Are the Wild West Days of Crypto Coming To An End?

One of the biggest selling points of crypto for many of the original investors was that it was so separate from all of the laws and regulations that FIAT currency had behind it. The idea of having no state interference and having a way of making trades and transactions not trackable to a single country was hugely appealing.

As crypto has become more widespread and established as a genuine currency alternative, governments have naturally made efforts to bring it into line with other regulated systems. Whether it's for tax, fraud, or any other state concern, the movement is a global one, and the U.S. is often seen as leading the charge. This article will discuss upcoming regulations, from what the current concerns are to the full discussion on the implications for the market.

The issue of definition

There are several key outstanding issues with cryptocurrency, some of which are U.S.-specific and some of which are global issues. In the U.S. the biggest debate currently is how cryptocurrency should be legally classified. While the name would suggest that it operates in the same way as a currency, many feel that, given its key characteristics, it can be treated more like a Security. That would put it under the jurisdiction of the SEC, and subject to all regulations and processes that come with it.

While there are arguments in both directions, government agencies are actively putting this definition to the test with several legal cases brought against a range of organizations and companies. They reason that, because buying crypto is a transaction where purchasers expect an increase of value over time, then it fits the legal definition of securities and they are taking that argument to the court.

Amongst the highest-profile cases currently active would be with Ripple, the money transfer network with XRP as its proprietary crypto coin. In an ongoing legal battle, both sides are arguing back and forth as to whether the $1.3 billion raised by Ripple initially would constitute an illegal sale of securities. On the part of Ripple, they are arguing that, because the coin can be used in regular financial transactions, it does not behave in the same way as security.

Initially, the balance seems to be in Ripple's favor, it's a tense situation for the crypto community as a negative outcome for them would set a legal precedent for other charges. There are also reports that crypto distribution giant CoinBase is under investigation both for sales of unregistered securities and insider trading, so the Ripple case would likely play a massive part in any legal action being pressed in the future.

The issue of fraud

Part of the existing legislation in the U.S., as well as a large part of proposed legislation shortly, focuses not on restricting or controlling usage but instead on protecting those who use crypto.

The trade-off for the freedom found in crypto is that criminals and fraudsters can enjoy the same freedom to conduct their own business. In what is essentially the Wild West, there is still very little to protect many crypto investors, given that any group or even individual can create a new coin out of nothing with no oversight or substantial registration.

This has led to several cases of cryptocurrency fraud across the world, often on a massive scale that takes advantage of the crypto hype. In 2021, one of the more high-profile examples was Squid Coin, a new currency created ostensibly by fans of the Squid Game TV show. In reality, it was one of the largest cases of a rug pull scheme, with the creators generating huge hype, taking in $3 million of coin purchases before vanishing with the code behind it.

This constitutes a clear criminal act in itself, however, because there was no official oversight, nor any kind of protection for the investors, very little could be done. The scammers put a wide number of restrictions in place around buying and selling the coin, then made sure there were very few avenues of contact with them directly. In the end, authorities couldn't very easily track the scammers, and there was little to no recourse for the roughly 40,000 investors to reclaim funds.

Rug pulls aren't the only danger to those looking at crypto investment either. One of the biggest traps for those new to crypto, in general, is fakeries. This could be a fake coin, a fake exchange, or a fake crypto trader. It's not difficult to convince a novice that someone is an experienced expert in the field, especially in such an unregulated market.

Veterans in the crypto market would know that detailed background checks are important. For instance, spotting whether the person you're talking to is using a proxy address through something like ProtonVPN or Tor, which are red flags to the investor. 

With cybersecurity tools like IP check-up software, plus a healthy amount of experience, amateur or casual investors can easily avoid get duped by fake personas and ensure their online safety. 

New measures are being taken

The market is awaiting the release of the U.S. Treasury Department's 'illicit finance risk assessment' on both crypto and NFT assets. Should the report prove critical of the current regulatory structure, it would undoubtedly support the current administration's proposal for a new legal framework to strengthen more formal regulation. In the other case, if the SEC makes headway in showing that cryptocurrencies are most often just another form of security, it would result in mandatory registration and regular reports from those setting up the coins to start with.

While many in the crypto community are hesitant when it comes to any form of regulation, it would go a long way toward combatting fraud cases. 

Mandatory registration creates a paper trail with registered owners and official licensing, drastically reducing the effectiveness of fakers and rug pull schemes. Regardless of the SEC's efforts, this may well end up being the direction that the government takes, as it would not only be effective but bring crypto in line with other investment-type industries.

Until the legal battles conclude and the report is seen in full, the crypto community can only wait and watch.

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