As global cryptocurrency mania flourishes and new alt-currencies ICO at a relatively rapid pace, it's inevitable that government regulators across the world are beginning to feel the need to take a longer, harder look at what has, up until now, been a fairly unchecked trading environment. As well, financial institutions continue to ponder the best, most lucrative ways in which they too can benefit from what was once a grass roots initiative, but their own internal regulatory departments advise caution until there's more reliable oversight of this particular asset environment.

On the one hand, this is good news since it means governments, central banks and institutional investors are finally getting serious about digital currencies. On the other hand, regulatory initiatives generally mean there's a reason investors may need protection.

Indeed, it's possible that new legislation will soon be introduced in Europe and the UK in order to tackle criminal activity surrounding trading and increase transparency by bringing digital currencies in line with existing legislation on tax evasion, anti-money laundering and counter terrorist financing. Changes could include forcing traders to disclose their identities and requiring cryptocurrency exchanges to do due diligence on customers as well as report suspicious transactions.

Recent regulatory announcements out of South Korea, which reportedly stated that exchange closures are possible, had a strong negative effect on Bitcoin. caused the price of BTC to tumble on December 28.

According to Australia's Sydney Morning Herald, crypto investors have been claiming that some of Australia's major banks, including National Australia Bank, ANZ and Westpac were freezing customer accounts and transfers to four different Bitcoin exchanges—CoinJar, CoinSpot, CoinBase and BTC Markets. In response, CoinSpot announced "a temporary restriction on all forms of deposits."

Massive Cryptocurrency Disruption

The International Monetary Fund (IMF) which is headquartered in Washington D.C., is made up of "189 countries working to foster global monetary cooperation [in order to] secure financial stability.” The IMF’s managing director, Christine Lagarde, has acknowledged both the growing popularlity of cryptocurrencies and the current murky situation surrounding their trade. She's cautioned that, "we are about to see massive disruptions" related to this new financial technology. Some crypto enthusiasts believe any attempt to crack down on digital currencies is simply an effort to protect the big banks.

Susan Zhou, COO and co-founder of Qlink, the decentralized telecommunications network, explains that both digital currencies and their individual ecosystems are still in their early, explorational phase:

“We witnessed the ups and downs in 2017, and we expect 2018 to achieve a rational and healthy development. Regulation is one of the aspects that forms and matures along with the industry, as the usage of crypto currency clarifies, some consensus on regulations will be in place as well.”

Some countries, such as the Republic of Belarus (formerly known by its Russian name Belorussia), favor the adaption of digital currencies and prefer to encourage the development and uptake of the assets within the eastern European country. Belarus recently passed statutes offering significant tax incentives to blockchain and crypto-related businesses.

Zhou's response:

“Some comparatively restricted regulations in certain jurisdictions are no doubt protecting investors, however at the same time [it's] missed the opportunity to lead the industry growth. As the double side of a sword, pertinent advantages over the next wave of technology evolution slipped away. 2018 will be the year to line the industry, the best and fittest projects will remain with strong capital and talent support, and at the same time, set examples for compliance best practices.”

Sergei Vasin, COO of Blackmoon Crypto, part of the fintech company Blackmoon Financial Group, explains that cryptocurrency investing doesn’t actually differ much from any other asset class. Crypto investing requires due diligence on both the part of the investor, the offerer and the organizations tasked with oversight. As well, consistency and clearly formulated policies are a necessity. He says:

“Certainly, investors should keep an eye on regulation and especially taxation. When buying into tokens that seem to be securities, investors should diligently check whether the team behind this token took necessary steps to ensure legal compliance. Of course, diversification is a must. And for those looking to invest in traditional assets via crypto the above-mentioned argument of legal compliance is of a paramount importance. Few teams pay necessary attention to this issue because of its complexity, but this is the effort worth taking."

The most notable announcement thus far regarding digital currencies and ICOs came last July, from the US, when the Securities and Exchange Commission (SEC) moved in on the “Wild West” environment surrounding crypto sales and trade. At that time they cautioned that virtual tokens are subject to Federal securities laws.

Trace Schmeltz, a partner at the Barnes & Thornburg law firm points out that the US's three big financial regulators—the SEC, the Commodity Futures Trading Commission and the Financial Crimes Enforcement Network which is part of the Department of Treasury—staked out their cryptocurrency turf in 2017:

“In 2018, we can expect each of them to define the parameters of their respective jurisdictions with a larger array of enforcement actions. For cryptocurrency issuers or fund managers, this activity will require time and money dedicated to compliance efforts. In the rest of the world, 2018 will see a strong and continued challenge by many national governments to any non-government backed currencies. Whether because of concerns about fraud or simply to ensure government control of the money citizens use, these wholesale governmental challenges to cryptocurrencies will gain strength.”

During 2017 there were additional countries that also began more closely scrutinizing, or actually acted on, crypto trade and/or regulation including China, Russia and most recently, Israel. Of course, no one really knows what's in store for this asset class in 2018. But as the frenzy of interest and adaption gathers momentum, be aware that regulators could—and likely will—clamp down on digital assets, creating additional volatility for this already mercurial asset class.