Are Stricter Regulations For Cryptocurrency Necessary?
The world of cryptocurrency has been viewed as the “Wild West of finance”, characterised as such due to its lawlessness. A space rife with unguarded activities where people were left to fend for themselves. However, over the last decade, there have been developments towards a potential meaningful regulation for both crypto and blockchain providing more sophisticated protection. As policymakers begin advancing regulations to crypto companies, what will the future look like for this digital space?
Will the imposition of stricter regulations promote good, or prevent innovation leading to growth in the field of cryptocurrency?
In the first significant crypto case AA v Persons Unknown 2019, the valid status of Bitcoin was questioned, where the Bitcoin in context was paid as ransom following a cyberattack on a Canadian insurance company. Here, the court further identified the inherent difficulties in seeking to recover Bitcoin, given its decentralised nature which eases the process of transfer. Following events like this, a need for universal protection against such wrongs was recognised.
Globally, the current starting points for guidance on cryptocurrency are broadly two main regulatory authorities:
The AML (Anti-Money Laundering) regime, which mainly aims to prevent money laundering, with administration determined by where the business is based.
The SEC (Securities and Exchange Commission) regime, which decides whether a token should be treated under the laws of the place where the crypto asset is sold into.
Despite this, the position is becoming more complicated for regulators. For example, the UK is looking at a more secure regime for stablecoins, while the EU is passing MiCA( Markets in Crypto Assets). Therefore, we see an interaction between different regulators - all of whom are desperate to do the ‘right thing’ in relation to the crypto asset but have varied ways of putting it into practice.
It is worth considering the volatile nature of crypto assets and what the industry can do to mitigate losses. An important aspect of this is the risk and return of investment. It is conventional wisdom that low-risk assets tend to have a low-risk return, and higher-risk assets give the potential for a higher return. Considering this, crypto assets are generally high-risk/high-return assets. Accordingly, it is imperative to not be overly exposed to crypto assets financially. In light of this, an interesting suggestion given by the FCA to the sellers of crypto assets is that, for certain crypto assets, the law requires each retail participant’s exposure to be less than 10% of their assets. It is usually observed as a potential danger when people mistake such assets as being lower risk than it is.
A deeper consideration of the concept of regulation would simply be the act of a regulator taking responsible actions for an activity. Generally, regulators simply want to do the ‘right thing’. However, a problem arises when attempting to decode the meaning of the ‘right thing’. For example, in the US, the main focus is on the rights of corporate bodies, on the basis that corporations are the backbone of the economy. Therefore, when it comes to innovation the question rests on the complexities in the pre-conceptions of what the ‘right thing’ to do is. This is vital to examine as it is a challenge for regulators to tackle the imbalance in risks versus opportunities in a nascent industry. In the UK, there has been a widely accepted development in this respect with the FCA’s Crypto Sprints, which aims to improve the approach to regulation where it shows the regulators who are actively engaging with industry stakeholders.
In conclusion, a degree of regulation is needed to bring certainty and remove bad actors. However, this regulation needs to be sensitive to differences in the market, and must also be flexible enough to adapt. It is likely that regulations will constantly change over time with functionality developments in the market. Most commonly, people expect a single global approach to regulation, with the prevalent idea being that there must be a single correct answer to regulation. Over the next few years, we can expect blockchain to become pervasive across different industries. The dilemma will be over the existence of blockchain and crypto assets and not whether people are dealing with it.