The rise of cryptocurrencies has revolutionised the financial landscape, offering an alternative to conventional monetary systems. Last year, the global cryptocurrency market reached a valuation of around USD 4.67 billion, as reported by Grand View Research. It is projected to experience a compound annual growth rate (CAGR) of 12.5% from 2023 to 2030. With the increasing number of individuals investing in digital assets, global crypto regulation's importance becomes evident for investors and the future of finance. However, regulating a type of asset that appeals to some investors precisely because it operates independently from government control presents a unique challenge.
Laura Talvitie, Senior Manager of PwC UK's Digital Assets Regulation, emphasises “Cryptocurrencies may have been created to operate free from control, but the lack of a robust global regulatory framework for digital assets is harmful to the sector, innovation and consumer protection.” Furthermore, recent unexpected events, such as the dramatic collapses of Terra and FTX, have highlighted the need for stricter regulations in the cryptocurrency realm. It is increasingly apparent that some crypto regulation is on the horizon. However, the regulatory landscape for cryptocurrencies remains intricate and fragmented.
Different jurisdictions worldwide employ diverse classifications and tax treatments for these digital assets. Some governments consider them commodities, others view them as property, and a few even recognise them as legal tender, subjecting them to traditional financial regulations. Concurrently, forward-thinking governments are actively developing new legislation to address the unique characteristics and challenges posed by decentralised currencies.
In this article, we will explore the existing regulatory approaches, ongoing framework developments, the latest news on crypto regulation, and the potential impact it may have on the cryptocurrency industry.
Risk for Investors
The volatility of the crypto market exposes investors to a high level of risk, including the potential for fraud, hacking, and other illegal activities. Recent months have witnessed multiple crypto crashes, such as TerraUSD, Luna coins, Binance, and FTX, which had significant repercussions. These incidents resulted in substantial losses, erasing billions of dollars from the crypto market in a single day, freezing investor assets, and halting trading and withdrawals. These events underscore the risks associated with investing in cryptocurrencies and highlight the urgent need for regulation.
Recognising the gravity of the situation, governments worldwide have acknowledged the need for action. In June 2019, the G20 members united in their call for a comprehensive global regulatory framework for cryptocurrencies, demonstrating unity and foresight. The objective of such regulation is to effectively address the opportunities and challenges presented by cryptocurrencies. By implementing robust regulatory measures, the safety and stability of the crypto market can be enhanced. When investors have confidence in the integrity of the market, it often leads to increased participation and can contribute to long-term price appreciation.
Global Regulatory Overview
Cryptocurrency regulations vary greatly worldwide. Currently, over a hundred countries have established regulatory frameworks that acknowledge digital assets as legitimate entities. However, approximately 42 countries have imposed implicit bans prohibiting local financial institutions from serving crypto companies.
In addition, the US Treasury has emphasised the significance of implementing cryptocurrency regulations to combat global and domestic criminal activities. In December 2020, FinCEN proposed a new regulation that would require cryptocurrency exchanges and wallets to gather data. This proposed rule would mandate exchanges to report suspicious activity for transactions exceeding $10,000, while wallet owners would need to provide identification for transactions surpassing $3,000. To ensure effective consumer protection and streamlined regulatory oversight, the Justice Department is collaborating with the SEC and CFTC to develop future cryptocurrency regulations.
Likewise, Japan's approach to regulating crypto-assets is outlined in the Payment Services Act, which classifies them as non-fiat currency payment methods and acknowledges them as legal property, though not as legal tender. Cryptocurrency exchanges in Japan must acquire registration and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) laws to operate. These exchanges are also responsible for maintaining comprehensive records and implementing robust security measures to safeguard the interests of their customers and investors.
