The recent collapse of Terra, the issuer of once the third-largest stablecoin, was a low moment for crypto and put the reputation of the industry in question. Wiping out tens of billions of dollars in market capitalization and garnering unprecedented losses for investors, such a crisis is encouraging regulators to take speedier action in terms of oversight of the digital assets arena.
Globally, countries are taking a broad variety of approaches, with the UK currently playing catch up with some of the jurisdictions, which have been quicker to embrace a more regulated approach. Ultimately the balance that needs to be struck within any framework that is adopted, is between giving investors more protection but still allowing blockchain/crypto businesses to continue to innovate at the pace that has caused such excitement and promises so much.
Globally there is a diverse regulatory approach
The world is very much divided in its approach to the regulation of cryptocurrencies. Typically, it takes its direction in the regulation of financial services from the US, although it is yet to develop a clear regulatory framework for the asset class. However, in March, President Biden signed off a much anticipated Executive Order on Ensuring Responsible Development of Digital Assets, in what was viewed as a concrete acknowledgment of the potential of the cryptocurrency industry.
The order lays out initiatives to study and engage in constructive problem solving around known risks that exist with the legacy financial system, and the new Web3 world. This order will direct agencies to coordinate their regulatory efforts, focusing on privacy, security, financial inclusion, and global competitiveness for the USD. What’s more, very recently, the US introduced the Responsible Financial Innovation Act, which is committed to ensuring that financial innovation does not come at the expense of the consumer. The bill will also review the environmental impact of crypto, which is an important factor in its long-term viability.
Meanwhile, neighboring Canada approved a Bitcoin exchange-traded fund (ETF), and proactively issued guidance requiring local crypto trading platforms and dealers to register with provincial regulators. Just last year, Canada unleashed a clear registration regime for trading platforms that provide custodial services to local clients. This has seen several firms register under the new rules, with the sector experiencing healthy growth in the region.
In Asia and the Middle East, advances are being made too. Dubai issued its first crypto law regulating virtual assets this year. Meanwhile, India has approached cryptocurrency with trepidation, with its Ministry of Finance equating cryptocurrencies to Ponzi schemes. Nonetheless, last year, India took second place out of 154 countries in the crypto adoption index – suggesting the government may have to rethink its attitude.
In Europe, Switzerland has arguably gone the furthest in passing blockchain laws, licensing two crypto banks as far back as 2019, the EU has proposed a wider framework to regulate issuers and service providers dealing with crypto assets in the EU. The European Parliament recently approved a draft of the regulation, which will be consulted with the EU’s executive branch and heads of member states. The new regulation will see the introduction of a European “passport,” enabling non-EU crypto platforms and service providers to apply for a license that will allow them to operate across all EU member countries.
UK finally catching up
After stalling for some time, the UK has finally signaled a move forward with plans to regulate payment stablecoins. An HM Treasury spokesperson commented that such regulation will “create the conditions for issuers and service providers to operate and grow in the UK, whilst ensuring financial stability and high regulatory standards.” The market instability of stablecoins will need to be recognized while the governments begin to develop and implement new rules on crypto assets.
The Treasury recently said that beyond stablecoins, it planned to consult on regulating a range of digital currencies – although the exact details were ambiguous. Then-Chancellor Rishi Sunak said: “We want to see the [cryptocurrency] businesses of tomorrow – and the jobs they create – here in the UK, and by regulating effectively, we can give them the confidence they need to think and invest long-term.”
Around blockchain technology, the government will look into the use of distributed ledger technology (DLT) in financial markets, contemplate using DLT for sovereign debt instruments and create a financial markets infrastructure sandbox to allow companies to test DLT in the operation of markets.
Reducing financial risk
As more and more countries look to regulate crypto markets, there is a common thread in their approach – reducing financial risk.
Innovation can equate to exciting growth and prosperity when it runs smoothly, but there are inevitable consequences when issues arise, and the crypto market should be realistic about how much independence they can have in a growth environment.
In order for the new regulations being mooted to be effective, there need to be stringent measures in place – such as prior authorization for issuers to operate, capital and liquidity requirements, and accounting and auditing obligations. In turn, this will provide consumers with the confidence to move forwards and continue to adopt crypto as an alternative means to traditional finance options.
Fine balance needed to deliver growth with governance
Regulatory clarity and appropriate governance are essential if we want to see broad-based mainstream adoption of crypto infrastructure in commerce and in the financial markets. In addition, greater regulatory guidance, if well targeted, could help limit speculation on crypto assets.
Less speculation could lead to greater investor confidence, which could draw in more long-term investors who have so far not been attracted to a highly speculative, volatile crypto market.
Overall, it’s clear that globally, regulatory compliance is still a work in progress. Yet whatever further steps are taken, they should have at their heart a simple principle, probably best articulated by US Treasury Secretary Janet Yelland in a recent speech, where she said: “our regulatory frameworks should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and economy.”
It’s this balance, which regulators need to get right, that will have perhaps the strongest sway over the future prospects of a sector that has dazzled many but still disturbs others.
