The Decentralised is being Centralised.
The crypto market cap jumped by at least US$250 billion in January, with Bitcoin prices increasing approximately 40% since its low in November. It’s no wonder many investors are more optimistic and bullish in crypto in the new year, especially after the touted long winter and the fiascos that happened in 2022.
However, cryptocurrency as a relatively new asset class despite it being around and trading for more than a decade, has no unifying regulatory framework internationally. This only means that investors could potentially be exposed to unchecked risks, and many other unidentified challenges with such regulation uncertainties. Hence, crypto regulations are needed now more than ever and even more so after FTX’s collapse last year.
Crypto regulation - An ongoing challenge
One prominent example of the ongoing challenges of regulating crypto is the SEC's lawsuit against Ripple Labs which has dragged on for years. The U.S. Security and Exchange Commission (SEC) alleges that Ripple's XRP token is an unregistered security and that the company has been illegally selling it to investors. The lawsuit has been ongoing since December 2020. and has created uncertainty for many XRP investors and price volatility.
Chart credit: https://www.fxstreet.com/cryptocurrencies/news/xrp-price-forecast-2023-ripple-gears-up-for-a-bright-future-if-it-wins-legal-battle-with-sec-202212201536
This case shows the need for clear guidelines on what constitutes a security in the context of cryptocurrencies and even for crypto-stablecoins.
More recently, on February 13th, the SEC made headlines for going after unregistered securities. The SEC issued a Wells Notice to Paxos Trust Company, the issuer of the stablecoin Binance USD (BUSD), labeling the stablecoin as an unregistered security. On the same day, the New York Department of Financial Services ordered Paxos to stop issuing BUSD. Some dismissed the issue as "FUD", a crypto abbreviation for fear, uncertainty and doubt, while others claimed it was an attack on the Binance exchange. These theories on the allegations that BUSD is an unregistered security were examined, alongside some additional ones.
CZ, CEO of Binance, wrote a thread on his twitter summarizing the issue and assured investors that the funds are “SAFU” (safe in layman’s terms). He further commented that Binance does not issue BUSD and is not in any way an owner of the stablecoin and will allow users to trade with USDT on their platform instead. Furthermore, Binance will also be reviewing other projects to ensure their users are insulated from any undue harm given the ongoing regulatory uncertainty.
The potential challenges with cryptocurrency regulations are reminiscent of the early days of the internet, when governments struggled to keep up with the rapid pace of technological change. In the 1990s, many governments attempted to regulate the internet, but ultimately, the decentralized nature of the technology made it difficult to control. This lack of regulation created a fertile ground for criminal activities like identity theft and online fraud. These regulations were often slow to develop and enforce, leading to a patchwork of rules and regulations that varied widely across different jurisdictions.
Likewise, the decentralized nature of cryptocurrencies makes it challenging for governments to regulate them effectively. Cryptocurrencies operate independently of national borders and are not subject to the same regulations as traditional financial assets. This lack of oversight creates opportunities for money laundering, tax evasion, and other illegal activities, and potentially affects the ecosystem and highly regulated nations. In an interview with CoinDesk, European Commissioner Mairead McGuiness commented that crypto regulations are pointless without global coordination.
Different approaches adopted by countries
With the many new developments in crypto regulations from various nations, governments around the world are still figuring out the best practices to regulate and streamline them. Some countries have embraced cryptocurrencies and have created clear regulatory frameworks, while others such as China and Bangladesh have banned them outright.
A law was passed in Russia in 2022 which effectively prohibits the use of cryptocurrencies and NFTs as payment for goods and services within the country, however it is still possible to trade and pledge these assets.
Since the implosion of Terra, the lawmakers in South Korea started working on Digital Assets Basic Act (DABA), a comprehensive legal framework that will provide guidelines for the country’s crypto industry.
In the United States, the regulatory environment is still evolving as seen in the two prime cases above calling for the need of clear regulation guidelines, with different states adopting varying approaches to regulating cryptocurrencies.
Dubai established Virtual Assets Regulatory Authority (VARA), the world’s first specialized regulator for the Virtual Assets sector in March 2022. Just last month, VARA published the Full Market Product Regulations (FMP Regulations) consisting of virtual asset licensing regulations. The regulatory authority plays a central role in the creation of Dubai’s advanced legal framework to protect investors and establish international standards for the Virtual Asset industry governance.
Singapore has been proactive in its approach to regulating cryptocurrencies. In 2019, the Monetary Authority of Singapore (MAS) introduced a regulatory framework for cryptocurrency trading platforms. Under this framework, cryptocurrency exchanges must comply with anti-money laundering and counter-terrorism financing measures. Additionally, exchanges must be licensed by the MAS and meet stringent cybersecurity standards.
Controversies surrounding cryptocurrencies have later on prompted the MAS to re-examine its regulations. In December 2020, MAS announced that it would be imposing new requirements on cryptocurrency exchanges to combat money laundering and terrorism financing. These requirements include enhanced customer due diligence measures and transaction monitoring, notably users had to submit non-custodial wallets to the exchanges as exchanges increased their efforts to link users to their respective crypto wallet addresses. In January 2022, the MAS introduced measures to restrict the marketing and advertising of cryptocurrency services in public areas and disallow cryptocurrency trading being portrayed in a manner that trivializes its risks. Moreover, the lack of clear regulations in other countries makes it difficult to monitor cross-border transactions, and Singapore is vulnerable to the same risks as other financial centers.
Regulatory uncertainties - What’s next?
Undoubtedly, when more countries start to accept and embrace cryptocurrencies, crypto regulations will have to be streamlined worldwide. After the 2022 crypto downturn, we can expect regulators to step up their game in a greater way, particularly to protect the retail investors.
How do professional investors then procure investments into cryptocurrency such as Bitcoin while not having to worry about regulatory risk?
The emergence of properly licensed entities is becoming increasingly critical in the ecosystem. Regulations are essential in an environment when assets like cryptocurrencies are not physical, unlike fiat, gold, and realty property. As such being licensed in a major financial jurisdiction means high standards and checks are met, signaling trust and credibility of the institution.
One possible solution is to invest through licensed fund managers like Fintonia Group, who are subjected to strict regulations and oversight. This ensures that all cryptocurrency transactions are conducted in compliance with relevant laws and regulations, giving professional investors a peace of mind knowing that their investments are safe and secure.