Calls for better cryptocurrency regulations intensified after the FTX crash in November.
The collapse of what had been the second-largest crypto exchange was surrounded by allegations of mismanagement, fraud, and lack of regulatory oversight.
The scandal rocked the reputation of cryptocurrency businesses. The contagion continues to spread, leading to company and project closures, frozen user accounts, financial losses, and crypto job cuts.
Cryptocurrency Regulations are Needed
The FTX experience, plus the failure of other crypto firms, rampant fraud, and continued suspicion about the washing of criminal funds, intensified demands for cryptocurrency regulations.
I wasn’t surprised, but I was disappointed. I understand that DeFi purists object to state scrutiny because of cryptocurrency’s ‘decentralised’ nature. However, I also understand
that to grow the industry, we need to win trust and give reassurance. Strong but practical regulation can help us achieve that.
I also believe that scandals like FTX set back the industry, destroying any confidence we may be building among new investors, especially institutional investors.
That’s why I have long said we need cryptocurrency regulations and welcome the new voices to this cause.
Where are We?
As demands for better cryptocurrency regulations grow, we should pause to look at where we have been and where we are now.
The keen eyes of regulatory bodies have shown a growing interest in crypto over the last few years.
Increased adoption, resultant volatility, money laundering, and fraud have all brought this attention.
Cryptocurrency is becoming increasingly influential. As it forms a greater part of the global financial structure, its weaknesses mean there is an increased risk to economic stability worldwide.
This is amplified by the rate of technological development and the seeming lack of risk management.
Last year was one of the worst for crypto reputation. A massive $3.5 billion of customer funds were lost to frauds, hacks, scams, or just plain mismanagement. This is an increase of 32% on the 2021 figure.
This threat to market integrity reveals the need for an urgent and comprehensive global regulatory approach to further enhance consumer protection and confidence.
Broad approach
While institutions push for international cooperation, it is at the local level that the details really matter.
With each country or jurisdiction at different points along the regulatory journey, some kind of global coordination seems almost impossible. Therefore, a broad guideline is probably needed to tie each country to a larger regulatory framework.
According to Coinbase CEO Brian Armstrong, any regulatory clarity must consider three important factors:
- The provision of clarity for centralised entities.
- The preservation of the decentralised/distributed ethos.
- The ensuring of a level playing field across all global exchanges.
If all three of the above are maintained, then there is every chance the crypto industry will develop the regulation it requires to grow.
However, Armstrong pushes further. He argues that regulation should be pursued quickly rather than spending decades thrashing out something comprehensive and perfect. To achieve this, the industry as a whole – companies, regulators, policymakers, and, indeed, customers – must move together in harmony.
This three-pronged approach is a simple yet effective starting point for what many deem one of the most complicated questions in international business. How do you draw effective regulation for an industry that has global reach and is also decentralised in nature?
The essence of crypto derives from the opportunity this technology presents as a chance to offer an alternative to overbearing centralised control. Therefore, overbearing diktat from global players such as the IMF, the WEF, or the BIS may not be the answer.
Finding the right balance of universal policy on cryptocurrency regulations isn’t going to be easy. With this in mind, Brian Armstrong’s approach makes a little more sense.
Financial landscape
Many countries are currently researching, drafting, consulting, and negotiating to bring digital assets under the umbrella of existing financial policy. However, the sheer speed and volume of innovation, terminology, and novel use case make this process almost impossible.
Crypto is redefining the financial landscape and requires appropriate legislation to define it correctly.
With such vast differences between jurisdictions, it is practically impossible to get a clear picture of the state of global crypto regulation today. However, it may be beneficial to take a closer look at four of the most advanced nations to do so – the Bahamas, Gibraltar, Switzerland, and Japan.
All four countries have comprehensive legislation in place governing the four most concerning areas of regulation:
- Providing a regulatory framework.
- Anti-money laundering and counter-terrorist financing.
- Travel rules.
- Rules concerning the use and issuance of stablecoins.
Just four of 195 countries have sufficient regulations in place to govern digital assets. This is clearly not enough. Although many other nations may be working hard to commit ink to paper, we still have some way to go.
The Howey Test
Many ‘industry experts’ believe that a completely new version of the well-known Howey Test is required before digital assets can be viewed as a legitimate investment vehicle.
The Howey Test was developed in 1933 by the US Securities and Exchange Commission in an attempt to determine whether a transaction qualifies as an ‘investment contract’ or not.
This simple test has become the cornerstone of the global investment market. While applicable in the traditional financial world, it doesn’t quite hit the mark when applied to cryptocurrency. New standards of measurement are required.
Cryptocurrency Regulations – Conclusion
With market trends shaping local frameworks, cryptocurrency regulations must be broad-reaching and flexible to change. Indeed, with many traditional financial management organisations looking to enter the space, any regulatory guidelines must be flexible enough to allow for innovative crypto start-ups alongside established money managers.
There is much still to be done. However, it is evident that the financial industry is undergoing radical change. Although regulatory timeliness differs worldwide, according to Laura Talvitie, Senior Manager, Digital Assets Regulation at Price Waterhouse Coopers, the ‘direction of travel is (certainly) clear’.
