Published May 12, 2022
By Qredo Team
Crypto Regulations Simplified
The pace of regulatory activity around the cryptoasset industry has picked up substantially in 2022, with many countries moving to define their rules for the market.
The development of the sector along with an increasing urgency from governments to define a coherent framework for it have supercharged the discussion, and we can expect a flurry of new rules before 2022 is out.
Here, we break down 5 of the most important regulatory issues in crypto and explain why they matter for the industry.
Getting to Grips with the Travel Rule
Why is the Travel Rule important?
The expansion of the Financial Action Task Force’s (FATF) Travel Rule to encompass Virtual Asset Services Providers (VASPs) is set to be one of the crypto industry’s biggest compliance challenges.
The regulation requires VASPs to provide identifying information for the originators and beneficiaries of digital asset transactions, including personal information such as names, physical addresses, and national ID numbers.
For firms such as exchanges with thousands or even millions of users, that entails a significant compliance burden, as well as putting the responsibility for maintaining adequate Know Your Customer (KYC) procedures and Anti-Money Laundering policies firmly in the hands of the industry.
When does it come into force?
The Travel Rule was first introduced by the FATF in 2019, and expanded to include VASPs in October 2021.
FATF President Dr Marcus Pleyer:
“Failure to implement the rule has real consequences, giving criminals and terrorists the green light to use virtual assets to launder illegal profits, knowing they’ll get away with it. So I urge G20 countries to implement the FATF Standards, including the travel rule requirements, as soon as possible. Effective AML rules are also crucial to ensure proper oversight of global stablecoins.”
Regulatory jurisdiction – Who owns US crypto regulation?
Why does US regulatory jurisdiction matter?
As one of the world’s most important financial centers and a standard setter for global regulation, how the crypto market is regulated in the US will have widespread implications for the development of DeFi.
The country had adopted a fractured approach to handling crypto, but in recent months a more targeted approach has emerged spurred by an executive order from President Joe Biden urging the various regulatory agencies to form a coherent strategy.
The Securities and Exchange Commission (SEC), the body charged with regulating US securities, has adopted a more stringent approach to the market under Chair Gary Gensler, while the Commodity Futures Trading Commission (CFTC) has made its own claims to jurisdiction of trading in the asset class.
Add that to moves by the US Treasury, The Office of the Comptroller of the Currency and other agencies, and the picture of who has the final say over crypto regulation in the country becomes increasingly blurred.
A push is being made to construct a clearer framework, but the issue still has some way to run as the various regulators all make their pitch for control over DeFi.
When does it come into force?
The timeline remains uncertain, but it is clear that US agencies are making strides towards a more coherent crypto strategy.
The Biden executive order added impetus to the process, and now the pace is picking up with the various agency chiefs making public statements about how crypto should eventually come under regulation.
That said, with mid-term elections coming up later this year, crypto may be put on the backburner as other political priorities come to the fore.
White House crypto statement:
“The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.”
“And, it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness.”
UK Opens Up to Crypto
Why is it important?
The UK hosts one of the world’s most preeminent financial and technology hubs in London, but the country has not proved a fertile ground for the growth of Web3.
The approach of the UK government to crypto over the past few years has been ambivalent at best and outright hostile at its worst, with many firms originally based in the country upping sticks to more welcoming jurisdictions.
A slew of announcements in the first part of 2022 however seem to have begun to turn that tide, with the Chancellor Rishi Sunak announcing efforts to create a UK stablecoin and a national NFT created by the Royal Mint.
The Financial Conduct Authority (FCA) has sent more mixed signals, on the one hand convening its first ‘CryptoSprint’, gathering the country’s market participants and interested parties to discuss the emerging crypto regulatory framework.
On the other hand, it has taken a hard line against some firms, particularly those with retail exposures, for their advertising practices and warning about the dangers of crypto investing and illicit financing.
Time will tell where the chips will fall, but the government throwing its weight behind crypto indicates that the country is set to be more welcoming to DeFi firms than it has been in the past.
When will these efforts materialize?
Once again, there is no set timetable for when the UK will implement these plans. Sunak said in his tweet announcing the NFT that the Royal Mint would release it by this summer, but there is no set deadline for when we could see a sterling stablecoin or more concrete legislation.
UK Chancellor of the Exchequer, Rishi Sunak:
It’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined.. will help to ensure firms can invest, innovate and scale up in this country.”
How Do You Regulate a Stablecoin?
Why is stablecoin regulation important?
As the ongoing tumult with the Terra stablecoin hitting crypto markets shows, stablecoins play a crucial role in the DeFi ecosystem, and regulators have the sector assets firmly in their sights.
In the wake of the UST saga, US Treasury Secretary Janet Yellen is pushing for stablecoin regulation by the end of this year, and other countries have signaled they will either take a similar approach or even create their own sovereign digital currencies.
China has already created a digital yuan, and countries such as the UK have unveiled their own plans for stablecoins based on their currencies. Meanwhile the EU has also reportedly come out in favor of a ban on large-scale stablecoins amid the Terra volatility that is against
Given that these assets allow for a more stable benchmark for trading in and out of cryptoassets and facilitate a large portion of transactions in the market, how stablecoins are eventually regulated will play an important role in the development of DeFi in the years to come.
When does it come into force?
Several governments have recently added more impetus to calls for stablecoin regulation, and Yellen has said that a forthcoming US Treasury report will give a more detailed timeline of how the US government will legislate for the market by the end of 2022.
Janet Yellen, US Treasury Secretary:
“[With stablecoins,] we see run risks, which could threaten financial stability, risks associated with a payment system and its integrity and risks associated with increased concentration if stablecoins are issued by firms that already have substantial market power. We definitely see significant risks.”
MiCA – The EU Gets Serious
Why is MiCA important?
The European Union’s Markets in Crypto Assets (MiCA) regulation is aimed at harmonizing the bloc’s approach to the DeFi market.
The legislation, a first draft of which was approved by the European Parliament in March, consists of a single licensing regime across the EU for cryptoassets which fall outside of current financial regulations.
That includes consumer protection provisions, a unified legal framework for the cryptoasset industry across the bloc rather than by individual countries, as well as specific rules for stablecoins to be treated as ‘e-money’.
Initially the industry had raised concerns about the proposed inclusion of an outright ban on proof-of-work cryptoassets such as Bitcoin on environmental grounds, but those amendments were dropped from the final draft of the legislation.
When does it come into force?
MiCA was first introduced in 2020 and made it through the first stage of European parliament scrutiny in March.
Further discussions and negotiations are currently underway and the legislation is expected to be formally ratified by the end of 2022.
MEP Dr Stefan Berger, EU Parliament rapporteur for MiCA:
“Many member states are interested in having such a regulation that allows growth and keeps developments open. We are the first continent to have such a regulation, so many are looking at it.”