Cryptocurrency –Regulatory Crackdowns and Inflation Risks

We’ve taken a look at what cryptocurrency is and how it can be a risk for you and your business, but there’s more to it than that. While understanding the risks of crypto is certainly important, it’s also important to see the benefits. Cryptocurrency can be useful, but you must be careful about who you deal with. You also must understand the regulations surrounding it. While it’s true that there were few, if any, regulations for cryptocurrency not that long ago, today various governments and regulatory bodies have realized that this form of currency isn’t going away. They’ve stepped in to regulate it and eliminate some of the risks, prevent fraud, and stop money laundering. However, if you don’t understand those regulations, you may end up facing stiff regulatory fines.


Let’s take a look at how cryptocurrency can affect your company, including its investors, and what regulations are in place that you will need to follow to avoid penalties. As always, Infortal is here to help you with understanding the risks to your business and mitigating them.


Increased Regulation: SEC Enforcement on Crypto Markets


The U.S. Securities and Exchange Commission has attempted to put into place restrictions and regulations to reduce risks and legitimize the use of cryptocurrencies. However, due to the fact that crypto is decentralized and global, it’s very difficult to fully regulate cryptocurrencies. Another question that has held back regulations concerns how cryptocurrencies should be classified. If it’s a security like a bond or stock, then it falls under the SEC. However, if crypto is determined to be a commodity or some other classification, then it would fall under the CFTC or a different agency. So far, the SEC has taken the lead in regulating cryptocurrencies based on a Supreme Court case that created criteria for securities.


Following the November 2022 collapse of FTX, one of the top cryptocurrency exchange markets, the SEC has increased their attempts to minimize the amount of illegal crypto activity in the U.S. However, because crypto is decentralized, the agency is limited in how effective it can be in combating bribery, fraud, and other illegal activities funded by crypto. The SEC has also received pushback on some of their regulations. Some have said these regulations are simply pushing more crypto exchanges and platforms to other countries, while others have said that the SEC’s rules are too vague and need to be clearly defined.


That hasn’t stopped the SEC and other organizations from taking action against companies and exchange platforms. For example, the SEC has sued both Binance and Coinbase, both exchange platforms, for violating regulations. These lawsuits stated that the platforms committed various securities law violations, but in response, Coinbase pushed the SEC to determine if digital tokens are actually securities or not. This question and others continue to make it difficult to regulate cryptocurrencies in the U.S.


Even celebrities haven’t remained immune from the SEC. Kim Kardashian, for example, was fined $1.26 million by the SEC for her promotion of EthereumMax, a type of cryptocurrency. She had failed to disclose that she had been paid for her endorsement. Other celebrities who have faced crypto-related fines include Lindsay Lohan, DJ Khaled, and sports figure Paul Pierce. This means that if you, your executives, or your company as a whole endorse, or appear to endorse, a cryptocurrency, you could find yourself under investigation, especially if you fail to report any payments received for that endorsement. This will likely lead to reputation damage plus fines and penalties.


Inflation: A Major Risk from Cryptocurrencies


Some people believe cryptocurrencies are like gold: they’re inflation-proof. However, that’s not true. Prices can fluctuate, even with gold. While it’s the case that neither gold nor cryptocurrencies can easily be printed like money, thus making it more difficult for inflation to occur, there is still the risk of losing a lot of money. In fact, many experts have started to call into question how inflation-proof crypto is, especially after the past few years and the roller coaster changes various digital currencies have seen.


In fact, inflation does have a direct impact on cryptocurrencies. One example of this occurred in  2022 when the Federal Reserve began increasing the interest rate in order to slow inflation. The result was that cryptocurrencies such as Bitcoin dropped dramatically in value. Bitcoin lost almost two-thirds of its value, going from a high of $65,000 per Bitcoin to around $18,000. 


This leads directly to the biggest risks of cryptocurrencies: how quickly they can go from being worth thousands to being worth pennies. Bitcoin’s rapid changes are not the exception: many digital tokens or currencies change by ten percent or more on a regular basis, which puts them in the volatile category for many investors. Without more consistency, it’s hard to see why investing in crypto is a better move than investing in other options. Even those who carefully watch the market in order to buy low and sell high can be caught unaware. 


A lack of data doesn’t help

Gold is often considered inflation-proof when you look at it in terms of decades, even though its value can change within a year or even a month. However, we don’t know if cryptocurrencies will show the same resilience over time. They could be a type of dam against inflation, as some investors believe. However, without more data, we simply don’t know how cryptocurrency will act in the long term. It’s possible that it truly will be a great investment, but it’s also possible that it will decline until there are few, if any, digital currencies. This is especially true if crypto continues to be used illegally for fraud and bribery or if agencies such as the SEC place very heavy regulations on trading. 


There are simply too many unknowns to really predict how cryptocurrency will fair in the future. It could, as some believe, lead to major changes. It could also be a passing fad that will eventually settle into a shadow of what it once was. Currently, it’s a risk that you will want to carefully research before investing.


One Potential Future: Crypto as a National Currency


While no one can accurately predict where cryptocurrencies are going, there is one interesting possibility: cryptocurrencies could become national currencies. While Bitcoin isn’t going to replace the dollar anytime soon, even the White House has released a document theorizing about a digital dollar. This memo discusses the possible creation of a U.S. central bank digital currency (CBDC), a type of cryptocurrency that would be accepted across the country. 


While the U.S. hasn’t moved forward with a CBDC as of June 2023, other countries have experimented with a digital currency. The Bahamas created a digital currency in 2020. The Sand Dollar, as it is called, is valued the same as the Bahamian dollar. However, adoption has been slow, partially due to the collapse of FTX. Another issue is that the Sand Dollar, as a CBDC, isn’t quite the same as Bitcoin or other cryptocurrencies. However, many people don’t fully understand the difference, making them hesitate to move to a digital currency. 


China also created a CBDC in 2020 after spending years of research and development. The digital yuan was released for early testing in 2020, and all other private cryptocurrency transactions were banned in the country the year after. However, again, few people were quick to change over from paper currency. China hoped the 2022 Winter Olympics in Beijing would boost the use of the currency, but due to the global pandemic, they did not see the results they wanted. That said, the country is still eagerly moving forward with the digital yuan and hopes to make it an international currency in the future.


Balancing Risks and the Future of Cryptocurrency


There are certainly risks to using cryptocurrencies. New regulations are being put into place, while other regulations are being amended or changed. If you don’t keep up with these rules, you could easily find yourself the subject of an investigation by the SEC or another agency. It’s possible cryptocurrencies could even be reclassified as something other than a security, which could lead to a major rewrite of all the regulations surrounding them. 


However, at least for the immediate future, cryptocurrencies are not going anywhere. In fact, it’s likely to become easier and more secure to make transactions, especially in digital currencies such as those used by the Bahamas and China. Despite that, there is also no question that the crypto market will continue to be fairly volatile and used for money laundering, bribery, fraud, and other illegal activities. The decision on whether to make use of cryptocurrency or to avoid it for now is one that many businesses and individuals will struggle with over the next few years. 


This is where working with Infortal can help you. Our team has years of experience in understanding regulations and business risks, including the risks carried by cryptocurrencies. We can help you examine potential mergers and acquisitions, agreements, and other transactions so that you fully understand the business risks you’re assuming and what you can do to mitigate those risks. Whether it’s with cryptocurrency or a more traditional financial transaction, you want to make certain you’re making the right decision. Reach out today to learn more about what Infortal offers and how we can help you. 


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