Why regulation is key to the crypto industry

Tom Stuart, CEO of Nous Systemsa Web3 marketplace for investments.
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The recent collapse of the Terra, the issuer of what was once the third largest stablecoin, was a low moment for crypto and tarnished the reputation of the industry in question. Wiping out tens of billions of dollars in market capitalization and causing unprecedented losses for investors, such a crisis encourages regulators to take swifter action in overseeing the digital asset arena.

Globally, countries are taking a wide variety of approaches, and the UK is currently playing catch-up with some of the jurisdictions, which have been quicker to embrace a more regulated approach. Ultimately, the balance that must be struck within any framework adopted is between giving investors more protection, yet allowing blockchain/crypto companies to continue to innovate at the pace that has generated so much excitement and promise.

Globally, there is a diverse regulatory approach

The world is very divided in its approach to cryptocurrency regulation. Generally, it takes its cue from the regulation of financial services from the United States, although it has not yet developed a clear regulatory framework for the asset class. In March, however, President Biden signed a long-awaited Executive Order to ensure the responsible development of digital assets, in what was seen as concrete recognition 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 USD. In addition, the United States quite recently 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), issuing proactive guidance requiring local crypto trading platforms and dealers to register with provincial regulators. Just last year, Canada launched a clear registration regime for trading platforms that offer custody services to local clients. This has seen more companies register under the new rules, and the sector is experiencing good growth in the region.

In Asia and the Middle East, progress is also being made. Dubai issued its first crypto law regulating virtual assets this year. Meanwhile, India has approached cryptocurrency with trepidation, with its Ministry of Finance equates cryptocurrencies with Ponzi schemes. Nevertheless, last year, India took second place out of 154 countries in the crypto adoption index – suggesting that the government may need to rethink its stance.

In Europe, Switzerland has arguably gone the furthest in enacting blockchain laws, licensing two cryptobanks as far back as 2019, the EU has proposed a broader framework to regulate issuers and service providers dealing with cryptoassets in the EU. The EU Parliament recently approved a draft of the regulation, which will be consulted with the EU’s executive authority and leaders of the member states. The new regulation will see the introduction of a European “passport”, which will enable non-EU crypto platforms and service providers to apply for a license that will allow them to operate across all EU member states.

Britain is finally catching up

After stalling for a while, the UK has finally signaled progress with plans to regulate stablecoins. A spokesperson for HM Treasury commented that such regulation would “create the conditions for issuers and service providers to operate and grow in the UK, while ensuring financial stability and high regulatory standards.” The market volatility of stablecoins needs to be recognized as authorities begin to develop and implement new rules for cryptoassets.

The Treasury recently said that beyond stablecoins, it planned to consult on the regulation of a range of digital currencies – although the exact details were ambiguous. Then-Chancellor Rishi Sunak said: “We want to see [cryptocurrency] tomorrow’s businesses – 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 at the use of distributed ledger technology (DLT) in financial markets, consider using DLT for sovereign debt instruments and create a financial market infrastructure sandbox to allow companies to test DLT in the operation of markets.

Reduce 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 things go smoothly, but there are inevitable consequences when problems arise, and the crypto market should be realistic about how much independence they can have in a growth environment.

For the new regulations to be effective, there must be strict measures in place – such as prior authorization for issuers to conduct business, capital and liquidity requirements and accounting and auditing obligations. In turn, this will give consumers the confidence to move forward and continue to adopt crypto as an alternative to traditional financing options.

Fine balance required to deliver managed growth

Regulatory clarity and appropriate governance are essential if we want to see broad-based mainstream adoption of crypto infrastructure in commerce and in financial markets. In addition, greater regulatory guidance, if well-targeted, could help limit speculation on cryptoassets.

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 is clear that globally compliance remains a work in progress. Whatever further steps are taken, they should have a simple principle at their heart, perhaps best articulated by US Treasury Secretary Janet Yelland in a recent speech, in which she said: “Our regulatory framework should be designed to support responsible innovation while managing risks – particularly those that can disrupt the financial system and the economy.”

It is this balance, which regulators need to get right, that will perhaps have the strongest influence over the future prospects of a sector that has dazzled many, yet unsettles others.
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Learn more:
– US Inches Towards Bitcoin & Ethereum Accounting Clarity, Leaving NFTs and Stablecoins for Later
– Paraguay’s President Crushes Bitcoin and Crypto Mining Bill with “Total Veto”

– Iran passes bill to authorize use of crypto for imports
– South Korea’s central bank demands an end to the ICO ban

– Taliban frees arrested crypto dealers, bans crypto in Afghanistan
– Brazil’s Senate seeks to hire crypto and blockchain experts to advise on policy