With institutional investors and governments opening for cryptocurrencies, it is no longer a niche space for nerds. Too many billions have been invested into it to ignore the need for a legitimate, regulated environment and legal protection.
The controlled environment is the opposite of chaos. Regulations establish order, meaning that any sector can operate more safely and with predictable outcomes. In a regulated ecosystem, digital currencies can be seen as assets whose risk can be managed and better protected.
Like in any other industry, regulations set the rules of play and provide a safer environment for investors and users. Investors need to clearly understand the environment in which a new asset class operates. They need to know the risk factors associated with the market before actively engaging with it. The existence of clear rules boosts confidence in a certain market, attracts new capital flows, and grows the whole sector.
As seen in 2020, institutional investors look for alternatives to allocate their capital in times of historically low interest rates. Traditional wealth managers and multiple corporations included cryptocurrencies in their investment portfolios as a new asset class to hedge against the inflation.
Applicable rules allow simplifying the process for entrepreneurs and give legal certainty for those issuing new digital assets. This means legal assurance that any newly issued coin meets certain criteria and is not simply created for quick scam purposes.
Accordingly, regulations can make the ownership of digital currencies more secure. In the past few years, malware attacks and hacks to crypto exchanges and digital asset wallets resulted in millions of losses. A more controlled environment could contribute to a higher security level, making the third-party crypto service providers (especially crypto custodians) more accountable when operating in clearer conditions.
The regulated environment encourages the development of innovations. The companies are more willing to invest in research, hire highly skilled professionals and create infrastructure when they see long-term stability and security in the field.
Finally, regulations may open the way for broader cryptocurrency adoption. There are multiple people worldwide that have not entered it yet, and for crypto usage to grow even further, it needs more trust and better access to it. Digital currencies may achieve this if they are perceived as trusted, secure, and easily available assets.