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Crypto Regulation or Administration

Reading Time 5 minute read


Technology, Media & Telecommunications Bulletin

Regulation and transparency have always been seen as a fundamental requirement in order to legitimize cryptocurrencies and crypto-exchanges. The crypto sector is currently viewed by many as the digital “Wild West.” The fear that cryptocurrencies and crypto-exchanges act as a medium for financial crimes, such as money laundering, has always been prevalent in the minds of investors and regulators alike.

The FTX saga will have done nothing to quell those fears. In light of the revelations regarding FTX’s balance sheet, lack of transparency and bankruptcy filings, the userbase, including a number of pension funds, is currently unable to withdraw funds from the platform leaving them questioning when, or if, they will ever see those funds again. The fallout on both an institutional and retail level has been huge with investors starting to pull back from the crypto-market and advising caution going forward. While FTX has almost certainly set the development and progress of the crypto sector back significantly, it has sparked renewed and increased calls for tighter and more transparent regulation to the space.

Prior to the FTX meltdown, international regulation in the crypto space was, and is, largely un-unified and is ultimately still being developed. For example, the UK’s crypto regulation consists of a Financial Conduct Authority (FCA) registration requirement for all cryptocurrency exchanges, providing services to UK users, for the purposes of money laundering prevention. The UK also requires financial regulations for cryptocurrencies if they fall under the FCA’s regulatory sphere established by the Financial Services and Marketing Act, the UK’s Anti Money Laundering regime, the Payment Services Regulations 2017 and the Electronic Money Regulations. As such, in practice, assets like e-money tokens are regulated but exchange and utility tokens are not. While greater levels of regulatory oversight are being considered and proposed, most recently through an amendment to the Financial Services and Markets Bill (currently being approved by parliament), regulators are ultimately playing catch-up.

In the US regulation is treated differently. The sale of cryptocurrencies tend to only be regulated if the sale amounts to a sale of a security under state or federal law, is considered money transmission under state law or facilitates a money service business. The Securities and Exchange Commission generally has regulatory authority over the issuance or resale of any token that constitutes a security, with the Commodity Futures Trading Commission also being granted regulatory powers. However, each state has their own laws, referred to as blue sky laws, which are not always aligned with federal law. This can at times cause confusion, resulting in regulators being unable to produce a workable or transparent framework for dealing with and handling cryptocurrencies. Again, like the UK, the US has produced an Executive Order in relation to ensuring the responsible development of digital assets. While a positive step, regulatory change has been slow. That lack of speed has contributed to entities such as FTX going unchecked and has certainly slowed the pace at which regulatory bodies can police and punish illegal activities such as money laundering.

In addition to the lack of regulatory unity, as has been noted by the International Monetary Fund, terminology used to describe the many different crypto related activities, products and stakeholders is not globally harmonized. This can create further uncertainty and disharmony between jurisdictions trying to effectively regulate cryptocurrencies and crypto-exchanges. In the wake of FTX, what the space requires is more robust regulation alongside the harmonizing of terminology, a sentiment shared by Binance CEO Changpeng Zhao, who has called for “new but stable and clear” industry regulations.

What we are starting to see in the UK, no doubt spurred on by FTX, is an understanding by law-makers that current regulatory controls and measures are not targeted or clear enough. The amendment to the Financial Services and Markets Bill, currently with parliament, aims to give the FCA powers to regulate not only stable coins, but also promotions for all crypto assets, and outlaw companies that are not authorized to operate in the country. This update to the law will move the UK more inline with the European Union’s stance on crypto assets. While certainly a positive step, what the industry likely needs to see is greater clarity and transparency regarding the rules and regulations, designed to protect consumers and investors, as opposed to heavier handed regulations and enforcement practices.

Further to this, despite the historic sentiment of crypto companies and exchanges being anti-regulation, in practice this has not necessarily been the case. A growing number of companies have in fact been working and or speaking with law makers and regulators in order to bring greater transparency, clarity and sensible regulation to the space. Companies are starting to see the need for more robust and clear regulation if they are to alter the current negative public opinion and add a greater level of legitimacy to the industry. Looking at the UK government, in order to facilitate clear and transparent crypto regulation they have created entities such as the Crypto-assets Taskforce. The taskforce will look to speak with companies and industry stakeholders, compile the relevant information and advise the government on crypto centric regulation along with the risks and benefits posed by crypto-assets and distributed ledger technology.

In order for cryptocurrencies and exchanges to succeed and develop in the long term there needs to be an appropriate level of regulation and transparency, as well as an increased focus on self regulation, industry codes of conduct and best practice. On both an institutional and consumer level the appetite and desire for cryptocurrencies are clear for all to see. While recent developments have knocked market confidence and trust in the sector, the renewed calls for regulation may help to rejuvenate a sector rife with controversy and stamp out illegality. The task for law makers and regulators is continuing to propose and implement regulations that add a greater degree of transparency to the space. Greater transparency will go a long way to alleviating investor fears in light of FTX and will help to solidify cryptocurrencies as the disruptive technology they were always touted to be. 

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