What is the current state of cryptocurrency regulation?

  • The total market capitalization of digital currencies is $1.7 trillion and more than $90 billion is traded every day.
  • Analysts have warned that the industry is so large that it could have macroeconomic consequences if mishandled.
  • Piecemeal approaches to cryptocurrency regulation must be replaced with a globally coordinated framework.

In early March, President Biden signed the long-awaited Executive order on the guarantee of the responsible development of digital assetsa high-profile recognition of the potential of the cryptocurrency industry.

That Executive Order commits the White House to participate in the cryptocurrency investigation and to engage departments across the government to collaborate on creating a regulatory framework for digital assets. It also outlines a “whole-of-government approach to address the risks and harness the potential benefits of digital assets and their underlying technology.”

According to the World Economic Forum Digital Currency Governance ConsortiumMember of the Steering Committee of , jeremy alliare“The Executive Order establishes initiatives to explore and engage in constructive problem resolution around known risks that exist with the legacy financial system and the new Web 3 world.”

This exploration, Allaire added, will cover “privacy, security, financial inclusion, global competitiveness for USD” and more.

The White House is about to make a concerted effort to regulate the digital asset industry; given the size and growth of the industry, that boost can’t come soon enough.

Today there are 18,142 cryptocurrencies, 460 crypto exchanges and the cryptocurrency market capitalization amounts to 1.7 trillion dollars. Every 24 hours, $91 billion worth of crypto is traded, most of it Bitcoin or Ethereum.

Given the size of the industry and the looming regulatory push, it is now worth taking stock of the current state of regulation. In doing so, it will become clear that a globally coordinated approach to regulation is necessary.

Crypto regulation is imperative

As the traditional financial system connects with the burgeoning crypto ecosystem, the growing interconnectivity raises concerns about spillover effects that could affect systemic stability.

For some time, cryptocurrency has been seen as a tool for diversification, but the tea leaves are beginning to be read differently. Earlier this year, the International Monetary Fund (IMF) released data indicating a correlation between bitcoin and the S&P 500. This raises fears of investor sentiment spilling over between the stock market and cryptocurrencies.

Shortly after this review, the Financial Stability Board warned of implications for global financial stability if the current trajectory of growth in scale and interconnection of crypto assets with these institutions continues. However, given the large number of data gaps that exist regarding crypto assets, a comprehensive assessment of the macroeconomic impact is still somewhat out of reach.

Furthermore, the nature of the underlying technology for cryptocurrencies is such that it allows for cross-border transactions without the need for existing financial intermediaries.

New applications and models such as tokenization, decentralized finance, NFTs (non-fungible tokens), and decentralized autonomous organizations challenge traditional models that describe who is currently considered a “person”, what is “value”, and how this “value” can be traded. “. . This threatens to come into direct conflict with existing regulations related to cross-border data flows, intellectual property rights and capital controls. It could also lead to ambiguity in the fiscal environment, as well as raising a host of other policy concerns.

The potential implications of cryptocurrencies for global financial stability and the distinctive nature of the underlying technology underscore the importance of prioritizing regulatory discussions and decisions, both nationally and globally.

The apparent relationship between Bitcoin prices and the US stock market could be a reason to focus on cryptocurrency regulation.

The apparent relationship between Bitcoin prices and the US stock market could be a reason to focus on cryptocurrency regulation.

Image: IMF

Current state of regulation

According to the World Economic Forum Global Future Council on CryptocurrenciesThere has been no internationally coordinated regulation of cryptocurrencies, although international bodies have been working to assess the risks and appropriate policy responses to the rise of cryptocurrencies.

Globally, central banks and regulators already have their eyes on this growing trend. Although they share a common goal, to stabilize their monetary systems and stimulate innovation and economic growth, countries from China to El Salvador have already begun to weigh and implement different regulatory options.

For those countries, their goals appear to broadly align: protect the consumer, prevent illicit financing, protect market integrity, and promote innovation. Their approaches, however, vary.

Although some jurisdictions, such as Indiahave amended existing laws, others, such as Liechtenstein, have proposed custom-made models. Another approach, apparently favored by the European Union and the United Arab Emirates, proposes setting up entirely new regulators to deal with the industry comprehensively.

These territorial differences, while offering jurisdictional arbitrage opportunities, create uncertainties and increase the compliance burden for companies operating in the sector. This is compounded by the absence of common standards and terminologies.

For a truly global coordinated approach, countries and international organizations must work together, building on best practices and learning from each other. In addition to risk assessments and the establishment of common standards, there is also a pressing need to harness technology itself to develop suitable and inclusive solutions, through public-private collaboration.

Blockchain is an early-stage technology that enables secure, decentralized storage and transfer of information and value. Although the most well-known use case is cryptocurrencies such as bitcoin, which allow electronic transfer of funds without banking networks, blockchain can be applied to a broader range of purposes. It has the potential to be a powerful tool for tracking assets, data, documentation, and transactions. The applications are seemingly limitless; it could cut out middlemen, potentially reduce corruption, increase trust and empower users. In this way, blockchain could be relevant to numerous industries.

That said, blockchain also comes with significant tradeoffs regarding efficiency and scalability, and numerous risks that are increasingly attracting the attention of policymakers. These include the use of cryptocurrencies in ransomware attacks, fraud and illicit activities, and the energy consumption and environmental footprint of some blockchain networks. Consumer protection is also an important issue that is often overlooked, as cryptocurrencies, so-called “stable currencies” and decentralized applications operating on blockchain technology present risks to end users of lost funds and also risks to broader financial stability based on adoption levels.

Read more about the work we’ve launched at blockchain and distributed ledger technologies – to ensure that technology is implemented responsibly and for the benefit of all. We are working to accelerate the most impactful blockchain use cases, ranging from make supply chains more inclusive for make governments more transparentin addition to supporting central banks in exploring digital currencies.

The way to follow

The White House Executive Order is a notable step in the right direction to enable interagency collaboration. A globally coordinated approach, encompassing international cooperation around the regulation of crypto assets, will be economically optimal, protect consumers and prevent the misuse of cryptocurrencies for illicit activities.

forum Digital Currency Governance Consortium, made up of more than 80 organizations and representatives from various sectors and geographies, works in this direction. It has focused its second phase of work on examining the macroeconomic impacts of digital currencies and informing regulatory approaches for them, as stakeholders continue to experiment with these instruments and the adoption of cryptocurrencies, stablecoins, and central bank-issued currencies. .