Three Predictions for Crypto Regulations in 2022

Source: Adobe/LizFoster

Manuel Silva Martínez is General Partner of Mouro Capitala UK-based venture capital firm.

2021 may not have been the year your grandparents started trading cryptocurrencies, but it was certainly a watershed year for technology. In fact, crypto transaction volume grew 567% year over year to reach a value of $15.8 trillion in 2021, showing that digital asset trading is becoming more mainstream. Even if the market is experiencing some correction at the beginning of 2022, 2021 was such a leap year that no one can deny that crypto assets are here to stay.

Although the total volume of illicit activity in crypto assets has grown in absolute terms; illicit activity today still accounts for less than 1% of all transactions, according to crypto asset compliance provider Elliptical. However, in emerging decentralized finance (DeFi) space, which has experienced by far the largest impact, losses due to theft and fraud are accelerating to more than $10.5 billion in 2021, up from $1.5 billion in 2020. These growing numbers were a factor determining factor in the many examples of regulatory activity that occurred around the world in the past year, with significant developments in Dubai, the usthe EUand South Korea to name a few.

These developments are so important because they provide crypto assets with confidence, which will be crucial to their continued success.

This year, the progress will be even more significant. I think 2022 will be a watershed moment for crypto asset regulation, with three key developments before the end of the year.

Prediction 1: Consumer protection authorities, rather than financial regulators, will take a stand

As the crypto asset industry matures and becomes increasingly integrated with the traditional financial system, regulators are looking beyond anti-money laundering (AML) and countering the financing of terrorism (CFT) measures to focus on consumer protection. This is due to the highly accessible nature of crypto assets: while it democratizes access to financial markets, it also exposes unaccredited and sometimes unsophisticated retail clients to great risk.

As the market capitalization of crypto assets has increased tenfold from the beginning of 2020 to $2.2 trillion In January 2022, protecting consumers from market volatility and ensuring market integrity has become a priority.

This will lead regulatory authorities such as the US Consumer Financial Protection Bureau (CFPB) taking on an increasingly important role in overseeing the crypto industry as they seek to implement standards, primarily around transparency, to protect consumers from fraud and manipulation. Regulation enacted in 2022 by consumer protection agencies will likely cover transparency regarding crypto asset services offered to consumers, including liquidity requirements, to ensure consumers can access robust and efficient financial markets and non-disclosures. based on codes for DeFi operations.

This could include requirements for DeFi platform developers to provide clear public statements (in addition to any open source code they develop) that clearly articulate how their platform operates, as well as the risks that consumers might face as a result of their actions. technical characteristics. design. It could also include requirements that the code underpinning DeFi applications be subject to regular third-party or even regulatory audits.

Prediction 2: Financial regulators will focus on DeFi

The growth in the DeFi space has been incredible, with Elliptic finding that the total capital locked in DeFi services grew by more than 1,700% in 2021 to reach USD 247 billion.

While this presents opportunities for underserved individuals and organizations to access financial services, there is a downside: DeFi is also being exploited by malicious actors to steal, defraud, and launder funds.

Most financial regulators globally have not yet clarified whether their existing frameworks apply to DeFi protocols. Despite this, lawmakers are attempting to apply the same regulatory principles used in traditional finance to this new ecosystem to protect investors, and it won’t be long before local regulators bring DeFi under the purview of AML regulations. / Existing CFTs.

We are already seeing the groundwork being laid for local approaches in some jurisdictions. In August 2021, the US Securities Commission (SEC) imposed a cease and desist order about the operators DeFi money marketwhich offered more than $30 million worth of unregistered offerings using a DeFi protocol, due to concerns about money laundering and cheating its customers.

As regulators take a closer look at the DeFi space, developers and market participants will need to prepare to meet new requirements.

Prediction 3: VASP due diligence will become standard practice

In October 2021, the Financial Action Task Force (FATF) published guidance Introduce the concept of counterparty Virtual Asset Service Provider (VASP) due diligence in the crypto industry. These due diligence requirements mirror those of correspondent banking.

In practice, this means that a crypto asset firm is expected to perform adequate due diligence on all other VASPs it is exposed to through customer transactions, such as its fiat currency on-ramps and off-ramps. This includes investigating negative media coverage, identifying any regulatory actions taken against the company, and obtaining evidence that it has sufficient AML, KYC, and data protection controls.

This represents a huge business opportunity for traditional financial institutions. With VASP due diligence common practice across the crypto industry, banks will gain confidence in their compliance processes, attracting many to serve the sector for the first time.

To take advantage of this huge opportunity, banks need to start thinking hard and fast about the changes they will need to make to incorporate crypto businesses efficiently and effectively.

The panorama

While cryptocurrencies have benefited from a lack of clarity and being in a gray area, 2022 could be the year regulation becomes more black or white. Reducing information asymmetries will provide trust and credibility to the ecosystem.

This presents huge opportunities, not only for VASPs themselves, but also for traditional financial institutions, many of which have limited their exposure to crypto assets until now due to market volatility and potential reputational risks.

However, financial institutions will need to be prepared to act quickly when it comes to compliance. Slow movers risk missing out on important new revenue streams where their more agile competitors have already established themselves.
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