Fast and simple payments are just two of the many advantages that crypto assets provide. Financial services of an avant-garde nature, access to previously unbanked regions of the world – the crypto ecosystem enables all of this. However, it should be noted that, in addition to the typical benefits of digital assets, they are linked to some risks and challenges that authorities must consider in order to avoid a large number of problems in the financial industry, specifically in payment systems. . Let’s take a look at it in more detail.
Risks associated with cryptocurrencies
When it comes to crypto and payment systems, stablecoins are one of the most discussed topics. Stablecoin growth has continued, despite the fact that there are rules about regulatory compliance, the quality and quantity of foreign reserves, and how to manage risk and solve problems. This is partly because DeFi was created. Today, the main use of stablecoins is to serve as an intermediary currency between conventional fiat currencies and crypto assets, which can have ramifications for market stability and efficiency. Liquidity in the largest crypto-asset ecosystem (including DeFi) could be reduced if a major stablecoin fails, disrupting trading and perhaps stressing those markets. If stablecoin reserve holdings are liquidated in a chaotic manner, this could potentially affect financial markets in the short term.
Since stablecoins play an important role in the case of payment systems, the crypto market crash can be a big risk and danger for these systems. As the market decline continued progressively, stablecoins, even though they are pegged to fiat money, began to lose value. As a result, many novice crypto investors began to adopt Bitcoin Smarter and other automated tools, which facilitate the trading process at the time of a market crash. A great example of stablecoins losing their value is the Terra Luna token, which lost its value in early May, as a result of a significant decline in the value of the crypto market. During instances of market instability, crypto exchanges have experienced major outages. Several thefts of consumer money related to high-profile hacking have also been reported. Financial stability has not been affected by these cases so far. Although crypto assets are still a relatively new phenomenon, their economic importance is expected to grow as they become more widely accepted.
Surveys imply that emerging markets and developing economies may be leading the way in crypto asset adoption, but it is difficult to quantify.
The possibility of tax evasion through the use of crypto assets could also pose a threat to fiscal policy. There may also be a decrease in seigniorage (profits generated by the authority to issue money). Capital outflows affecting the forex market could be facilitated by the growing demand for crypto assets.
Regulators need to take into account both the dangers stablecoins pose and the economic tasks they provide. Regulations should, for example, be harmonized with companies supplying comparable goods and services.
Are regulations a solution?
Cryptocurrencies are becoming more and more popular and the authorities are working hard to protect the interests of investors by going to great lengths to regulate and regularize ICOs. After months of anticipation, the Federal Reserve has finally released its long-awaited research into the costs and benefits of issuing a national digital currency. The Fed has given the public until May 20 to provide input before making a final decision on whether or not to proceed. Also a popular topic, many experts believe stablecoins will become the first type of cryptocurrency subject to regulation.
So can crypto regulations be the remedy for the financial risks associated with digital currencies? Nowadays, after the crypto market crash, more and more authorities started thinking about taking measures to protect customers from fraud and scams. But, these regulations are a double-edged sword. First of all, it can be profitable for investors, however, on the other hand, it can also harm them.
However, as long as the crypto market is a decentralized market, it will be quite difficult for the authorities to define and create the proper and suitable legislation for the market. It is also worth noting that the regulations may not have a dramatic effect on lawbreakers, as the blockchain system makes it almost impossible to find the violator. However, with the help of regulation, the authorities can control the companies operating in the market.
On the other hand, it can be said that regulation can be detrimental to investors. Companies operating in the market may find it difficult to make their services more innovative and useful to customers. The main idea here lies in free market theory, which shows that markets free of taxes and regulations can develop faster and faster than the market that is burdened with laws and regulations. In the case of global payment systems, it should be noted that regulations cannot have much effect. The crypto market is volatile and clients cannot protect themselves from price fluctuation. However, with the regulations, the authorities can give cryptocurrency companies the responsibility to protect their clients from bankruptcy. But, this can be quite unprofitable for companies operating in the market. As a result, regulations, like everything in the world, can generate both positive and negative results.