Cryptocurrency, a decentralized digital asset vulnerable to market volatility, must be regulated to prevent the financial instability it exacerbates. Because cryptocurrency is available for trade 24/7, it is often subject to significant overnight fluctuations. Large institutions are active in crypto transactions, which means their activity can mobilize market instability and evolve market conditions quickly. The decentralized aspect of cryptocurrency, in addition to a lack of legal entity regulation, results in a lack of consumer protection within the crypto market. The volatile nature of cryptocurrency which breeds, surges and crashes along with the establishment of speculative bubbles could eventually lead to instability in the broader financial market; hence, crypto assets must be subject to government oversight. Cryptocurrencies experience surges in 24/7 trading. Bitcoin, for example, had a value increase of $5,000 in March 2020 to $60,000 in one year.

However, the crypto-boom was soon followed by a crash. A contributing factor to this crash in 2022 was the fear surrounding the Ukraine conflict, which led to the worsening of the market through heightened inflation. Rising inflation accompanied by increased interest rates made asset investment more risky and less appealing, fueling the decline of crypto assets. Stablecoins, a crypto with a value that is fixed to conventional currency, diminish currency risk as users can cash out of risky assets and protect their money in a safe space protected from further risk. However, if stablecoin were to undergo a crisis, it would eliminate liquidity. For instance, the Terra Luna stablecoin is an example of a volatile crypto asset, as it collapsed in only three days in  May 2022, leading to a $50 billion loss in valuation (Hern and Milmo, 2022). Moreover, investors often engage in speculative actions within the crypto market, as they believe purchasing such currency while it is limited in supply will allow them to re-sell it at a later time at a higher price. Cryptocurrency’s lack of intrinsic value leads to increased speculative behavior and riskier asset engagement.

Currently, blockchain is used as a public ledger where crypto assets are transferred and recorded. However, there is no authority or facilitator of transactions in the network. Rather, computers are utilized to facilitate and verify transactions. The U.S. Securities and Exchange Commission is in favor of enacting greater regulatory measures, as SEC Chairman Gary Gensler believes that cryptocurrency assets are susceptible to fraud and scams. The Federal Trade Commission asserts that 46,000 Americans have lost amounts exceeding $1bn since 2021 due to scams. The use of blockchain lacks transparency, which can foster an environment for fraudulent transactions to occur. Furthermore, Gensler favors crypto lending being regulated as a stock exchange for crypto to be viable for investment. This aspect of cryptocurrency has led to its increasing use of illegal markets because no clearing authorities are necessary to facilitate transactions.

Economist Stephen Cecchetti argues that cryptocurrency shouldn’t be subject to government oversight, as doing so would grant legitimacy and drain government resources that can be invested into other productive activities. However, I feel that crypto being utilized as an accomplice in illegal transactions is a valid reason enough to invite regulation. Cryptocurrencies and their constantly fluctuating price values accompanied by risky investor behavior pose a threat to market stability, thus, the government must impose regulation as a means to protect consumers and investors from the digital asset’s volatility and fraud.