As soon as the word “regulation” comes into contact with the crypto community, there is much booing and hissing. The decentralized nature of Bitcoin and other cryptocurrencies is supposed to bring total economic freedom but it turns out that freedom is still a dangerous thing.
The recent move by the Lloyds Banking group in the UK, as well as JP Morgan in the US, to ban the buying of Bitcoin with their credit cards is a slightly removed form of regulation that is not only necessary, but beneficial to the crypto ecosystem.
Buying with debt
Straight off the bat, it is nonsensical for people to purchase a speculative asset such as Bitcoin with credit cards, or any sort of debt. It is not only foolhardy, but dangerous for investors, and for Bitcoin.
News sprung up during Bitcoin’s monster rally last year, through November and December, of people getting caught up in the fear of missing out (FOMO) who were desperate to get involved in this ‘once in a lifetime’ opportunity.
People began buying Bitcoin with credit cards without really taking into consideration the dangers it could bring. At that time, it was all green markets and huge upswings. However, what goes up, must come down, and down the market went.
Those people who bought Bitcoin at the top with credit cards are now suffering not only the normal debt associated with credit cards but also have to deal with almost a 50 percent loss in their investment.
Reasons for stepping in
Whenever banks start making rules about Bitcoin, people get nervous. However, it’s good to remember that this move by Lloyds and JP Morgan is really a very specific niche of regulating. The banks are not involved in controlling people and their Bitcoin but are rather setting the rules for how their credit can be used.
It is pretty standard for banking to have such a level of control, and it’s a bit of regulating that the ‘new crop’ of investors could use. The reason that the banks have for doing this is the fear that their customers will get even deeper into debt, and thus could default.
Sounds like bubble talk
Buying highly volatile assets with debt is almost always a bad move. This happened in the housing market with its sub-prime mortgages. The dotcom boom also saw people throwing huge amounts of money at companies, some of it borrowed, leading to an eventual bubble.
It is not the technology that’s the problem, but people’s psychology. If people continue to get into the Bitcoin market just to make huge returns with no understanding of the underlying asset, the currency is in danger of bubbling.
However, if banks and others step in, then a little bit of added regulation can moderate people’s worst impulses and help Bitcoin survive and become viable.
Blending in regulation
There is regulation, and then there is regulation. Some are out there to try and strap Bitcoin down to a point where it cannot exist, such as in China. On the other hand, there is regulation which is actually aimed at helping fintech and the evolution of Blockchain technology.
If there can be protections and rules from banks and other institutions to protect people from a bubble or a bad Bitcoin experience, it can only be beneficial for the digital currency and should be sought, rather than shunned.