The current stance of the United Kingdom regarding cryptocurrencies is that they are considered ‘property’. Cryptocurrency exchanges are required to register with the UK Financial Conduct Authority (FCA) and adhere to specific reporting obligations related to Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter-Terrorist Financing (CTF) measures. Profits gained from trading cryptocurrencies are subject to capital gains tax. To mitigate unforeseen losses, selling crypto derivatives to retail customers is prohibited. Notably, in October 2022, a draft bill acknowledging cryptocurrencies as regulated financial instruments received approval from the UK House of Commons. However, it still awaits passage through the House of Lords and royal assent before becoming law.
In addition, June 2022 marked a significant milestone for the digital currency industry within the European Union (EU). EU officials successfully passed the Markets in Crypto-Assets Regulation (MiCA), a groundbreaking legislation aimed at regulating the sector. MiCA primarily focuses on specific categories within the crypto-asset realm, such as stablecoins and crypto-asset service providers. By introducing MiCA, the EU demonstrates a proactive approach towards promoting transparency, stability, and trust in the rapidly evolving domain of crypto-assets.
Challenges in Crypto Regulation
Implementing global regulation for cryptocurrencies presents several significant challenges, including:
- The lack of a unified regulatory framework hampers the development of a cohesive global approach.
- The decentralised nature of cryptocurrencies makes it challenging to establish centralised regulatory control, as they operate independently of traditional financial systems.
- Fast-paced industry dynamics: The crypto industry evolves rapidly, with new technologies and trends emerging frequently. Keeping up with these developments and adapting regulations accordingly is a constant challenge.
- Recovery and asset-tracing difficulties pose challenges for law enforcement and regulatory bodies.
- Stakeholder consensus, including governments, financial institutions, industry players, and investors, can be difficult due to differing perspectives and interests.
- Promoting international cooperation while establishing harmonised regulations is crucial, but it requires overcoming geopolitical and jurisdictional barriers.
- Balancing innovation and investor protection is a delicate balance that regulators must strive to achieve.
- Combating money laundering and illicit activities.
- Uncertainty in creditor distribution in the event of insolvency or bankruptcy poses challenges in terms of ensuring fair and predictable distribution.
Despite these challenges, some countries have made notable progress in establishing favourable regulatory frameworks for cryptocurrencies. For example, Japan has recognised cryptocurrencies as legal means of payment, while Switzerland has emerged as a hub for crypto startups and innovation.
Bridging the Gap
The cryptocurrency world is evolving rapidly, and governments recognise the need to regulate this industry rather than ignore or ban it. Influential figures in the crypto community, such as Charles Hoskinson and Andre Cronje, are also expressing their support for comprehensive regulation. However, implementing effective regulation faces challenges.
One potential challenge is the traditional top-down approach imposed by centralised authorities. To overcome this, it is crucial to establish a two-way communication bridge between financial regulators and crypto players. By fostering an open dialogue and actively engaging with industry insiders, regulators can gain valuable insights and a deeper understanding of the ever-changing crypto landscape. This collaborative effort lays the foundation for regulations that strike the right balance, nurturing innovation, safeguarding investors, and fostering healthy market growth.
Additionally, Gita Gopinath, the Deputy Managing Director of the International Monetary Fund (IMF), views India's upcoming G20 presidency as pivotal for addressing three key issues: debt relief, cryptocurrency regulations, and enhancing climate finance. This highlights the global significance of formulating regulations for cryptocurrencies.
In conclusion, the journey towards tailored and effective regulations in the crypto world is an exciting one. It requires regulators and market participants to work together, shaping a dynamic and sustainable future for digital assets.
Author: Varun Bhatia, Co-Founder of 3NServe.
Disclaimer: The views and opinions expressed in this article do not necessarily reflect the official policy or position of Novum Learning or Legal Practice Intelligence (LPI). While every attempt has been made to ensure that the information in this article has been obtained from reliable sources, neither Novum Learning or LPI nor the author is responsible for any errors or omissions, or for the results obtained from the use of this information, as the content published here is for information purposes only. The article does not constitute a comprehensive or complete statement of the matters discussed or the law relating thereto and does not constitute professional and/or financial advice.