By Ben Richmond, CEO at Cube
The dramatic fall of the stablecoin, Terra (CRYPTO: LUNC), earlier this year has shaken the industry and raised questions about the permanent viability of crypto markets. Many are seeing the movement as a much-needed market correction, rather than a ‘crash’, which only serves to highlight the insuppressible need for regulatory oversight. In the past year the volatility of the crypto market means the burgeoning crypto ecosystem can no longer fly under the radar – regulation is needed – and so we stand at a crossroads. The mainstream is calling, as crypto markets are becoming inextricably interconnected with other components of the financial sector. But can this emerging currency be truly considered ‘mainstream’ without mainstream regulatory protections?
Government and industry leaders from around the world are moving to propose and enact regulatory frameworks, with regulators publishing 9,872 pieces of crypto-related content over the course of 2021 and on course to approach 14,000 in 2022. However, they face imposing challenges in resolving a series of contradictory forces: innovation versus regulation, decentralized finance versus centralized oversight, and collaboration against fragmentation. Assimilating a new financial product of this complexity into existing financial systems requires careful consideration, yet regulators are moving fast. We must review the current global landscape of crypto regulations to consider what might be the best approach – one that manages the risks of cryptocurrency while simultaneously creating a regulatory utopia that helps realize its enormous potential.
Global crypto landscape hamstrung by fragmented patchwork of regulatory policies Crypto regulations are suddenly moving at a rapid pace, with over 15,000 regulatory issuances published in the last four years. Despite the speed of regulatory action, the global regulatory landscape remains badly fragmented. A lack of cohesion and collaboration across borders and state is creating complexity for the compliance team and a waterbed effect where people move around from country to country depending on the regulations and restrictions. Further muddying the possibility of cross-border cohesion are the differing regulatory priorities, including some rightly concerned with the environmental impact of crypto mining. El Salvador was the first nation to declare crypto a legal tender in October 2021, proven to be a highly questionable move. Brazil passed its first bill to regulate its crypto market at the end of April 2022. Meanwhile, as it did with GDPR with regards to consumer data privacy, the European Union has taken the lead in designing the most comprehensive crypto regulations to date, known as the Markets in Crypto Assets Regulation (MiCA), which was agreed upon at the end of June.
Despite the EU’s ambitious proposal, North America appears to be talking about cryptocurrency far more and is responsible for 51% of all crypto-related issuances, with Europe accounting for 32% according to a new CUBE study. The US alone has a uniquely fragmented regulatory system. A bipartisan action to set crypto standards at the federal level – the Responsible Financial Innovation Act (RFIA) – was introduced simultaneously with New York becoming the first state financial regulator to set prudential standards for the licensing, issuance and custody of digital assets. Further complicating the issue is the contentious debate between lawmakers and stakeholders on whether crypto assets are commodities or securities, although the RFIA aspires to define most crypto as commodities, assigning the majority of jurisdiction to the CFTC. Conversely, cryptocurrencies have so far been captured more so by securities laws worldwide, as our data confirmed, securities-related issuing bodies are doing more than commodities-related.
Striking the right balance The borderless nature of cryptocurrency runs contrary to the often-localized nature of financial regulation. Crypto was invented to democratize access to finance and create a fluid financial system with global connectivity and without barriers. So how can regulators in individual jurisdictions create a unified regulatory system that works? Despite seeing conversations that suggest a willingness to coordinate for crypto, our data shows little evidence of concrete action. Still, the activity within international bodies suggests a global approach is at least under consideration.
Generally, the government is looking to increase competition and protect the market, while regulators move to mitigate losses and increase investor protections. Conventional wisdom suggests that regulation could thwart innovation, though this idea is swiftly becoming outdated. A market without regulation will soon become obsolete and deplete in value, in which case there will be no motivation to innovate. While some jurisdictions have taken pro-innovation stances by imposing commercially attractive regulatory standards, others have pursued a more critical approach. We must strike the right balance to move forward.
Clearing muddied crypto regulatory waters with cooperation Regulatory activity shows no signs of slowing. The arrival of crypto regulations is a certainty. Leaders face the fundamental question of whether to reinvent the wheel or expand existing regulations to fit the nuances of cryptocurrencies. Adapting the existing perimeter is currently the preferred option, however they must be cautious to avoid shoehorning a highly advanced technological ecosystem into a clunky legacy framework. Officials agree that regulators must work with the crypto and DeFi industry to create new regulations – or even to implement old. Regulators will likely act swiftly to stretch existing regimes to cater for cryptocurrencies. In turn, they may use USD-backed stablecoins as a blueprint for new regulation to come.
While we have seen messaging from regulators about their intentions to work together, the data shows little collaboration within the regulation itself. Instead of secrecy, regulators should be working together and sharing efforts and insights, learning from each other to create a holistic framework for crypto’s future success. It is incumbent on them to overcome these obstacles to target cryptocurrency at a global level, where sharing knowledge across borders is the priority.
At this moment of inflection, time is of the essence before the volatility of crypto bleeds into global financial stability. We all seek the same endgame of a sort of “cryptopia” in which we balance managing the risks of crypto with optimizing innovation and building financial inclusion.
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