easy task. Too much red tape may hamper innovation. Some think, for example, that ICOs could give rise to a new form of “crypto co-operative” in which digital tokens provide founders, employees and users with a shared interest in its success. At the same time, a market in which scammers and criminals roam freely deters honest actors from taking part. The fact that all of this is new technological terrain adds to the pressure on regulators to show unusual flexibility. For as long as crypto has its Wild West image, regulators will need to keep their frontier mentality.