Enhancing Financial Security in the Digital Age: Mitigating Risks of Virtual Currencies Through Regulation and Institutional Mechanisms

Abstract

Abstract The swift rise of virtual currencies (VCs) as financial instruments has raised concerns about their ability to increase risks in the global financial system, especially given the current geopolitical instability. This article examines the connection between virtual currencies and financial security, highlighting the importance of strong economic and financial institutions and mechanisms to ensure the reliability of digital assets. We investigate through an extensive literature analysis the various risks linked to VCs, including market volatility, regulatory inconsistencies, and security vulnerabilities, which are exacerbated by geopolitical conflicts. We then examine how institutions have responded to these concerns, focusing on the proactive actions taken by international organizations and national authorities to reduce possible disruptions. The focus of our paper is the Markets in Cryptoassets (MiCA) law, an innovative legislative framework created by the European Union to standardize VC regulation among member states. We analyse the goals and main provisions of MiCA to evaluate its ability to establish an international benchmark for overseeing virtual currencies, ultimately improving investor safety and market integrity. The paper concludes by discussing the changing role of VCs in the geopolitical sphere and supports flexible and cooperative regulatory strategies to balance the advancement of digital assets with financial security needs.