What should cryptocurrency regulation look like?

What should cryptocurrency regulation look like?

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Cryptocurrencies are lauded for their decentralised nature. Part of the very reason that they exist is to act as a store of value that seems to operate outside of government control. It’s this quality that has made the technology so disruptive, and it’s no surprise that cryptocurrency regulation has garnered interest from legislators across the world.


With the net of US Securities and Exchange Commission (SEC) litigation closing around Ripple and calls from the President of the European Central Bank for regulation to be agreed upon “at a global level”, the rapidly developing crypto market is coming under greater scrutiny than ever before.


In this article, we look at the current state of crypto regulation and consider whether there is a more constructive way forward.


Why crypto regulation is necessary


The prospect of cryptocurrency regulation is considered by many in the industry as a bad thing. They fear that regulations could suppress trading volumes and limit real-world use cases. This may be true in the short term, but the unwavering view of cryptocurrency regulation as a negative step is myopic.


For the crypto industry to continue its journey of growth, a wider cross-section of the world’s population must be able to access it safely and securely. This can only be achieved through a stronger regulatory framework. Matched with institutional acceptance, an improved user experience, and scalability, regulation could pave the way towards mass adoption of cryptocurrency as an alternative to existing monetary systems.


The current approach – and why it doesn’t work

As regulators have struggled to keep pace with the swift development of the cryptocurrency market, a patchwork of laws and guidelines has arisen. The approach taken varies considerably by jurisdiction, from Vanuatu accepting BTC payments in exchange for citizenship, to Egypt forbidding crypto trading under Islamic law.


US


Across the US, cryptocurrencies are subject to regulation both on a state and federal level. The SEC oversees initial coin offerings (ICOs), while the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) acts in its capacity as an anti-money laundering body.


It’s under the guise of AML provisions that the most recent pushes for regulation have been made. In December 2020, FinCEN filed a new proposal that would see banks and money services businesses become subject to data collection and reporting requirements. The planned rules conflict with the anonymity that is valued by so many individuals and organisations involved with cryptocurrency.


The move also marks a continuation of movements by US regulators to apply existing financial frameworks to this new and fast-expanding area of activity. This follows from the lawsuit filed against Ripple and its native XRP cryptocurrency, which the SEC alleges to be an unregistered security. A response issued by Ripple has since labelled the case “regulatory overreach”.


UK and European Union (EU)


The UK benefits from an arguably more cohesive and progressive stance, but there are still areas where the authorities have yet to fully embrace cryptocurrencies. In October 2020, the Financial Conduct Authority (FCA) went as far as to ban the sale of crypto derivatives to retail consumers on the basis of extreme volatility and the alleged prevalence of market abuse and financial crime.


The judiciary has adopted a similarly restrictive approach, with the finding in FCA v Bright that cryptoassets can constitute regulated investments. The FCA believes that cryptocurrencies are “high-risk, speculative investments”. It’s this stance that marks an attempt to shoehorn cryptocurrencies into the existing financial regulatory framework.


This view is largely mirrored by authorities in the EU, too. In a recent interview, the President of the European Central Bank said that Bitcoin “is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”Tellingly, no specific examples were given.


Finding a way forward


The contradictory views of regulators and the wider cryptocurrency industry leave us at something of an impasse.


To protect the markets and the public, regulators have taken steps to curtail the sale of cryptocurrencies and to impose restrictions on exchange providers. Conversely, many cryptocurrency advocates have set against the prospect of regulation on the grounds that it cuts against the characteristics that make cryptos so attractive. For them, transparency, anonymity and even decentralisation are on the line.


Rather than resisting regulation, the cryptocurrency community should be supporting and contributing to its development. As former chairman of the Commodity Futures Trading Commission (CFTC), Timothy Massad, put it “industry participants … should focus on the development of self-regulatory standards. Those standards can help shape sensible regulation.”


Similarly, regulators should accept that a new approach is needed for cryptocurrency. As Shawn Bayern puts it, “because [Bitcoin] is something new, it does not fit neatly into classical categories”. In such a fast-developing area, it makes little sense to apply existing principles and norms. Beyond this, it’s necessary for the authorities to recognise that while there may be bad actors using cryptocurrencies, this is not reflective of the wider industry.


For truly effective regulation that promotes cryptocurrency adoption while securing adequate protection for the markets, collaboration is necessary. To learn more, or to find ways to contribute to that discourse, contact our specialist team by emailing info@blockchainlegalconsultancy.co.uk

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