Emerging regulatory trends in crypto assets
As a company operating in the financial services industry, we consider the role of regulation in all of our mission critical decisions. The industry has consistently fostered innovation and re-invention and regulators have in turn sought to introduce standards that engender consistency and proportionality, to protect consumers and stimulate competition, without unduly hampering nascent products or technologies that have the opportunity to benefit all; including those that have historically been disenfranchised from the benefits of operating within the global financial system and are starved of wealth-enhancing opportunities.
Given the growing adoption of blockchain technologies and their capabilities to potentially revolutionise processes and commerce, as we’ve seen with cryptocurrencies and non-fungible tokens, ongoing regulatory evolution and iteration is inevitable. A clear example of the effective and controlled use of blockchain is the speed and ease of processing international payment transactions, which can now be done in minutes unlike a period of days that such transactions could have taken using more traditional methods. Equally meaningful are the decentralised finance solutions available to individuals and small businesses in developing and emerging markets, facilitating opportunities to borrow that would otherwise be unachievable given market inefficiencies.
Global Consistency
A globally consistent, comprehensive framework, based upon identified best practices, is essential to avoid regulatory arbitrage and ‘bad actors’ identifying loopholes to exploit. Regulatory certainty can support innovation, rather than inhibiting it. A key factor in any investment decision is trust — operating in a framework where there is clarity of potential returns and risks, legal certainty, order of operations and transparency of disclosure is essential to stimulate that trust.
Clearly the processes involved in promoting, distributing, executing and reporting upon investment offerings may differ markedly in a Web3 environment, however key foundational controls currently being employed to mitigate risks, such as anti-money laundering reviews and a focus on positive customer outcomes, remain equally relevant. Innovation and pragmatism should be shown in designing frameworks that continue to mitigate these risks, whilst also continuing to avail of the attributes and benefits of the technology, to stimulate efficiency and choice.
The proposals of the Financial Stability Board are a great example of the desire to achieve a coordinated and consistent approach however there is clearly much to be done, as demonstrated by the number of countries that have yet to implement the Financial Action Task Force’s travel rule on crypto. As witnessed with other global financial regulation, increasing harmonisation commonly results in more robust outcomes as well as often reducing the costs of compliance when operating across multiple jurisdictions.
Recent Developments
The demise of FTX has clearly sent shockwaves in the crypto asset market with U.S. Treasury Secretary, Janet Yellen, emphasising the need for effective regulation and consumer protection, describing it as a ‘Lehman moment’ for the sector however continuing to recognise the potential benefits that the technology has to offer.
This may be a telling parallel to draw further to the improvements in investor protection witnessed following the Global Financial Crisis of 2007–2008; particularly in areas such as comprehensively assessing the appropriateness and suitability of investments, ensuring a standardised and balanced disclosure of investment rewards and risk and further robustness in the segregation, stewardship and protection of client assets. Such standards appear pertinent to any investment offering and seem to present a clear direction of travel for the relevant elements of the crypto industry, with many participants already recognising this and therefore having framed their operational and risk frameworks to currently show due regard to these considerations.
We’ve witnessed with interest the recent regulatory advances in Europe and the U.S.; with the E.U. releasing the Markets in Crypto-Assets (MiCA) provisional agreement and the U.S. releasing the Framework for International Engagement on Digital Assets.
MiCA provides greater regulatory clarity, as there had previously been no uniform framework across the E.U. with some member states having varying domestic legislation relating to crypto assets.
The legislation intends to:
- address the situation whereby many crypto assets fall outside the scope of E.U. financial services legislation, with an absence of standards relating to many crypto activities; and
- have particular focus on the operation of crypto platforms; regarding aspects such as administration and custody as well as any dealing or advisory activities associated with the platform.
The new framework mandates that crypto-asset service providers must be authorised to operate within the Union and the passporting mechanism will allow service providers to expand their activities across Member States.
The developments above in the E.U. and the U.S. are reflective of a global trend in regulatory evolution, and we anticipate that this will continue to be a vibrant space in coming years.
Originally published at https://www.hedgehog-invest.com.
