Cryptocurrency regulations needed now, insiders say
19:00, 10 February 2022
Cryptocurrency is not just a topic for math experts, computer nerds, and get-rich-quick adventure seekers anymore. As the global crypto industry expands rapidly, investors and developers are anxious to see how regulatory processes and new rules will unfold in 2022 and beyond.
Cryptocurrencies already fall under some existing rules, but agencies that police markets for the trading of securities and commodities are considering extending their reach.
This week, for example, the head of the US Commodity Futures Trading Commission told a US Senate committee: “In essence, this is an unregulated market.” CFTC Chairman Rostin Benham cited the goals of limiting risk to individual investors and promoting market integrity as reasons the commission should play a leading role in regulating cryptocurrency trading in the US. (Read the full story on Capital.com here.)
We approached crypto experts from around the world for their views on tihs topic. Contrary to what you might expect, some are calling for more regulations. Jurisdictions to watch, they say, include the US, China, Europe, Singapore and, perhaps Costa Rica.
How soon will changes come? Well, views vary.
But, in the short run, at least one investor believes, the price of Bitcoin and other crypto assets will be affected.
More rules wanted
Youbi Capital CEO Chen Li wants to see more regulations in the US and globally.
“That (position) is really counter-intuitive to a lot of people, especially for someone like me that’s working in the crypto industry – that are used to the lack of regulation,” he said. “But my point is that we want more regulation so the mainstream users can start to get access to cryptocurrency.”
Youbi is a New York-based venture-capital firm that invests in blockchain technologies. Li said many more applications need to be developed for consumers – “for the very real, regular, normal people that are not very technically savvy” – so that they can use crypto and the blockchain.
Once regulations are in place in the US, other countries will follow its lead, he said, since more regulations will help consumer banks get into the crypto industry and use stablecoins and decentralised finance protocols.
Stablecoins can verify ownership
Stablecoins are cryptocurrencies pegged to physical assets, like the US dollar. Once more regulations are in place, and stablecoins are more regulated, it will be easier to verify ownership of crypto assets, Li said.
“If we want to push adoption to the mainstream, we really need a (US) stablecoin that’s more regulated, kind of like the (central bank digital currency) that’s issued by China,” he said.
The Chinese central bank digital coin (CBDC) will put more pressure on the US to adopt crypto, and the US will pick up the pace this year. But it could take a few years for Washington to implement more regulations, he predicted.
US becoming more hawkish
But Ethan Lou, author of Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West, which details his first-hand experiences trading Bitcoin and dealing with crypto development in its early days, said Washington may introduce more regulations sooner than people think.
“If you compare crypto regulation with how the US is developing regulations for other areas, perhaps it’s actually fast – because one thing that people in power fear is how they dealt with the tech giants,” Lou said.
“I think the US was actually very slow to deal with the tech giants, and they are still trying to regulate them to this day – and they fear that, if crypto grows too big, it will become as uncontrollable as a tech giant.”
In Lou’s view, the US Securities and Exchange Commission (SEC) has developed an increasingly hawkish view on crypto in accordance with President Joe Biden’s general view on the markets.
Lou noted that new SEC chief Gary Gensler has been “clamping down” on many securities issues. Gensler, a former Massachussetts Institute of Technology (MIT) crypto and block professor, has pledged to provide greater regulatory clarity on cryptocurrencies.
“I thought he would be a friendly face (for crypto), but apparently not so much,” Lou said.
Other governments watch China
If Lou had to pick one country to watch for regulations this year, it would be China as the country further develops its CBDC. He contended that Beijing has long wanted to develop its own digital coin for a long time and views all other cryptocurrencies as “competition.”
“I think, one day, we will see that (CBDC) used very ubiquitiously in China, because it is already a cashless society,” Lou said.
As the CBDC’s use increases steadily, it will be hard to tell when a full-fledged shift occurs.
“Everything (in China) is monitored and I think China sees a great potential when everyone uses the central bank coins because, right now, I think China wants to monitor the spending of its people.”
Lou, who is based in Toronto, predicted that Canada will follow the US and display more hawkishness, as the province of Ontario is already doing. He anticipates that other countries will base decisions on whether to introduce government-minted crypto on how events unfold in China. Governments will have to walk “a fine line” between protecting consumers and not stifling innovation, he added.
Consumer protections sought
Rutger van Faassen, head of innovation, new markets, and industry ecosystems at New York-based data intelligence firm Curinos, said regulations are in flux globally as governments try to figure out which ministries crypto should fall under.
