The popularity of blockchain-based assets is rocketing all over the world: the cryptocurrency market cap is already over $1 trillion and is expected to grow. Many large economies are exploring digital ledger technology, the use of stablecoins in retail, and even launching their own Central Bank Digital Currencies (CBDC).
Along with this rapid development, regulatory attention paid to the cryptocurrency sector of modern digital finance is increasing worldwide. High volatility of assets and an increased number of fraud and money laundering cases require action. Officials strive to create a supervisory system to ensure consumer protection.
But it’s not only general asset popularity that is interesting. Regulators and lawmakers are investigating the causes of crypto company collapses. For example, after FTX went bankrupt, FINRA began collecting information about crypto marketing methods, which could also lead to a new policy. The US House Financial Services Committee held a hearing on FTX in late 2022.
We have already discussed the current trends in crypto asset regulation in different countries for 2021-2022 in the Grapherex blog article. Today we will focus on the governmental plans for the next few years and talk about the main ideas of regulators concerning global crypto management.
Regulatory Authorities Will Sue
Regulators have been litigating individuals and firms from the crypto sector for a long time. The US Securities and Exchange Commission (SEC) initiative was to sue Kim Kardashian for fraud with Ethereum Max in 2022. The Ministry of Finance agreed with BitPay to allow people in sanctioned countries, North Korea and Iran, to use its platform, and in March, the DOH created a task force to enforce sanctions against Russia.
The US government is likely to continue its litigation in 2023, and we will see additional recommendations on sanctions related to cryptocurrencies in the near future. Joe Biden has also had some influence on crypto asset regulation since March 2022, when he required federal agencies to report on the industry.
The coming year will be full of litigation. In August 2022, sanctions against Tornado Cash were added. The SEC will continue its case against Ripple Labs, a company which is likely selling XRP as unregistered securities. Bankruptcy courts will consider the cases of FTX, Three Arrows Capital, Voyager and Celsius.
Politicians and Regulators Will Ponder New Laws
Preventing another collapse is one of the goals of government agencies in numerous countries. In the UK, the Bank of England has called for continued regulation of crypto activities and organisations. The new regulation will ensure that the stablecoins comply with the money standards of commercial banks.
In the US, Treasury Secretary Janet Yellen called for separating customer funds from company assets. Then, the newly introduced DCCPA law (Digital Commodities Consumer Protection Act) was designed to protect people from another Celsius or Voyager case by establishing strict rules regarding assets. If a crash occurs, the Commodity Futures Trading Commission (CFTC) will litigate those who violate the rules. However, there is a downside to this control: according to critics, restrictions can make it difficult for decentralised finance (DeFi) protocols to work. The CoinDesk article stated that this threatens the unique properties of DeFi – the composability and the absence of restrictions.
Perhaps the introduction of new laws is not the way forward. We already have very strict laws to protect investors and consumers. Lisa Braganca, a former SEC branch chief, believes that potentially the new rules will come from the SEC and the CFTC. There are serious doubts about whether Congress wants to step in instead of letting the SEC and CFTC sort this out.
The SEC has called on several regulators to cooperate in developing new policies. Critics argue that the SEC did not do enough to prevent FTX from fleeing with customer funds, and the collapse may prompt the regulator to reconsider its laws. Hal Scott, Harvard Law School professor, and John Gulliver, director of research at the Capital Markets Regulation Committee, argued in an article in Financial News that SEC accounting rules dissuaded reputable large banks from owning crypto assets.
Stablecoin Legislation Will Change
The 2022 US Presidential Administration report on stablecoins proposed regulation for them and stated the possibility of introducing a digital dollar. In 2023, there may finally be some change in the key bill on stablecoins.
Patrick McHenry, one of the sponsors of the bill that would allow the Federal Reserve to license stablecoin issuers, described this as insufficient due to the ambiguity over who should regulate the issuers of stablecoins. If it is the Federal Reserve, stablecoin issuers will be able to borrow money or get insurance coverage from the central bank.
Europe Will Introduce Landmark Crypto Regulation
The Markets in Crypto-Assets (MiCA) Regulation initiative refers to the first cross-jurisdictional supervisory framework for crypto. It is expected to come into force and be ratified by the European Parliament. The law was supposed to be adopted in early 2023, but BNP Paribas believes that its adoption will be postponed until the second half of 2024. The MiCA will become the main document on crypto asset regulation in the EU. In June 2022, the Council and the European Parliament approved the MiCA, which included requirements for CASP to protect consumers.
Law firm Akin Gump noted that the legislation is one of the first attempts to globally and comprehensively regulate cryptocurrency markets. The bill covers corporate reporting, money laundering, environmental protection, and consumer protection. It would require stablecoin issuers to have sufficient reserves to prevent collapses and would require crypto miners to disclose information about energy consumption. Moreover, the exchanges will have to be controlled by a financial regulator from an EU member state.
The annual Crypto Policy Forum in Austin, Texas, gathers leaders of the government and the crypto and blockchain community to determine where the affairs of the state should be within the framework of the Web3 economy. The forum explores the development of central bank digital currencies (CBDC), regulation of stablecoins, and rules for combating money laundering and terrorism. Participants strive for an international consensus on how to optimise the regulatory approach, protect users and increase trust in the digital asset industry.
The Right Rules Will Provide a Space for Innovation
Over the past few years, crypto assets have moved from niche products to a more widespread presence as speculative investments, hedging against weak currencies and potential payment instruments. An impressive but volatile market, the growth of the market capitalisation of crypto assets and their penetration into the financial system have led to increased efforts to regulate them.
The failures of crypto issuers have also added incentive to the desire for regulation. Monitoring crypto markets is challenging because the data is heterogeneous, and it is difficult for regulators to keep track of thousands of participants, but it is surely possible to open space for innovation while protecting consumers and making the system transparent.
Terminology Will Be Discussed to Establish a Global Standard
The situation is complicated even more by the fact that the terminology used to describe many different activities, products, and stakeholders is not globally consistent. The term “crypto asset” itself refers to a wide range of digital products that are privately produced and can be stored and sold using digital wallets and exchanges.
There are different approaches; namely, some regulators may prioritise consumer protection, while others – security and reliability or financial integrity. And there are a number of crypto actors like miners, validators and protocol developers that are not covered by traditional financial regulation. Products and participants are difficult to identify due to the underlying technology, so this sphere is likely to face change and adoption to become clearer and more understandable.