Stricter regulations are expected to hit the cryptocurrency market as countries aim to promote their own digital currencies and ensure their success. The global cryptocurrency market, valued at $1.7 trillion with 106 million users according to a Crypto.com report, has attracted many investors seeking rapid capital gains due to its volatile nature. However, recent regulatory actions signal a tightening environment for the sector.

In May 2021, China banned financial institutions from conducting cryptocurrency transactions. Similarly, UK retail banks have suspended transactions with cryptocurrency exchanges like Finance and Coin base due to concerns over financial crimes. Banks such as Barclays, Monzo, and Starling Bank temporarily halted payments to crypto platforms in response to suspicious transactions. These restrictions are intended to be temporary until better checks and verifications are in place.

The popularity of cryptocurrencies has been accompanied by increasing rates of financial crime. Despite efforts by the Financial Conduct Authority (FCA) to register all crypto firms by July 2021, only five companies are fully registered. The FCA has extended the registration deadline to March 2022. This extension means most crypto exchanges in the UK operate without FCA oversight, leaving them unbound by anti-money laundering rules. Until full regulation is achieved, banks must mitigate their exposure to financial crime through independent measures.

There is a pressing need for an international regulatory framework for cryptocurrencies to ensure uniformity. Currently, regulatory approaches vary widely. Japan, for example, has embraced cryptocurrencies, recognizing them as legal property and placing them under the supervision of the Financial Services Agency. In contrast, India proposed a bill in March 2021 to ban cryptocurrencies entirely. China has prohibited financial institutions from engaging in crypto transactions to support the development of its own digital currency.

Countries are restricting or banning cryptocurrencies to prevent decentralization from undermining their economic control. In the UK, the Bank of England released a discussion paper suggesting that stable coins should be regulated like fiat currencies and hinted at the introduction of a digital currency, “Bitcoin.” Similarly, China is trialing its own digital currency in several cities to ensure its success.

Regulating the cryptocurrency sector is essential to protect users from fraud and prevent its use in money laundering. Until the FCA fully regulates cryptocurrency firms, UK banks must protect their customers from online fraud associated with crypto transactions. The growing popularity of cryptocurrencies poses a perceived threat to central banks, who are concerned about the impact of a volatile decentralized currency on their economies. By restricting cryptocurrency adoption, central banks aim to transition to their own digital currencies, resulting in potentially stringent regulations.