(Sept 8): Chinese regulators this week dealt a huge blow to the cryptocurrency market after the People’s Bank of China (PBOC) banned initial coin offerings (ICO) and asked all related fundraising activity to be halted immediately.

See: Bitcoin tumbles as PBOC declares initial coin offerings illegal

ICOs had become an easy platform to raise funds through digital tokens. According to Cryptocompare, some US$2.3 billion ($3.1 billion) have already been raised through ICOs so far.

The ban by China’s central bank, back by concerns of fraud and criminal activity, saw Bitcoin lose 11% of its value – the biggest tumble since July.

As at Sept 7, the total market capitalisation of cryptocurrencies is close to US$160 billion, according to CoinMarketCap.

China was the first nation to ban activities related to cryptocurrency issuances such as ICOs. But the call to regulate cryptocurrencies is gaining momentum.

In the wake of an increase in the number of ICOs used to raised funds in Singapore, the Monetary Authority of Singapore (MAS) in August clarified that “the offer or issue of digital tokens in Singapore will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act.”

This echoed the sentiments of United States Securities and Exchanges Commission (SEC), which noted that “offers and sales of digital assets by ‘virtual’ organisations’ are subject to the requirements of the federal securities law.”

The Inland Revenue Authority of Singapore (IRAS) has also introduced new tax guidelines for businesses using digital currency. “Businesses that choose to accept virtual currencies such as Bitcoins for their remuneration or revenue are subject to normal income tax rules,” IRAS says on its website.

On the other side of the coin, some countries have already classified cryptocurrencies as a legal entity, or in the process of making it legal.

The Reserve Bank of Australia (RBA) treats Bitcoin as an accepted mode of transaction and thus allows trading, mining and buying of cryptocurrency. Meanwhile, Japan has legalised cryptocurrencies usage, and treats the virtual currency as an asset for accounting purposes, which will be taxed accordingly.

Given the secrecy which shrouds the trading of Bitcoin and other cryptocurrencies, legitimacy is one the main concerns of crypto users and investors. And regulation is key if cryptocurrency is to survive.

Regulation of cryptocurrencies will drive the demand of its usage in many financial transactions and will also manage the volatility in its price movements. It will also instil a sense of confidence that it is safe to use, so cryptocurrency users will not panic at the whiff of trouble.

While regulation will not prevent any crypto crises, it can help manage their impact on financial trading and minimise any bubble-like scenarios.

Another reason why cryptocurrencies need to be regulated is due to its usage in fraudulent activities and prominence on the darknet. These include the usage of Bitcoin at drug marketplaces such as Silk Road and as a mode of payment of ransomware, which have attracted negative sentiments for crypto that far overshadow its potential monetary benefits.

The bottom line, however, is that there has not been consensus among regulators on how to bring order to transactions involving peer-to-peer cryptocurrency. As such, it is going to be an uphill battle for regulators to legalise and regulate its use.

But whatever the future of cryptos, the decentralised monetary system of cryptocurrencies is likely to be future of financial transactions. And it will revolutionise the global financial landscape – if it is able to survive the complex regulatory regime.

Nafis Alam is an Associate Professor of Finance at Henley Business School, University of Reading Malaysia. His research is focused on Fintech, banking regulation, financial market, corporate finance, and Islamic banking and finance.