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- Insider spoke to CoinShares' James Butterfill about the future of regulation.
- Governments can't truly ban crypto so they are fighting to stay relevant with central bank digital coins, he said.
- Regulatory action is feeding the volatility in bitcoin and the market needs clarity, Butterfill said.
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Regulators around the world are tightening the screws on cryptocurrencies, but greater oversight and increased transparency is the only way the market can evolve and progress, according to CoinShares investment strategist James Butterfill.
In the wake of a sustained crackdown across various countries on Binance, a crypto exchange and China's severe restrictions on bitcoin mining, CoinShares' Butterfill said it was really up to the regulators to offer clearer guidance and better definitions for the market.
"I think bitcoin has got an identity crisis. It's a birth of a new asset class, and both investors and regulators are struggling to figure out where to place it and how to categorize it," Butterfill told Insider in an interview this week.
CoinShares is Europe's biggest crypto asset manager. The company had $3.35 billion under management by the end of the first quarter, according to its most recent earnings report.
He explained how the lack of clear definitions for the asset – such as whether regulators and tax authorities treat it as a currency or a security – means any changes or developments on the regulatory front inject a lot of volatility into the price.
"When new regulation comes along, bitcoin does tend to be volatile, because people don't know how it's going to impact the crypto space," he said.
"As an investor, it's important to be able to categorize different assets, you know when you're making investment decisions what you do is you make an economic construct of the world, and you say 'okay I can see what works in that economic construct'," Butterfill said.
How to define bitcoin
In the United States, for example, the Internal Revenue Service calls it a taxable property. The Commodities Futures Trading Commission says it's a commodity and the US Securities and Exchange Commission has no official clarification.
"With something like cryptocurrencies, it's none of those, it's its own thing, its ownership of a distributed peer to peer monetary ledger system. And to further extend that, it's a diversified non-sovereign asset... So, it definitely does warrant its own asset class and all the regulators are slowly discovering this," Butterfill said.
He said regulators must deal with cryptocurrencies and not ban them because that just drives people to "more nefarious places to buy bitcoin."
"The only way you can essentially ban it in the end is by cutting off the internet," he said. "That is a bit like cutting off your foot to spite your toe and economically that has big ramifications so it's not really practical from that standpoint. So, I think most of them have decided: 'let's launch CBDCs'," he added.
Central banks and the digital world
A number of major economies are exploring digital versions of their own currencies and many have been clear about the risks attached to standard cryptocurrencies, such as bitcoin or ether.
China is running trials of its digital yuan and the Federal Reserve and the Bank of England are looking into the possibility of their own central bank digital currencies (CBDCs), while European Central Bank President Christine Lagarde has said she expects a digital euro to launch in the next four years.
The future of central banks and digital currencies is not all doom and gloom. El Salvador has already made bitcoin a legal tender and the Bahamas has a functioning CBDC.
"We could see people use crypto alongside their own native currencies or we could start to see in the developing world more countries like El Salvador start to adopt bitcoin as a currency instead," Butterfill said.