Crypto has gone mainstream.
What was previously a niche, derided asset class deemed by many in traditional financial circles to be nothing more than a scam, is now at the forefront of economic and technological development.
From retail investors to institutions and publicly listed companies, crypto has cemented its place as a crucial building block for the economy and digital infrastructure of the future.
With surging values and adoption levels, the cryptoasset industry has also attracted the attention of governments and regulators amid concerns about its potential impact.
While many of these concerns, such as digital assets’ utility for money laundering or other illicit commerce, are often overblown, the sheer size, reach and technological capability of the market has prompted regulatory changes across the globe.
Countries and supranational bodies have taken diverging approaches to the market, ranging from encouraging its growth as a source of innovation, to outright bans. But, one way or another, we are likely to see much more crypto-specific regulation in the next few years.
Here are the top 5 issues to watch in crypto regulation.
The technology’s inherent anonymity and decentralization has meant that money laundering has emerged as one of the main criticisms leveled at cryptocurrencies over the years.
Given that the blockchains on which cryptocurrencies such as Bitcoin run contain a complete record of every transaction ever made, those fears are not as warranted as they may seem to those unfamiliar with the industry, but nonetheless they have persisted.
In any case, regulators have made efforts to bring forward new rules to bring the governance and KYC systems for crypto into line with those used in TradFi.
That’s where the US Financial Action Task Force (FATF) Travel Rule comes in.
The Travel Rule was first introduced in June 2019, and further expanded in October 2021. It requires all Virtual Asset Service Providers (VASPs) to share identifying information — including names, physical addresses, and national ID numbers — for the originators and beneficiaries of digital asset transfers.
The regulation is likely to prove a serious compliance challenge for the crypto industry.
In response, Qredo has built a bespoke Travel Rule Compliance Solution which allows parties to bind the compliance data packet to the asset transfer, providing operational efficiency and full non-repudiation so no party can deny that it has sent or received a message.
This helps avoid the potential of handling toxic assets while reducing the operational compliance burden and allowing for connectivity between firms.
The US is one of the most open and vibrant centers of technological innovation in the world, but — when it comes to crypto — the country has a mixed history.
On a state and city level, some places have welcomed crypto, and significant hubs have emerged in cities such as Miami which are even planning to allow residents to pay their taxes and purchase real estate using Bitcoin.
On the other hand, at a federal level the industry has received mixed messaging, with the position of politicians and regulators swinging from initial hostility to a more cautious and balanced stance in recent years as it has become clear crypto is more than a passing fad.
This confusion has been reflected in the regulatory sphere, where agencies ranging from the Securities and Exchange Commission to the Commodity Futures Trading Commission, the US Treasury and FATF have all at some point claimed to have the relevant jurisdiction.
As crypto presents a new paradigm for financial dealings, it has become clear that the industry doesn’t neatly fit into any of the traditional regulatory boxes, and so the various agencies and branches of government have had to gradually try and find somewhere to draw the line.
Recently, President Joe Biden issued an executive order aimed at bringing some clarity to the issue, and recent comments by SEC chair Gary Gensler about working in tandem with the CFTC appeared to show that the regulators are accepting that some form of cooperation will be necessary.
The issue is critical for the crypto industry at large because how the US regulates the market will set a precedent for other countries and determine the fate of digital assets in one of the world’s most important economies.
Some places on the European continent have emerged as a hub of crypto activity, such as Switzerland, Malta, Gibraltar, and others which embraced the industry with open arms.
For countries which come under the jurisdiction of the European Union, the regulatory story has been more complex.
The issue came to a head recently when, as part of the bloc’s Markets in Crypto Assets legislation (MiCA) tabled by the European Commission, the idea of banning proof-of-work based cryptocurrencies such as Bitcoin on environmental grounds was tabled.
The proposal was ultimately removed from the final draft of the legislation, but the issue prompted a rapid response from the crypto industry as the prospect loomed of the largest currency being banned in a major market.
Thankfully cooler heads prevailed, but the EU is still determined to set high standards for crypto governance; MiCA outlines significant regulatory, and compliance demands the market will eventually have to meet to operate in the bloc.
The UK is home to one of the world’s dominant financial hubs in London, and in more recent years the city has also gained a reputation as a hive of activity and innovation within the FinTech space.
However, for a long while it appeared that approach would not extend to the crypto markets, with the Financial Conduct Authority (FCA) warning on the dangers digital assets posed to consumers. It even took steps to prevent one of the preeminent exchanges serving customers in the country.
That position has proved off-putting to many crypto start-ups who have chosen to instead base their businesses elsewhere, but in recent months there have been signs that the tide is beginning to turn.
The UK Chancellor Rishi Sunak recently announced that, as part of a push to make the country a crypto hub, the government was exploring the idea of a Central Bank Digital Currency (CBDC) for pound sterling.
While many governments have outlined ideas in this space, Sunak went a step further than many had expected by revealing that the UK Royal Mint would issue its first Non-Fungible Token (NFT) at some point this year.
In tandem with announcements by the FCA that it had extended the application period for crypto licenses for companies in the process, it is worth paying close attention to whether one of finance’s biggest hubs is finally beginning to warm up to crypto.
Stablecoins are a critical component in the crypto ecosystem, allowing users to enter and exit positions in other assets while maintaining a peg to fiat currencies such as the US dollar or euro.
The success of these coins has attracted considerable scrutiny from regulators and governments, given that they are effectively a representation of state-backed currencies, with their pegs and how they are maintained a question of significant interest.
There are billions of dollars in assets tracked by these coins, and — as they present a form of competition to existing currencies — governments have also explored the option of issuing their own cryptos, known as Central Bank Digital Currencies (CBDCs).
China became the first country to pilot a CBDC during the recent Winter Olympics in Beijing , and other nations including the US and UK, as well as the EU, have all said they are researching the concept.
Will a digital dollar run on the blockchain and backed by the Federal Reserve come to fruition? Time will tell, but the issue is set to become one that defines the future of digital money and how traditional currencies interact with cryptoassets.