In recent years cryptocurrencies reached unprecedented heights in terms of both popularity and value. But still, Many new players looking to enter the crypto market face significant obstacles.
While individual traders and investors have flocked to cryptocurrencies a long time ago, the lack of a regulatory framework in place makes companies looking to establish themselves in the space worried about what will happen next, both short term and long term.
This article will explore some of the challenges that new companies face when trying to enter the crypto market and offer our insights. We will cover regulatory hurdles and technological barriers, from a few different perspectives.
Cryptocurrency service providers are subject to a wide range of regulatory requirements, which can serve as an entry barrier for new businesses seeking to enter the market. These regulations can include anti-money laundering (AML) and know-your-customer (KYC) requirements, licensing and registration requirements, and compliance with tax laws and regulations.
The end goal is to protect consumers and prevent criminal activity, such as money laundering and terrorist financing, which can be facilitated by anonymous crypto transactions. the lack of clarity and consistency in regulations across different jurisdictions can create further challenges for businesses operating in multiple markets.
Despite these challenges, regulatory compliance is essential for the long-term viability of the cryptocurrency industry. Businesses that can effectively navigate the regulatory landscape can gain a competitive advantage, as consumers and investors are increasingly looking for reputable and trustworthy service providers.
Understanding Crypto Can Take
It’s one thing to be a crypto investor or enthusiast that knows the ins and outs of certain companies, but operating a company in this space, requires you to have in-depth knowledge about so much more topics. This steep learning curve can get very complex very fast when it comes down to all the moving parts that a regulated crypto company needs to address, from their processes, finance, and IT infrastructure, so they can combat some the biggest threats the industry is facing: fraud, cyber-attacks, transactions between bad actors, market manipulations and money laundering.
This is before we even mentioned anything about regulations and compliance with the laws of different jurisdictions, which will require a high level of expertise, to make sure the company is not in constant threat.
No Protection of Crypto-Assets
Under Current EU Law
On March 17, 2022, the European Supervisory Authorities (EBA, ESMA, and EIOPA – the ESAs) warned people that cryptocurrencies are risky and speculative.
According to ESA, consumers can lose all their money if they invest in digital currencies.
Under the current EU financial services law, crypto investors have no protection if they lose their crypto assets. This is true for companies and entrepreneurs as well.
Even The Biggest Exchanges
Although cryptocurrency exchanges have to follow a broad set of regulations for offering services, there are some cases where some exchanges (even popular ones) have collapsed. The most recent example is FTX, one of the top cryptocurrency exchanges worldwide, which declared bankruptcy and ceased all crypto withdrawals.
Crypto lending unit Genesis Global Capital with $2.8 billion in active loans suspended customer withdrawals due to the FTX collapse.
Just a few days ago, on 9/2/2023 Kraken (another big exchange) was fined 30M$ and was forced to stop the availability of their staking-as-a-service platform to US citizens.
A couple of cryptocurrency exchanges have been hacked as well. The first well-known exchange that was hacked, Mt.Gox, was hacked twice, with the second time being in 2014 when 615M$ worth of bitcoin was stolen. keep in mind that also big and established exchanges are not bulletproof to cyber attacks, for example, Binance and KuCoin, which were hacked in recent years.
New players can face difficulties and even lose their investments if they don’t have a comprehensive plan, and the sad truth is, it might happen even if they do.
Crypto Beginners are Vulnerable
to Online Traps
Nowadays, many online advertisements offer free crypto. If you accidentally click on any one of them, there are chances that your crypto wallet will get hacked, and you might lose all of your digital goods. Many beginners become victims of free social media giveaways and phishing scams and end up losing all their crypto. There are quite a few famous stories online where people have lost millions of dollars due to a “small” mistake.
It means that a “misshapen” that has your company name tied to it, can raise a scandal, and as you understood from the last section, in crypto more than in any other industry, even the biggest companies can collapse from this type of bad publicity.
Compared to traditional stocks, cryptocurrencies are highly volatile. The recent volatility in the cryptocurrency market has left many crypto companies on edge. The drastic swings in value can have a profound impact on the bottom line of businesses that rely on cryptocurrencies, such as exchanges or payment processors. For example, a sudden drop in value could lead to a significant loss in revenue or make it difficult for companies to meet financial obligations. However, individual traders and investors are less susceptible to these risks, as they are typically investing with a long-term perspective and are not as reliant on short-term price movements. Despite this, it is important for all participants in the crypto market to be aware of the risks associated with high volatility and take appropriate measures to mitigate them.
Gemini, a well-known crypto exchange, experienced $485 million in outflows that led to the suspension of its yield-earning program. However, shortly after, the company confirmed that all customer funds are secure and held in a 1:1 ratio, and available for withdrawal at any time.
You Have to Pay High EU Taxes
Depending on your country in the European Union, you must pay taxes on the profits you make using cryptocurrencies. Apart from a few countries in the EU in which you don’t have to pay taxes if you hold a certain amount of crypto for a longer period, you will be paying high capital gains taxes on crypto trading.
However, the percentage of taxes varies from one EU country to another. For Germans, the tax rate you will pay on your crypto profits is the same as the regular income tax rate – around 45% (and the 5.5% Solidarity tax), which is exceptionally high.
In Denmark, you must pay a fixed tax rate of 12.10% on your crypto profits, similar to your personal income.
Tax-wise, Estonia, Lithuania, and Bulgaria, are known for their favorable tax regimes when it comes to crypto-based businesses, and until last year, they were among the best options for both new and existing crypto ventures.
Recently Estonia and Lithuania have both tightened their criteria and regulations, in a way that left Bulgaria top of mind as a solid EU-based jurisdiction for a regulated crypto business.
New players are facing many barriers entering the market and even vetted players are not in the know about what tomorrow will bring.
As you know, it’s always advised to DYOR – due diligence is required as an entrepreneur even more so than it’s recommended for an investor.
We have published an article that compares different jurisdictions in the EU, covering different angles which are relevant to the crypto space, we encourage you to learn more.