Cryptocurrencies

Bitcoin ETFs mean that Bitcoin can now be traded by investment firms, not just through crypto exchanges. Bitcoin as a financial product could spell a new dawn for crypto. Although was crypto already on the up?  

Bitcoin’s price doubled during 2023. While crypto is worth much less than it was at its 2021 peak, it is up substantially from its 2022 trough, and anyone who bought into it then has probably made a significant profit. However, looked at over the long term, recent events may just be the latest loop in the crypto rollercoaster. 

Uncertain future outlook

Cryptocurrency tends to polarise opinions. Some crypto fundamentalists believe the future will see control of the means of exchange removed from governments, with the complete decentralisation of digital currencies and the elimination of fiat currencies. But if this is the future, it’s certainly not the immediate future, or even a future to which there is an obvious path. 

On the other hand, many of the commentators who predict the complete collapse of crypto have been predicting it for years. The reasons for crypto’s robustness may owe as much to psychology or even sociology as they do to economics. But whatever the reasons, crypto has so far managed to survive and, often, to thrive. 

The biggest challenge for crypto is that, if in the long term it is going to be more than a gigantic poker game, it has to function more like traditional finance. It needs to engender broad confidence as a store of value and to offer a practical way of conducting a wide variety of transactions. 

It is currently a long way off that mark. Even crypto buyers tend currently to treat it as a speculative investment rather than a means of exchange. In the UK, the FCA found that only 16% of people who have invested in crypto have used it to pay for goods or services. 

While there is some data to suggest that greater regulation may increase overall investment in crypto, by encouraging investor confidence, it will also increase the compliance burden for crypto exchanges and other players. Ultimately, it will reduce or even eliminate some of the differences between crypto and other systems. 

Regulating – gradually and then suddenly

After a slow start, regulators around the world have intensified their efforts to regulate crypto – or at least some elements of crypto. Most are so far dealing with it by bringing crypto into the scope of existing regulatory regimes. 

However, there is increasingly a sense that crypto needs bespoke joined-up regulation. In 2023 the EU’s Markets in Crypto-assets Regulation (MiCAR) became the first harmonised regulatory framework for crypto-assets, extending regulatory oversight to various categories of crypto and tokens that had previously been outside the scope of regulation. 

In the UK, the government has consulted on its proposals for a future financial services regulatory framework for cryptoassets, including plans to regulate activities such as custody and lending, and to apply financial services regulation to centralised crypto exchanges.  

When new rules regulating cryptoasset promotions came into effect in October 2023, the FCA issued 146 alerts on the first day of their operation – even though it had spent the previous eight months warning firms that they needed to prepare for the new regime. This suggests that an even larger number of businesses will be in danger of falling foul of broader regulations.   

Many crypto businesses have managed to avoid significant regulatory oversight in the past. To many, this seemed a reasonable position, given their belief that they were part of a “parallel” financial system with its own way of working. It is now clear that most will find it harder to avoid such oversight in the years ahead, unless they make significant changes to their business models.