The global challenge of crypto regulation

The crypto world runs 24/7 and has no borders, but it is not a monolith. However, the rules can be used that way. And that creates a challenge.

The big picture: “Law is jurisdictional, but crypto is not,” Mitzi Chang, a partner at Goodwin who also serves as co-chair of its fintech and digital currency and blockchain technology practices, told Axios.

Driving the news: The Financial Stability Board (FSB), the global watchdog that aims for consistent application of crypto rules, last week proposed an international framework in an effort to “promote the consistency and comprehensiveness of regulatory, supervisory and supervisory approaches.”

Why it matters: While it is uncertain whether the FSB’s proposal will lead to any meaningful change in each country’s independent rulemaking efforts, it is remarkable that they care at all.

• “They think crypto is important enough to have these conversations,” notes Chang.

Context: Indeed, when the FSB refers to this year’s “turmoil,” the collapse of Three Arrows Capital, Terra, and other events come to mind.

Details: The FSB’s framework was rooted in “same activity, same risk, same regulation.”

• That is to say: “Where crypto-assets and intermediaries perform a similar economic function to one performed by instruments and intermediaries in the traditional financial sector, they should be subject to corresponding regulation,” the proposal states.

Between the lines: To Chang, those words were evocative of Gensler’s position that existing securities laws should apply to crypto.

• “To me, I don’t see what’s the same. This is 100% a new way of doing things,” says Chang.
• “Like in the US applying decades-old securities laws to something new – we have to make sure that [complying to the rules] can operationally work, that it can actually be done.”

Flashback: Recall Chairman Gensler’s recent speech referencing Joseph Kennedy and the rise of the SEC in the early 1930s.

• He said: “Nothing about the crypto markets is inconsistent with the securities laws.”

Yes, but: As influential as the FSB is as an advisory group, there is no regulatory or enforcement authority to ensure that its recommendations are followed.

• The FSB will finalize its proposed recommendations by mid-2023.

• Again, these are “non-binding” and any member can opt out. In the meantime, they are asking for public comments until December.

What’s next: Several members of the G20 group are already putting together their own rules for digital assets and may have them finalized before the FSB finalizes its own guidelines.

• “From a timing perspective, it is certainly possible that some G20 countries are ahead of any final recommendations from the FSB,” says Chang.

Crypto companies pick and choose jurisdictions to operate in now, but consistency is likely to be welcomed by the industry.

• “Many in the industry would like consistent rules and regulations given the operational difficulties of today’s patchwork of regulations where the same product in two different countries is treated differently, or it is unclear how it is treated,” explains Chang.

The intrigue: However, countries may try to promote industrial growth, which may mean more relaxed rules in some areas versus others.

• “There will likely always be some form of regulatory arbitrage in any industry, so it would not be surprising that some countries might want a lighter or different regulatory approach,” says Chang.

The bottom line: It’s the spark. “It’s hard to affect change if everyone doesn’t participate,” Chang said.