Aaron Tang, Luno Malaysia Country Manager (1)

The Crucial Role of Regulations in the Cryptocurrency Industry

By Aaron Tang, Luno Malaysia Country Manager

The excitement around bitcoin, and cryptocurrency in general, has continued to rise. Many people have turned their attention to the world’s most popular cryptocurrency for its disruptive capabilities, viewing it also as an alternative store of value, and a hedge against inflation. Coupled with the increased interest from institutional investors, bitcoin looks to solidify its place in the modern finance landscape.

As with any new technology, bitcoin has prompted many questions from everyone looking to understand it. In addition, its volatility, environmental impact, the crackdown in China, and regulatory issues faced by a certain cryptocurrency exchange, have become a recent topic of debate. The latest developments have encouraged conversations among many and, in particular, discussions about regulations. Therefore, it is worth addressing them to give a perspective on the role of regulations in the cryptocurrency industry.

The latest cryptocurrency mining and trading regulations in China have caused a stir in the market. It is estimated that 90% of the country’s mining capacity will shut down as a result. This new regulation is significant news as 65% of bitcoin mining occurs in China due to the wide availability of cheap electricity sources in several regions.

Nevertheless, we believe that these regulations will strengthen bitcoin’s long-term growth. Increased mining decentralisation ensures that the bitcoin network is less vulnerable to the regulation of one country in the long term. Furthermore, the mining regulation in China presents an opportunity for miners to move to locations with abundant renewable energy sources such as El Salvador for its geothermal energy and Texas, United States for its solar and wind power.

Due to their mobility, bitcoin miners will go wherever they can to use the cheapest energy source and move to locations where power is affordable and clean. This relocation will go a long way towards reducing bitcoin’s carbon footprint and point to a greener future for the cryptocurrency industry. Bitcoin’s technology is built in such a way that it incentivises the use of renewable energy. This is because it is currently much cheaper to mine bitcoin using renewable energy than using non-renewable energy. In an industry with such significant financial rewards, this matters.

Renewable energy sources such as solar, wind, and hydro typically produce excessive supply when demand is low. But, conversely, they struggle to provide enough when demand is high. Essentially, bitcoin miners would effectively be using up energy stores that would have otherwise gone to waste. Moving forward, bitcoin can replace and combine many existing financial systems in a way that could benefit everyone, and in doing so, help reduce global carbon emissions.

Although regulatory practices in China are on the extreme end of the spectrum, fair and progressive regulations are crucial for the healthy growth of an industry. Furthermore, a practical regulatory framework promotes the protection of customer funds and strikes a balance between the need for rules and the space needed for innovation to happen. As such, the existence of a license to operate should provide consumers with a good indication that consumers can trust a company with their funds and that they will have controls in place to prevent the use of cryptocurrency for illicit means.

Recently, a prominent cryptocurrency exchange is facing some regulatory issues in Europe and other parts of the world. As a result, the cryptocurrency exchange was prohibited from operating in one country and received warnings from regulators in several others. This situation highlights why cryptocurrency exchanges need to work closely with local regulators to establish appropriate regulatory frameworks that benefit both industry players and customers. 

In Malaysia, we work closely with the Securities Commission in helping it to understand the cryptocurrency industry better as it goes through the regulatory process. As a result, the Securities Commission was efficient in introducing cryptocurrency-specific regulation, and we are proud to have become the first registered cryptocurrency exchange in Malaysia. As a result, cryptocurrency has shown that it can exist in a fair and progressive regulatory environment. It is proven to be as we are now storing more than RM1 billion of digital assets on behalf of more than 300,000 customers and processing more than RM4.2 billion in 2021 — indicating a positive trend of cryptocurrency demand in Malaysia.

For cryptocurrency, regulation is also crucial because it lays the groundwork to develop relationships with other industry players such as banking institutions. The advantage of having a regulated exchange is obvious; greater transparency and protection of consumers and a blueprint for further collaboration with regulatory bodies. Regulators like the Securities Commission and Bank Negara Malaysia are opening up the way for investors, traders, and individuals to maximise the benefits of a new financial system such as cryptocurrency. Today, there are three approved digital asset exchanges in Malaysia, further showcasing the Malaysian regulator’s readiness to uphold the regulatory framework of the cryptocurrency industry in Malaysia.

Regulation is necessary for the cryptocurrency industry. We believe that regulation will raise the bar in the industry, and, in our experience, this is also what customers want. It will continue to strengthen cryptocurrencies and encourage mass public adoption. We are building the bridge between what we have today and a future financial system that ensures faster, more secure, and more accessible transactions.

Currently, we are in a mixed economy where we still heavily rely on existing financial infrastructure to make a move to a future system easier. For as long as we interact with the existing financial system, we will have to adapt and follow some of the same rules that apply to them. Cryptocurrencies are maturing from a self-regulated domain to a regulated one, where individuals and businesses can introduce aspects of cryptocurrency assets into their daily lives, with investments and payments. However, for this to happen, a relationship with local regulators needs to be built upon trust and a common goal to ensure a financial system that is beneficial to everyone regardless of their background.