Why Regulation Is Key to Crypto Industry  

Source: Adobe/Aleksej

Tom Stuart, CEO of Nous Systemsa Web3 marketplace for investment.

The recent collapse of Land, the issuer of the third-largest stablecoin, was a bad time for cryptocurrencies and put the reputation of the industry in question. Wiping out tens of billions of dollars in market capitalization and creating unprecedented losses for investors, this crisis is encouraging regulators to take faster action in terms of oversight of the digital asset arena.

Globally, countries are taking a wide variety of approaches, with the UK currently catching up with some of the jurisdictions, which have been quicker to adopt a more regulated approach. Ultimately, the balance that needs to be struck within whatever framework is adopted is between giving investors more protection and still allowing blockchain/cryptocurrency companies to continue to innovate at the pace that has caused so much excitement and so much promise.

Globally there is a diverse regulatory approach

The world is highly divided in its approach to cryptocurrency regulation. It typically takes its cue from US financial services regulation, though it has yet to develop a clear regulatory framework for the asset class. However, in March, President Biden signed a long-awaited executive order on Ensuring Responsible Development of Digital Assets, in what was seen as a concrete recognition of the potential of the cryptocurrency industry.

The order establishes initiatives to study and engage in constructive problem-solving around known risks that exist with the legacy financial system and the new Web3 world. This order will direct the agencies to coordinate their regulatory efforts, focusing on the privacy, security, financial inclusion and global competitiveness of the USD. Furthermore, very recently, the US introduced the Responsible Financial Innovation Law, which is committed to ensuring that financial innovation does not come at the expense of the consumer. The bill will also review the environmental impact of cryptocurrencies, which is an important factor in its long-term viability.

Meanwhile, neighboring Canada approved a Bitcoin exchange-traded fund (exchange traded fund), and proactively issued guidance requiring local cryptocurrency trading platforms and dealers to register with provincial authorities. regulators. Last year, Canada implemented a clear registration regime for trading platforms that provide custody services to local clients. This has seen a number of companies register under the new rules, with the sector experiencing healthy growth in the region.

In Asia and the Middle East, progress is also being made. Dubai issued its first crypto law regulating virtual assets this year. In the meantime, India has approached cryptocurrency with trepidation, with its Ministry of Finance equate cryptocurrencies to Ponzi schemes. However, last year, India I take second place out of 154 countries in the crypto adoption index, suggesting that the government may have to rethink its attitude.

In Europe, Switzerland has arguably gone further in passing blockchain laws, licensing two crypto banks since 2019, the EU has proposed a broader framework to regulate issuers and service providers dealing in crypto assets in the European Union. The European Parliament recently approved a bill regulation, which will be consulted with the executive power of the EU and the heads of the member states. The new regulation will see the introduction of a European “passport”, which will allow crypto platforms and service providers outside the EU to apply for a license allowing them to operate in all EU member countries.

UK finally catching up

After stalling for some time, the UK has finally signaled a breakthrough with plans to regulate payment stablecoins. An HM Treasury spokesman commented that such regulation “will create the conditions for issuers and service providers to operate and grow in the UK, while ensuring financial stability and high regulatory standards.” The instability of the stablecoin market will need to be recognized as governments begin to develop and implement new rules on crypto assets.

The Treasury recently said that beyond stablecoins, it planned to consult on the regulation of a variety of digital currencies, although the exact details were ambiguous. The then Chancellor Rishi Sunak said: “We want to see the [cryptocurrency] tomorrow’s businesses, and the jobs they create, here in the UK, and by regulating them effectively, we can give them the confidence they need to think and invest for the long term.”

Around blockchain technology, the government will study the use of distributed ledger technology (DLT) in financial markets, consider the use of DLT for sovereign debt instruments, and create a financial markets infrastructure sandbox to allow companies to try DLT in the markets operation.

Reduce financial risk

As more and more countries seek to regulate crypto markets, there is a common thread in their approach: reducing financial risk.

Innovation can equate to exciting growth and prosperity when it runs smoothly, but there are inevitable consequences when problems do arise, and the crypto market needs to be realistic about how much independence it can have in a growth environment.

For the proposed new regulations to be effective, strict measures must be implemented, such as prior authorization for issuers to operate, capital and liquidity requirements, and accounting and auditing obligations. In turn, this will give consumers the confidence to move forward and continue to embrace cryptocurrencies as an alternative medium to traditional financial options.

A good balance is needed to generate growth with governance

Regulatory clarity and proper governance are essential if we are to see widespread mainstream adoption of crypto infrastructure in commerce and financial markets. Additionally, further regulatory guidance, if well-targeted, could help limit speculation in crypto assets.

Less speculation could lead to greater investor confidence, which could attract more long-term investors who have not been attracted by a highly speculative and volatile crypto market until now.

Overall, it is clear that globally, regulatory compliance remains a work in progress. However, whatever steps are taken, they should have at their heart a simple principle, probably best articulated by US Treasury Secretary Janet Yelland in a recent speech, where she said: “our regulatory frameworks must be designed to support responsible innovation while managing risks: especially those that could disrupt the financial system and the economy”.

It is this balance, which regulators must strike, that has perhaps the strongest influence on the future prospects of a sector that has dazzled many but still unnerves others.
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