Will Recent Global Regulatory Actions Signal Demise or Advancement for Cryptocurrencies?
Balancing the need for protection with the ability to innovate.
Across the globe, governments are contemplating their next regulatory moves for the nascent crypto industry. But the state of play among major developed countries is widely varied. In the wake of the crypto winter, the FTX collapse, and surrounding events, will regulation help drive further crypto adoption, or will it discourage innovation?
Learning From Japan
Cryptocurrency exchange Mt. Gox operated in Japan between 2010 and 2014, and once accounted for over 70% of all bitcoin trading volume. In early February 2014, Mt.Gox suspended customer withdrawals due to suspicious activity in its digital wallets. While 200,000 bitcoins were found, approximately 650,000, or $14 billion (using a valuation of $22,000 per coin) were considered lost and removed from the network. Then in 2018, crypto exchange Coincheck Inc. was hacked, with nearly $500 million in digital tokens stolen.
Following these events, Japan’s Financial Services Agency (FSA), the agency responsible for overseeing banking, securities and exchanges, and insurance sectors, established standards for crypto exchanges — including the segregation of customer fiat and crypto from an exchange’s own crypto. By separating funds, the potential for fraud is reduced — conversely, when funds are mingled, it is harder to determine what belongs to who — a point that SEC Chair Gary Gensler has recently been emphasizing.
Following the collapse of FTX, customers in Japan and the US are at opposite ends of the spectrum. While consumers in the United States must go through the process of trying to recover their assets through bankruptcy, those in Japan are scheduled to begin recovering their assets in February — thanks to the protection laws in place.
EU — Ahead of the Curve
In 2020 the European Union put forward one of the first guiding frameworks for the crypto space, and implementation of rules are expected to begin later this year. The markets in cryptoassets proposal, or MiCA, seeks to protect consumer wallets. The proposal tasks the European Banking Authority with maintaining a public register of non-compliant crypto-asset companies and developing a robust framework around stablecoins, among other things. Stablecoins will be required to have a “sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits,” according to a council of the EU press release.
The regulation will also require that crypto-asset service providers receive authorization to operate in the EU. The framework looks to create a cohesive set of rules for crypto assets, providers and servicers across the eurozone.
UK — Striving to Be a Blockchain Innovation Hub
The UK has set its sights on becoming a crypto hub and recently announced a number of regulations to bring crypto assets in line with traditional financial instruments. In the proposal, “Future financial services regulatory regime for cryptoassets,” the government is seeking to protect customers while also allowing for financial innovation. As the government tries to ensure robust and transparent protections, they are striving to be at the cornerstone of crypto and blockchain technology. Per the paper,
“The government’s firm ambition is for the UK to be home to the most open, well-regulated, and technologically advanced capital markets in the world.”
The rules aim to align crypto assets with traditional finance regulations and will likely take years to go into effect.
US — In Need of Clarity
Following the White House Executive Order, “Ensuring Responsible Innovation of Digital Assets,” issued in March 2022, lawmakers began to draft legislation. But almost a year later, various proposals are circulating, yet the United States still has no defined regulator or rules around digital assets. As multiple regulations make their way through legislation, Republicans, now in control of the House of Representatives, have formed a Subcommittee on Digital Assets, Financial Technology and Inclusion in hopes of establishing regulatory clarity.
The US still has no defined taxonomy or single overseer for crypto assets — and this lack of clarity has the Commodities and Futures Trading Commission (CFTC) claiming crypto assets are currencies and, therefore, under their purveyor. Meanwhile, the Securities and Exchange Commission (SEC) regulates securities and claims that some — but not all — coins are securities, particularly initial coin offerings.
But the SEC isn’t sitting idle. The agency has recentlyy taken several enforcement actions. Crypto platform Kraken will no longer be allowed to offer crypto staking services, an action that could send ripple effects across the industry. And in a move against stablecoins, the agency just ordered crypto firm Paxos to stop minting the Binance stablecoin (BUSD), adding that it is considering recommending an action alleging that BUSD is a security and therefore Paxos should have registered the offering under the federal securities laws.
But are all these actions bad news for the industry? The moves may provide the industry with much needed clarity, according to Tim Frost, CEO of digital wealth platform Yield App.
“The long-term goal of regulation has always been to lay down the framework so that the crypto industry has the appropriate support to grow. As other countries take the lead in proposing a robust regulatory framework for digital assets to thrive, the SEC is now in a position where it can follow in these footsteps and drive digital asset adoption through regulatory clarity. Until regulatory bodies define the rules around consumer use and the tax implications around digital assets, the US will fall behind its counterparts. As the digital asset industry evolves, regulatory guidance needs to do the same.”
Borderless Transactions, Borderless Regulations
Crypto is considered borderless — should regulations follow suit? The International Monetary Fund has stated the dangers of countries taking such diverging positions.
“The resulting fragmented global response neither assures a level playing field nor guards against a race to the bottom as crypto actors migrate to the friendliest jurisdictions with the least regulatory rigor — while remaining accessible to anyone with internet access.”
To Regulate or Not to Regulate
At this point, crypto regulation is inevitable. The regulation of the financial markets has always been something that is done at the local level, usually under the auspices of the government protecting their citizens.
However, according to Mati Greenspan, Founder & CEO of Quantum Economics, this is the first time in history there is a class of assets that are global in nature and cannot be governed at a local level — and that consumers are taking matters into their own hands:
“When dealing with programmable money, the use cases of various cryptocurrencies and NFTs are extremely diverse and don’t fit neatly into any previously defined categories. Some countries have been quick to set ground rules while others drag their feet or opt for an all-out ban. However, what’s happening on the ground is that consumers themselves are becoming smarter about the various ways of protecting themselves and ultimately are better equipped to deal with potential threats in the 21st century than any government body.”
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in this article.
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