Regulation of Cryptocurrency and its Implication for Financial Stability. A Qualitative Analysis

The Great Recession of 2007-2009 was preceded by decades of deregulation, reduced supervision, and growing belief in self-regulation. Today, the cryptocurrency markets operate in a similar fragmented and unregulated environment. An unbacked cryptocurrency market with 6.8% global ownership carried a familiar, dangerous optimism for financial stability. Therefore, this study through a qualitative approach explores the regulation of cryptocurrency and its implications for financial stability. The study proved that there are several weaknesses in the current regulatory framework for the cryptocurrency ecosystem, namely, (1) Regulatory fragmentation, (2) Absence of the integration of security and consumer protection issues, (3) Used of existing traditional financial institutions' regulations to regulate the cryptocurrency market; (4) Flaws in the European Union Market in Crypto-Asset (MICA) regulations (5) Lack of a comprehensive uniform global regulatory and supervisory framework for cryptocurrency. Hence, the study findings further shows that the identified weaknesses in current regulatory framework for the cryptocurrency market could amplify financial vulnerabilities in the cryptocurrency ecosystem that could hamper the resilience of the global financial system to cryptocurrency market-based shocks through an increased contagion risk that has significant implication for financial stability. The paper concluded that while a fragmented and unregulated global cryptocurrency market may not currently pose a risk to financial stability in the global economy, an extensive adoption of cryptocurrency without a comprehensive uniform global, regional and national regulatory framework will amplify their vulnerabilities, exacerbate contagion, and generate systematic risk, which will have significant implication for financial stability-Minsky moment. The research recommends that national, regional, and international regulators, and policymakers, must engage in constructive dialogue to develop a risk-based global regulatory and supervisory framework for the cryptocurrency ecosystem, with greater requirements on cryptocurrency issuers, cryptocurrency backed stablecoins, DeFi smart contract, non-fungible tokens (NTF), cryptocurrency exchanges, holding reserves and blockchains operation that generate significant risk for financial stability.