Over the past few years, regulatory attention to digital assets has increased significantly and will continue to grow. The rise in retail and institutional adoption has led to a rapid increase in the market cap of crypto worldwide. Recently, we have witnessed extreme volatility and a loss of consumer confidence after several failures of trusted crypto companies.
Fraud, data leakage, scams, and improper management of customer funds also contribute to user mistrust and attract the attention of regulators. Risks are increasing due to the pace of innovation and insufficient attention being paid to risk management. The current situation demonstrates the need for a rapid and global approach to regulation and the supervisory system to ensure consumer protection. Let’s explore global crypto asset regulation with the experts from Grapherex.
The term digital assets is a broad umbrella that refers to anything built and exchanged on a blockchain, a decentralised ledger. A digital asset is created (minted) when new information is added to the blockchain on which it is stored.
Crypto digital assets include cryptocurrencies (tokens and coins), stablecoins, non-fungible (NFT) tokens, central bank digital currencies (CBDC), utility or security tokens, and more.
With decentralised crypto assets being accessible to almost everybody, international cooperation is necessary to regulate the market. The local authorities of many countries have publicly announced that they will participate in the development of their own digital currencies and will become centres of technology and innovation and establish the procedure and policies for regulating this type of finance.
Let’s look at some striking examples:
- The European Union is at an advanced stage of finalising Markets in Crypto-Assets Regulation (MiCA).
- Switzerland has implemented a mature regulatory framework for crypto assets, which allows market participants to gain confidence in the legal regulation of their projects.
- The world’s first body specialising exclusively in virtual assets has been created in the United Arab Emirates.
In general, a large number of countries conduct research, consult, negotiate and develop legislation to implement digital assets, as a rule, in line with the existing framework of financial services. However, the speed of adoption and current approaches, new products and services, and even the terminology remain highly fragmented.
There is no unified global way to manage crypto for now, but we can explore modern trends and policies used in particular regions.
A BIS (Bank for International Settlements) study found that nine out of ten central banks around the world are studying CBDC. In the autumn of 2021, BIS interviewed representatives of 81 central banks. More than half of the respondents are developing their own digital currencies, while about 20% of respondents noted that they are creating or testing retail CBDC.
Results showed that national digital currencies could potentially become the basis of the monetary systems of the future, while cryptocurrencies struggling with their shortcomings and problems with fraud are not suitable for this.
China remains the leader in the CBDC race. According to the Wall Street Journal, during the Beijing Olympics, the digital yuan (e-CNY) surpassed Visa in the number of transactions. The US and Australian authorities considered the Chinese project a possible threat to national security, so American congressmen even proposed removing e-CNY payment applications from Google Play and App Store.
The European Central Bank intends to finish its preparation for the launch of the digital euro by the year 2023 and then test it until 2026. The issue of the European CBDC is planned to be limited and will amount to €1.5 trillion.
The US Fed released a report on the results of the CBDC study in January 2022. The document does not contain conclusions about the need for its release. The chairman Jerome Powell said there was no decision on the launch of CBDC yet, but the authorities continued to explore this opportunity.
India has launched a wholesale digital currency project and started retail CBDC testing. Japan, Hong Kong, Thailand, Turkey, Australia, Brazil, Mexico, Taiwan, and several other countries appeared among the nations wishing to issue their own national digital currency in 2022.
The term stablecoin refers to digital assets pegged to the market value of a certain external asset: fiat currency or commodity. When the UST — the algorithmic stablecoin of the Terra ecosystem — collapsed, stablecoins became one of the main regulatory trends in the crypto industry in 2022.
Creating a comprehensive federal law on stablecoins is a challenging task, the US government says. The Fed noted their risks to financial stability and non-compliance with the standards set for digital assets by the central banks of the largest economies.
In the Chaoyang District in China, paying a salary in USDT is illegal. According to the decree of the court, employers must not make payments to employees in stablecoins.
The UK intends to include the regulation of stablecoins in the monetary policies list, that is, the laws regulating financial markets and services. The UK authorities also declined the legalisation of algorithmic stablecoins.
In Japan, the parliament stated that stablecoins are recognised as digital money. The law is set to come into force in the summer of 2023. However, the Financial Services Agency of Japan (FSA) recommended limiting the use of algorithmic stablecoins in the country.
The Markets in Crypto-Assets (MiCA) regulation initiative refers to the first cross-jurisdictional supervisory and regulatory framework for crypto assets. It was introduced in 2020 but is expected to come into force in 2024 and be ratified by the European Parliament.
This is part of the plan of the European Commission to create a regulatory framework to facilitate the introduction of distributed ledger technology (DLT) and ensure integrity and financial stability. Generally, any business activities related to crypto in the EU may fall under the MiCA.
