How Can Cryptocurrency Regulations Impact Forex Trading?

Cryptocurrency market troubles continue to make headlines. The FTX outburst and Gemini’s recent interest account fraud lawsuit have stained the cryptocurrency market. Former FTX CEO Sam Blankman-Fried has been indicted by the U.S. Department of Justice, which is likely to introduce additional cryptocurrency regulations in the United States. Protecting retail consumers is at the heart of U.S. securities regulation. Unfortunately, this concept runs counter to the idea that cryptocurrencies should be decentralized. The question for the industry is whether decentralization and governance can coexist. The idea behind a decentralized blockchain is to leave control to the users of a distributed network, rather than a central bank or government. How can a decentralized organization regulate itself when the process starts to harm consumers? With more cryptocurrency regulation, as well as the impact of oversight on currency trading, how can a decentralized organization regulate itself?

What is the difference between Forex and cryptocurrency

To get a feel for what will happen in the forex market if there is more oversight of cryptocurrency trading, you need to understand the differences between cryptocurrency trading and forex trading. Forex trading is the exchange of fiat currencies. Fiat currencies are issued by governments and are subject to internal oversight, such as a central bank or government agency. In the United States, the Federal Reserve oversees forex trading through the Currency Comptroller. The Commodity Futures Trading Commission (CFTC) is also responsible for currency trading, being a branch of the United States government.

If there is an unfavorable change in the value of a currency, the government can manipulate the currency to the benefit of the country. For example, if the currency increases, the country’s exports may become less competitive. In this case, the central bank can intervene in the forex market to devalue the currency.

Forex trading can have an interest component. Let’s say you buy a higher yielding currency and sell a lower yielding currency some time in the future. In this case, you can take advantage of holding the higher yielding currency to generate the difference between the higher and lower yields if all exchange rates remain the same. If the spot price changes, you will still gain interest, but you may also experience a capital gain or loss. There is no guarantee that you will be able to lock in your profits, as the exchange rate will constantly change. Currency trading in a carry trade is regulated as a currency pair.

Cryptocurrencies are digital coins created in a decentralized system. Coins are made through exchanges every time a new transaction is verified. There is no oversight body, except for those involved in the buying and selling of cryptocurrency.

Cryptocurrencies are created through the process of mining. There are two common ways to mint a new coin. Proof of work is the standard process used to generate new Bitcoins. When a new Bitcoin transaction is generated, the transaction must be verified. Minors compete for the right to verify the transaction by solving a complex algorithm. The first to solve the problem verifies the transaction and receives the Bitcoin. The process is completely decentralized and managed by a member who verifies transactions and participates in the trading process.

Proof of Stake is another process that verifies the transaction. Ethereum is an example of a coin verified by the proof of stake process. This mechanism randomly selects the stakeholder whose currency Ethereum owns to verify the transaction. The validator is awarded Ethereum. The process is completely decentralized and run by members who hold shares in Ethereum and participate in the trading process.

Generally, to buy Bitcoin or Ethereum, you need to exchange it for another cryptocurrency or fiat currency. Therefore, there is a value between cryptocurrencies and fiat currency. This value can change over time, but can be influenced by the supply and demand for cryptocurrency and fiat currency.

FTX Explosion

Some problems can affect both fiat currencies and cryptocurrencies. For example, George Soros, a hedge fund titan, but a significant amount of money that the British pound would fall in value due to fundamental problems with the country’s lending and debt practices. Soros broke the British pound in 1992, generating over a billion in profits for his fund.

At the end of 2022, the FTX cryptocurrency exchange announced bankruptcy. The decline was likely due to fashion fraud, which the U.S. Department of Justice has yet to prove. The exchange’s CEO is known to have used client funds to finance private bets that were taken by a hedge fund he also managed. Bankman-Fried used customer funds to finance his trading efforts, and when this information leaked, customers fled for their existence. Bankman-Fried did not have enough money to cover the company’s profit margin, which led to bankruptcy. Many customers participated in interest-bearing accounts. FTX wasn’t the only cryptocurrency exchange borrowing cryptocurrencies from its customers.

Twins Defendant

In December, Gemini Trust Company and its founders Tyler and Cameron Winklevoss were sued by investors. They claimed that the interest paid by the company on cryptocurrencies was sold as an interest-bearing investment and should have been registered as securities. To attract investors, it promised investors a whopping 8% interest-free stake. However, in November, the company halted redemptions after partner Genesis Global became embroiled in the FTX implosion. Gemini refused to honor any redemptions, causing the loss of all funds held in the interest-bearing program. Any time there is an issue where programs that should have been registered as securities affect consumers, there is a chance of a rebound. Consumer complaints are at the heart of the latest effort by regulators to further oversee the cryptocurrency industry.

Does the lack of trust in cryptocurrencies and fiat money matter?

Historically, it is difficult to regain investor confidence after a currency explodes. The fiat currency, the USD/JPY carry trade, exploded, and despite the stain on the trade, investors returned and used the low-interest yen to finance finances. This likely means that there is hope for cryptocurrency stablecoins that bring significant returns to investors. When government profitability is low, investors look for alternatives. There may come a time when cryptocurrency financing transactions return to the market with the confidence of cryptocurrency investors.

Will further cryptocurrency regulation impact currency trading?

It is difficult to measure how much the pending regulations will benefit forex trading. Initially, cryptocurrency trading, which has seen price increases and declines (see chart), is less attractive because the momentum that led to the public quickly believing that cryptocurrencies were likely to gain widespread adoption has stalled. While many still believe that a decentralized monetary system will eventually be fully adopted, there is also reason to believe that some form of oversight may be needed for decentralized tokens to work. The mania around NFTs has faded somewhat, and constant headlines describing interest-free products not registered as securities will have an impact on cryptocurrency adoption. The question remains whether the trader wants to learn how to trade cryptocurrencies.

Cryptocurrency volumes have been declining since November. Volumes spiked in the wake of the FTX bankruptcy, but have since fallen and likely lost many traders to other asset classes. Fiat currency trading is the largest capital market and has likely benefited from the lack of cryptocurrency trading.

Summary

As a result, the cryptocurrency is taking time to stabilize after a meteoric rise that saw prices skyrocket from very low levels to record highs and then plummet. As prices skyrocketed, it became clear that many players in the cryptocurrency game were betting badly and potentially trying to take advantage of customers to fund their trades. In the wake of the FTX outbreak, several companies are trying to describe why they have not registered their interest-earning products.

No one ever said that full adoption of digital coins would happen in a straight line. The bumpy road to cryptocurrency adoption won’t include a significant stock market explosion and potential regulatory scrutiny. Consumers need to trust cryptocurrency exchanges and the product they produce to force adoption. In the meantime, forex volumes should remain solid.