The last decade is a long time in the world of Crypto Assets, the exponential growth in private tokens on existing platforms and the emerging discussions and movements towards issuing central bank digital currencies (CBDCs) or “stablecoins” are the cause of much attention and debate.
Whilst the Crypto Asset market moves forward, ahead of regulation in many cases, the catalysts at work for central banks and regulators alike represented by increased regulation of this sector mean that it is only a matter of time that regulation catches up.
RegTech terminology has grown to be its own thing, and in fact, if we are able to foresee where regulation will be focused, here are our key pieces:
- Broadening the scope of AML/ATF regulation
The increased scope is both for entities which are regulated and the definition of virtual assets which are regulated. This has already been realized in the FATF guidance on Virtual Assets and Virtual Asset Service Providers which will oblige FATF member countries to ensure entities are licensed and regulated to a similar if not same standard as other regulated entities for AML/ATF.
Areas of regulatory development already in the pipeline include Digital Identification and transaction monitoring of Crypto Assets because the considerable benefits for both regulators and regulated entities of undertaking identification and verification effectively on a non face to face basis and the ability to trace crypto assets as a replacement to other less traceable payment methods.
- Investor Protection
There have been various warnings issued by regulators that investments in crypto-assets are very risky and often fall outside the scope of EU financial services laws, leaving investors unprotected if something goes wrong. Regulatory arbitrage between different jurisdictions, is something which leads to legal uncertainty on investor rights and protections.
Rather than rewrite the regulations around investment protection, it is foreseen that regulators will continue to expand existing requirements to cover Crypto Assets as financial instruments. Risk disclosure statements are likely to be a requirement for regulated and unregulated Crypto Assets alike to increase investor protections as are other reporting or monitoring tools.
- Cybersecurity
It is also anticipated, that additional requirements will be enforced by regulators to prevent security breaches and fraud. The amount of funds lost due to where private keys are stolen or inaccessible has been increasing to the point where cybersecurity is a major issue for Crypto Assets.
Here we expect cyber hygiene requirements to become more onerous and holistic across the areas of continuity management, disaster recovery, security, access and audit.
The ability to trace the transaction journey of Crypto Assets means that automated monitoring will be able to track the trail adequately and will place more focus on AI solutions to prevent criminals from monetizing their Crypto Proceeds. This in turn, is expected to increase the credibility of Crypto Assets.
Conclusions
Appropriately applied regulation will have the benefit of cleaning up the image of Crypto Assets and increase their credibility. The benefits for growth, financial inclusion, transparency and cost reduction which can be realized by all stakeholders make RegTech an enabler perhaps more than an operational burden for more disruption.