In short, it states that if a digital asset is categorised as a financial instrument, it should be governed by the EU financial services legislative and regulatory instruments and go through authorisation and supervision.
The MiCA became the main document on the regulation of cryptocurrencies in the EU in 2022. In June, the Council of the EU and the European Parliament agreed on the provisions of the MiCA, which included requirements for CASP aimed at protecting consumers. The document edited in October includes rules that apply to issuers of unsecured crypto assets and stablecoins, as well as trading and custodial platforms. Final approval was postponed until 2023. The document will be published in the official journal of the European Union before it comes into force in 2024.
In Belgium, the Financial Services and Markets Authority has introduced mandatory registration of cryptocurrency exchanges and custodial wallet operators, so unregistered companies will face fines. In Italy, the draft budget for 2023 includes the introduction of a 26% tax on capital gains received as a result of trading digital assets (if the profit exceeds €2,000). In Spain, the requirements for advertising cryptocurrencies were tightened, meaning that a disclaimer with a warning about the unregulated status of the asset and the risk of losing funds has become a mandatory element.
The UK has every opportunity to become a global hub for crypto asset technology and investment. In 2022, the House of Commons voted to grant the UK Treasury (HMT) the right to turn crypto assets into a regulated instrument. The vote clarifies that Digital Settlement Assets can be included in the scope of existing financial rules, which will allow regulators to respond quickly to new developments.
The project is included in the Financial Services and Markets Bill (FSMB) and covers measures to bring stablecoins in line with current legislation on financial services. The bill is awaiting approval in 2023.
Regulators continue to openly state the risks to stability and consumer protection and pay attention to the increased levels of financial crime. In June, HMT stated that it planned to extend information-sharing requirements for wire transfers to include crypto as well.
On November 23, 2021, US banking regulators issued the first instruction to suppress crypto assets (except for previous decisions of the Securities and Exchange Commission (SEC)). It sets out expectations regarding safety, consumer protection and compliance with the law. The global cryptocurrency market capitalisation today is over $1 trillion, according to CoinGecko, and continued growth is expected in the coming years.
State and federal regulators have outpaced Congress and the White House in taking measures to regulate activities with digital assets. This was done through regulation using a payment scheme and through the banking system using a non-proprietary mechanism. In March, US President Joe Biden issued a decree on the coordination of federal agencies in the regulation of cryptocurrencies.
As the digital asset market grows and stablecoins approach systemic importance (exceeding the threshold of $50 billion), Congress and the White House are increasingly engaged in this issue. Politicians are developing proposals for legislation; for example, the bipartisan Responsible Financial Innovation Act (RFIA) will classify most digital assets as “commodities” and set requirements for stablecoins.
Regulators are still openly voicing the risks to financial stability. Digital asset firms are required to register with FinCEN and comply with AML and sanction requirements. Authorities have released guidance on how to augment Know Your Customer (KYC) verification and transaction monitoring programs.
Stablecoins are generally treated and regulated as payment instruments. The reserves are held in insured depository institutions, which are subject to federal oversight. Regulators are at the early stages of monitoring NFTs and wider DeFi.
China is actively promoting the digital yuan, and in 2022, the Shanghai High Court recognised Bitcoin as a virtual asset with an economic value protected by law. At the same time, the PRC tightened criminal liability for illegal fundraising in cryptocurrencies. According to the former CEO of Bitmix, China intends to return to the digital asset industry through Hong Kong.
India considers itself a hub for the digital asset ecosystem. It promotes FinTech and strives for the adoption of financial services. The government is welcoming the application of blockchain for governance, but it has exercised caution towards cryptocurrencies. Cryptocurrencies cannot be used as legal tender or a medium of exchange. The RBI expects crypto firms to undertake Customer Due Diligence, AML, KYC, etc. India has also introduced a 30% tax on income from transactions with digital assets.
Hong Kong is implementing a harmonised regulatory framework that covers the entire crypto ecosystem. The SFC and the HKMA continue to expand the regulations over activities with virtual assets. In October 2022, a policy statement that included the government’s vision for DLT, Web 3.0 and Metaverse management was issued. Among other things, they proposed the use of digital assets that meet specific requirements in retail. In June 2022, the SFC announced a mandatory licensing regime for Virtual Asset Service Providers. It comes into force in 2023 with the AML and Counter-Terrorist Financing Bill 2022.
In South Korea, the Financial Services Commission has ordered cryptocurrency exchanges to comply with FATF recommendations. The collapse of Terra forced local financial regulators to hold an emergency meeting, and then the media reported on the creation of a Committee on Digital Assets.
In Singapore, MAS presented two advisory documents to reduce the damage to consumers from cryptocurrency volatility by tightening the supervision of the industry. During the year, licences were obtained by Blockchain.com, Coinbase, Paxos and Circle.
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