This year had been a good one for those that invested in crypto expecting higher valuations. Despite elevated volatility, cryptocurrencies are now among the best-performing assets and head towards 2021 with good price momentum. However, 2018 had thought us an important lesson and that is governments increase regulatory pressure when crypto valuations increase exponentially. As a result, we should have a proactive approach and think about what could happen next year in terms of crypto regulation.
# Tighter rules for crypto-based companies
In case governments will start imposing tighter rules for crypto companies, the current market exuberance is very likely to take a break. The uncovering of many fraudulent crypto projects will be a great reason to reinforce a stronger grip on the industry and act as a negative factor in future developments. More rules to comply with will mean a shift towards crypto-friendly jurisdictions or fewer incentives for large companies to invest in the industry.
# Banning crypto to create space for CBDCs
The chatter around central bank digital currencies is more intense now and next year it is expected that more central banks will launch pilot projects. China and Sweden are among the ones currently testing CBDCs and with that in mind, traditional cryptocurrencies represent a threat for governments that want to introduce their own versions. Unfavorable regulation for Bitcoin and altcoins, to encourage the adoption of CBDCs is something we should expect moving forward.
# Bureucracy for crypto firms
One of the main roadblocks to optimal business activity is bureaucracy. At present, crypto companies benefit from loose regulation and that had been one of the main reasons why the industry managed to grow this big during the span of just a few years. However, regulators are arguing that this is not fair for traditional companies and common ground should be found.
It shouldn’t be a surprise if crypto companies will need to comply with more rules starting with 2021, especially since the COVID-19 will be close to an end, and regulators will shift their priorities towards other economic sectors.
The bottom line
Regardless of the current market conditions, we should not forget how sensitive cryptocurrencies are when it comes to regulatory news. The 2018 bear market had been triggered by deteriorating regulatory prospects and that’s a risk investors/traders need to monitor carefully. On the flip side, supporting regulation will be a major tailwind. Regulators don’t want to clap down on blockchain but had been posturing themselves against traditional cryptocurrencies, which should be a solid reason of concern.