Opinion Piece: No Amount Of Regulation Can Make Up For Crypto Illiteracy

As the cryptocurrency crowd ponders what the next year holds for digital assets, one thing is for sure: regulation is still on the agenda, very much. But no amount of regulation can stop a novice investor from plummeting dramatically into uninformed, emotion-driven moves. And such moves are easy to pull off when you have little idea what exactly you’re up against, which is often the case.

Even the traditional stock market, which has been around for a while, is terra incognita for a large proportion of retail investors. More than 32 percent of respondents in a 2021 Bankrate survey admitted they didn’t understand anything about stocks. But as worrying as that may be in itself, they navigate different hurdles than cryptocurrencies. Public companies have to comply with the rules, duly reporting their financial information and undergoing regular audits. Meanwhile, the exchanges their stocks are traded on and the brokers face their own fair share of scrutiny.

Of course, none of this necessarily means that a Main Street investor can’t treat stocks like a casino and spend their money on risky investments. Quite the contrary, in any case, is their right, and that is not what the regulation is supposed to fix. The rules are there to make sure the investor has enough information on hand to estimate the risks of a specific investment, and to give people who try to scam investors a heavy slap on the wrist, along with a fine or time in court. jail.

So there is something quite ironic about the fact that investors with less financial knowledge seem to be more likely to invest in cryptocurrencies, according to a 2020 report from the Bank of Canada. Unless the trend has changed, it is also quite worrying, because traditional stocks have nothing to do with cryptocurrencies when it comes to confusing dead ends. It’s an innovative, technology-driven space full of new ideas and projects, but understanding what these projects do often requires at least a basic understanding of the technology that powers the space, not just general financial knowledge. So it’s no surprise that one in three digital asset holders don’t really understand cryptocurrencies, describing their knowledge as non-existent or “emerging,” according to a 2021 Cardify study.

Aside from having to deal with something so confusing on its own, would-be cryptocurrency investors are also a lucrative target for scammers. Let us remember the Squid Game currency and the Africrypt projects that took millions from the pockets of their backers. There’s even industry jargon to describe this crypto fraud: “rug pulling,” for example, was coined to name the all-too-common malicious operations where crypto developers abandon a project and run off with investor funds. These accounted for more than $2.8 billion stolen in 2021, blockchain analytics firm Chainalysis mentioned in a recent report.

That said, one look at the price action of Bitcoin or Ether is enough to see that even the most trusted and battle-tested crypto investments can wipe out a sizeable portion of their funds in an unfortunate nosedive. But that is not what novice traders go into crypto for. They want the golden ticket to a prosperous future, and the bright outlook gets the better of them, often leading them to overlook the high risks involved. For many, trading becomes a social activity, which is perfectly fine, as long as you know what you’re doing.

Look at the Wall Street Bets saga, for example. Too often, we think of it as a story of retail investors, your everyday folks, coming together to freak out on Wall Street, big time. Lost in the rumor mill, however, is that the bold trade got off the ground thanks to an experienced trader, not your usual novice investor. The rookies were mostly losing money, if anything. In crypto, social trading can take on a whole new volume, with thousands of Telegram channels offering their opinions on the market and their hidden gems. Sure, they’re not all scammers, but you know the problem is wide open when even Kim Kardashian and Floyd Mayweather are sued for promoting an alleged crypto pump and dump.

So what is the discard? Just as no amount of traffic lights can teach you how to drive, no amount of crypto regulation can make up for investors’ lack of understanding of the space they work in. So while cryptocurrencies are becoming popular, it is time to step up our efforts to educate retail investors on the exciting and innovative field they can delve into.

Crypto trading platforms themselves are already taking the lead in educating investors by offering all kinds of educational content on both safe trading 101 and the fundamentals of the technology that underpins the ecosystem. They also post explanations about red flags to watch out for when reviewing new crypto projects and coins, pointing to the scammer problem. Such efforts deserve all praise as they make it easy for retail investors to understand things in an easy to digest form.

But broader awareness will require a broader effort, and it is about time to bring crypto into schools and colleges, especially as Gen Z seems to be really buying into the crypto edition of the get-rich-quick myth. Schools are already providing financial education, and adding crypto to the curriculum is simply the next logical step in this direction. Furthermore, the technical side of the matter can also inspire more students to think about things like privacy, encryption, and ownership of digital assets, the values on which cryptography is based.

One day, regulation will make the crypto ecosystem more secure and transparent, which will mean less risk for retail investors. But schools don’t need to wait for that day to start their own educational plans and projects, and in the long run, this will do more to keep investors safe than policymakers ever could.

Guest post by Vasja Zupan from The Matrix

Vasja Zupan is the Chairman of Matrix, the first MTF (Multilateral Trading Facility) and virtual asset custodian to be launched under the ADGM (Abu Dhabi Global Market) Financial Services Regulatory Authority regulations. Before joining Matrix Exchange, he was COO at Bitstamp, the first fully licensed cryptocurrency exchange in the EU and the oldest in the world, and managed the turnaround of struggling multinational Kolektiva Group for German Rebate Networks VC. .

More information →Posted in: Guest Post, Regulation