Smart regulation is needed to rebuild confidence in crypto

The crypto industry had a historic 2022. Between macroeconomic headwinds, a bear market, insolvencies of major exchanges and providers (such as FTX and BlockFi), which was preceded by the staggering collapse of stablecoin TerraUSD, the global crypto market capitalization fell to $858 billion in early December from peaks at $3 billion.

It is easy to lose sight of the big picture on the back of a year characterized by so many challenges. Around 10% of people around the world own digital assets. Crypto and blockchain technologies have proven their value in addressing real-world challenges for millions in financial services and beyond.

Growth in blockchain technology is also set to become a core differentiator for economies and a key measure of international competitiveness in the next decade to attract foreign direct investment, cultivate innovation and create jobs. Investor appetite and sentiment around the technology’s potential clearly underpin this vision.

The 10 global crypto and blockchain venture capital funds raised over $12.5 billion in 2022, making it a record year for fundraising activity in the industry despite a noticeable slowdown in the second half of the year. The fall follows a robust first half of the year and reflects the more significant and sustained year-long setbacks in other sectors that were initiated by the broader macroeconomic and geopolitical environment.

Crypto seems to be at a regulatory tipping point in many places around the world. Governance, consumer protection and security remain top concerns, understandably highlighted by recent events and/or lingering misconceptions surrounding the technology.

Financial stability and integrity are also important to regulators. Although cryptoassets make up only a small portion of the global financial system’s assets, with a total market capitalization of less than $1tn in June 2022, their rapid growth makes a strong case for significant regulatory attention.

At this crucial time, the right balance is essential to allow responsible innovation and growth. A regulatory framework for digital assets should:

• maximize user protection and eliminate bad actors
• favoring simpler technologies that deliver tangible solutions to the most pressing needs
• provide clarity and avoid duplication or conflict with other regulations
• adopt a proportionate and risk-based approach as the industry and technology continue to mature and
• create a level playing field to enable world-changing innovation.

The backdrop of challenges and rapid growth made 2022 arguably the busiest year yet for crypto policymaking, accelerating the need for regulatory clarity to protect consumers. The industry saw a multitude of global regulatory and legislative developments, as well as standard-setting activity and industry initiatives.

The European Union published its Markets in Crypto-Assets regulation, the first and most comprehensive digital asset regulation to date – although it won’t come into effect for another year. In the United States, the work initiated by the White House in March 2022 resulted in the United States’ first ever comprehensive framework. The UAE, Saudi Arabia, Bahrain and most of Brazil have also introduced crypto regulations.

In addition, much guidance has been provided by global standard-setting bodies in various areas, such as the Financial Stability Board’s framework, the International Organization of Securities Commissions’ roadmap, the Financial Action Task Force’s guidelines for virtual assets and the Basel Committee’s recommendations. By 2023, there will be much rapid movement by countries to implement these proposals. There will also be a lot of focus on areas that were left out by MiCA and other frameworks, such as decentralized finance and non-fungible tokens.

Exchanges around the world have also been proactive and quick to launch their own voluntary initiatives to reassure consumers, increase transparency and (re)build trust in the ecosystem. Examples include publishing wallet addresses, proof of reserves, and launching mining assets.

With the right guardrails in place, Web3 can improve the lives of millions of people by transforming financial services and more – but only smart regulation and serious industry effort can (re)build the trust needed to make it happen.

Rana Kortam is Director of Global Public Policy at Binance.

This article was originally published in the Digital Monetary Institute Annual 2023.