Trading in foreign exchange takes is available electronically through decentralized networks all around the world rather than on centralized marketplaces as in conventional stock markets. Although the fundamental methods and technology are different, the decentralized and worldwide structure of forex trading and the burgeoning cryptocurrency and digital asset markets have a lot of similarities.
Since the late 1990s and early 2000s, the forex market has been available to the general public, thanks in part to the internet. Individuals were able to trade from their own computers at the time, and this was a fresh possibility. Apart from large financial institutions, a multitude of smaller retail brokers has emerged to support the expanding forex trading scene with user-friendly tools and services.
The “Wild West” that characterized the early days of cryptocurrencies, has persisted in the world of forex trading, which first went online in the late 1990s. In a merged trade arena, the similarities in the digital infancy of both parties make them potential friends, and the growth of regulation in one has broad ramifications for the other.
It is important for us to understand the present market circumstances for both conventional forex trading and cryptocurrency trading to comprehend recent regulatory changes in the established forex market.
Regulatory regulations and standards in the currency market have traditionally been based on protecting individual investors and ensuring market stability. For a forex broker to be licensed in their country, they must fulfill a variety of regulations, including minimum capital requirements, strict reporting, and auditing requirements as well as restrictions on leverage. The main reason for this is that regulated Forex brokers in the industry should provide their clients with legal services under the country’s regulatory framework. Also, regulators want to prevent fraudulent brokers from entering the market and taking advantage of customers by instituting the existing licensing procedure.
By law, foreign exchange brokers must be registered with the US Commodity Future Trading Commission (CFTC). The National Futures Association is in charge of a substantial part of the CFTC’s registration procedure (NFA). Investing by “individuals with assets of less than $10 million and most small enterprises,” as defined by the CEA, is a risky proposition.
Australia’s Securities and Investments Commission (ASIC) began regulating OTC derivatives trading in 2009, after the G20 Summit, which provided the push for other nations to overhaul foreign exchange legislation as well. When the G20 Summit called for “improving the transparency of transaction information available to relevant authorities and the general public, promoting financial stability, and supporting the detection and prevention of market abuse,” ASIC in Australia began implementing legislation in 2013.
Deregulation in the 1980s and 1990s had a negative impact on Australia’s regulatory system, but now it is regarded as one of the strongest and most successful. There is a new requirement for forex brokers today: they must keep an ASIC license, which requires them to have “at least $50,000; plus five percent of adjusted liabilities between $1 million and $100 million; additional 0.5% of adjusted liabilities over $100 million.”
For forex brokers, Australia is not the only country to have minimum capital requirements. FSA regulations have been revised many times since the 2005 revision of Japan’s Financial Futures Trading Act to cover FX trading. During the financial crisis of 2007–2008, authorities began imposing a 4% margin requirement on some kinds of foreign exchange transactions.
Margin requirements for all forex transactions were revised by Japanese authorities in 2016. The Monetary Authority of Singapore (MAS), on the other hand, has modified its criteria for providing forex broker licenses. As a result, today’s applicants must fulfill a variety of conditions, including minimum capital requirements, educational requirements, and “fitness and propriety.”
It is possible that the digital asset market will encounter one of its greatest difficulties in the form of legacy regulation, which might result in the type of concentration and centralization seen in currency. It is possible to reduce the complexity and expense of the administrative and liquidity overheads, but this comes at a high cost to smaller and start-up firms, who are priced out of compliance.
For example, the United States is home to some of the world’s largest forex brokers. There is still a strict set of rules governing trading in this region. The market is very difficult to get into because of the significant expenses connected with receiving approval to provide services. For smaller firms, MiFID regulations may be too costly to comply with because of current initiatives to include “variation margins” in their policies.
In recent years, as cryptocurrencies have gained traction and become a new asset class, the issue of regulation has become more important. For investors and entrepreneurs, the regulatory environment around digital assets is of immense importance, and regulatory actions by one nation may have a substantial influence on the worldwide market.. There is no denying that governments throughout the world want to control digital assets in a similar way to how conventional currencies are regulated, despite the fact that many bitcoin enthusiasts reject this.
Enforcement of encryption-based services on the blockchain might be challenging. However, we can take a look back at the forex scene of 20 to 30 years ago and observe how regulatory agencies entered a decentralized, multinational market that was mostly uncontrolled at the time.