“That’s probably the starting point right there – it doesn’t squarely fit in anyone’s box,” said van Faassen, whose firm advises financial institutions.
The blockchain’s decentralised nature “clashes automatically with a centralised regulator,” making it more difficult for regulators to oversee crypto and “put themselves in the middle.”
“That’s why some crypto players are staying away from the US market altogether,” he said.
Van Faassen believes Costa Rica, which plans to make Bitcoin legal tender, and Singapore, where many crypto players are based, will be countries to watch for new regulations this year. Europe, which is leaning towards open banking for consumer and financial products and becoming more regulated, will also be a region to monitor.
He said more regulations are needed generally to protect consumers who lack knowledge on crypto so that they can better understand it.
“(Consumer protection) is important and, ultimately, I think that will be good for crypto,” he said.
More regulatory strategies coming
Frederic Paquay, strategic advisor for the Borderless Blockchain Alliance (BBA), said most of the world’s governments will have to define crypto strategies and work on initial policies and regulations this year.
“Some governments will ban crypto transactions or crypto activities – such as mining – because it is just simpler, or to protect their own CBDC projects,” Paquay said.
The BBA is a global community that promotes using blockchain for application-building and problem-solving purposes. Paquay believes that other governments will follow the example of El Salvador and approve bitcoin as legal tender while also permitting the use of digital coins for other payments.
Price volatility a concern
He agreed with Li’s claim that government authorisation of digital coins and more regulations globally will prompt more financial institutions to develop crypto strategies designed to keep pace with the competition. But Paquay believes that a lack of crypto knowledge, and fear of price volatility among coins not backed by fiat currencies, pose the biggest barriers to mainstream adoption.
(Fiat currencies are those minted by national and, in the case of the Euro, regional governing bodies.)
Paquay questioned the purpose of making adoption more mainstream. Most governments and private organisations will prefer private blockchain environments where cryptocurrencies are not necessary, he predicted.
Most blockchain projects, he contended, do not need crypto to work properly. The alternative would be to use non-fungible tokens.
Sandboxes test business models
Paquay, who is based in Dubai, where he also serves as head of growth for credit and compliance-risk management firm Cedar Rose, said the United Arab Emirates is among countries that understand blockchain benefits.
Many UAE jurisdictions have started regulating crypto and companies in a “sandbox” environment in which to test and grow business models.
Many other countries are using so-called sandboxes, which Investopedia describes as “live-like” testing environments that ensure regulatory compliance and security checks for financial operations, including cryptocurrencies and blockchain networks.
The Europe situation
Paquay, who was previously based in Paris, France, believes Europe will need time to develop new crypto rules, because the European Central Bank may lead projects, such as the development of an e-Euro, that are separate from those of national government.
“A consensus will be very difficult,” he said.
But Jonathan Simnett, a director with London, England-based tech mergers and acquisitions advisory firm Hampleton Partners, expects Europe and the US to lead the global crypto regulations race in 2022.
He noted that the European Union (EU) was the first international trade bloc to provide a special dedicated regime for crypto-asset providers. If everything goes as planned, only licensed providers will be able to offer cryptocurrencies and operate crypto exchanges in the EU.
And, UK regulators, including the Treasury and Bank of England, have hinted at tighter crypto regulations.
Simnett said crypto-related mergers and acquisitions are not being hampered by a lack of regulations because the sector is in an early growth stage. Mergers between traditional companies and crypto firms rapidly accelerated in 2021, and he believes that large financial companies will “continue shore up their future” by looking to buy crypto data providers, stablecoin issuers, and payment firms focussed on digital assets.
Prices will be affected
Simnett concurs with Li’s claim that more regulations are needed to help crypto assets become more mainstream.
With global trade digitising faster due to the Covid-19 pandemic, Simnett said, regulatory change covering the exchange of non-fiat currency is needed.
In particular, there are “profound” tax implications as states seek more revenues to deal with aging populations and such issues as the pandemic, the use of crypto for money-laundering purposes, and “the massive scale of international tax avoidance.”
He pointed out that EU crypto taxation varies from country to country, with rates ranging from 0% to 50%.
As crypto regulations increase, Li said, new rules will have a short-term impact on cryptocurrency values – a point that investors must understand.
“We’re going to see a lot of bubbles being busted after the regulation comes in place,” Li said. “On the other hand, we’re going to see more mainstream adoption of crypto and allow a lot of these traditional service providers to participate.”
