Blockchain and Cryptocurrency Regulatory Trends

Cryptocurrency has existed for a long time, but it is only now that discussions on regulations are becoming more significant. In fact, central banks of various countries are actively engaging their stakeholders on the best possible regulations of this market niche. The need for regulation has been so because of crypto volatility despite its growth into an already regulated financial system of various currencies, expansion of various crypto products and offering in addition to the evolving global innovation in the digital financial market that has enabled transactions and issuance at various levels. Developing a new regulatory framework in addition to application of the already existing framework to crypto assets is very important yet faces significant setbacks. For instance, despite inactively being in existence for many past years, the cryptocurrency world is rapidly evolving hence the challenge in keeping up with the speed through acquisition of skills and talents. Crypto data is also seasonal hence making it difficult for regulators to monitor the markets and keep tabs on the various actors in the market.

The Crypto Regulatory Trends

?A recent event by Brookings’ Center on Regulation and Markets in collaboration with the Hutchins Center on Fiscal and Monetary Policy came up with a number of takeaways on crypto regulation trends. There is a high level of retail participation compared to traditional commodity markets and this poses unique challenges in relation to regulation. A finding in the US shows that one in every five Americans have traded in cryptocurrency and that the most common group are the racial minorities and the younger adults. This market behavior is different from the normal financial instruments thus more research and regulatory need.

Unlike the traditional SEC which focuses on regulating securities, CFTC focuses on regulating derivatives and commodities. It is still not very clear whether cryptocurrency can be classified as a commodity or a security. A case scenario was experienced where a federal judge made a ruling that virtual currency such as bitcoin are commodities despite the SEC having argued that a number of crypto tokens were securities.? Crypto therefore challenges the traditional regulatory distinction between commodities and securities.

The regulatory trends focus on the protection of consumers as a key objective thus the continuous changes at the CFTC. One of the LabCFTC key players, Benham, noted that the crypto world is currently beyond the incubator stage and that the decentralized financial technologies and digital assets have outgrown their sandboxes.

Crypto laws and regulations are therefore constantly evolving as has been experienced globally. There has been a gradual shift in the past years from no one bothering about the existence and regulation of crypto to the present whereby crypto is considered an asset, commodity or security that needs to urgently be regulated. The difficulty in defining and classifying cryptocurrency given its various existing forms makes it the greatest challenge in regulating crypto. All indications, however, point out that cryptocurrency and digital currency are the future of currency and that more use cases, investments and crypto-backed ventures will continue emerging globally. As such, more accurate regulations will come into play.

The US Securities and Exchange Commission (SEC) sued Ripple (XRP) on the basis that Ripple raised funds from the public by selling their digital token XRP without a securities license to do so. The case has been long-standing and has been part of the negative sentiments that have affected the crypto markets. In October 2019, SEC filed a suit against Telegram with claims that the company had raised funds from the public through the sale of a cryptocurrency known as Gram Token without registering it as a security. Telegram was found liable and ordered to refund investors $1.2 billion and fined $18.5 million. Despite these precedence set out by the SEC, most regulators globally still do not consider cryptos as securities. In fact, most regulators globally do not have particular regulations for cryptocurrencies. Most central banks including the Central Bank of Kenya have issued a caution to the general public against trading cryptocurrencies and restricted commercial banks from facilitating crypto-related transactions. The National Bank of Ethiopia has stated that cryptocurrencies are illegal and not recognized as a currency in the country.

In the Middle East, most countries have banned cryptocurrencies, but the United Arab Emirates (UAE), particularly Dubai, is making fairly friendly crypto regulations making it a crypto hub and consequently attracting a number of major crypto companies such as Binance, Kraken, XT.com, and LBank among others that have already opened offices in Dubai or Abu Dhabi. The Dubai Multi-Commodities Centre (DMCC) has provided ways through which crypto exchanges and wallet providers can operate in the free zone. A number of regulators are also trying out Regulatory Sandboxes such as Kenya's Capital Markets Authority (CMA).

Regulate or Not?

Crypto regulation has been a controversial topic with each side of the divide giving their genuine reasons for or against regulation. Largely, experts express the need for regulation for the safety of investors’ securities and commodities. Those against crypto regulation argue that regulating crypto goes against the spirit of its existence and that it would hinder innovation in the crypto market. The other side of the divide, who are the majority, largely supports crypto regulation because it will help protect long-term investors, provide a clear guideline for crypto investment, and prevent fraudulent activities within a crypto ecosystem.

Potential Benefits and Limitations of Regulations

NDTV Business Desk outlines five major reasons why the crypto market should be regulated. Prevention of market manipulation and protection of investors forms the greatest need for regulation. Bitcoin is usually given as a perfect example of what losses could look like in the crypto market if it is not regulated. The significant rise and fall between 2021 and 2022 forms the basis for this argument. The second reason for regulation is that despite crypto technology being adopted as a new technology in various parts of the world, there are already thousands of cryptocurrencies. With such a trend, investors are unable to tell which are genuine and which are not. There is need for a regulatory measure to disclose information about a particular cryptocurrency, its performance, potential, and risks. Investment in cryptocurrency without sufficient regulations exposes individuals and governments to online fraud and money laundering which may be a huge security threat.

On the flip side, it is believed that regulation was not part of Satoshi Nakamoto’s vision when creating Bitcoin. Bitcoin’s inherent infrastructure is designed to operate without regulations. The semi-anonymity of most crypto transactions and the use of web3-based non-custodial wallets that do not require Know-Your-Customer (KYC) documentation make it more difficult for regulators to have a grasp of the industry. Most regulations including the European Markets in Crypto Assets (MiCA) are designed to protect the consumers rather than create regulatory frameworks that would promote the adoption of blockchain and cryptocurrencies.?

The Effect of Terra-Luna and FTX Collapse on Regulation

FTX exchange has repeatedly been in the news headlines in the recent past with a close comparison of what befell Terra Luna in May this year. The collapse of the two significant platforms in the crypto market is expected to not only give rise to criminal and civil actions against the respective exchanges and their executive but also push for actual regulatory changes in the crypto market. Various State and Federal agencies are already launching or expanding investigations into these companies. The impact is expected to go beyond its customers who had invested more than $16 billion that has been held by FTX for instance. Lawmakers seem to see these two scenarios as a good opportunity for them to introduce crypto regulations and be done with recurring crypto fraud of such nature.?

Africa is one of the fastest-growing crypto markets in the world, according to Chainalysis, but remains the smallest, with crypto transactions peaking at $20 billion per month in mid-2021. Kenya, Nigeria, and South Africa have the highest number of users in the region. Many people use crypto assets for commercial payments, but their volatility makes them unsuitable as a store of value. - IMF        

The collapse of FTX and Terra Luna, and the subsequent filing for bankruptcy by BlockFi and other crypto firms have sent shockwaves across the crypto industry in the midst of the industry's longest winter. While countries like El Salvador and Central African Republic (CAR) have legalized use of Bitcoin, the level of uncertainty about bitcoins stability still remains high across the world.

Conclusion

The global blockchain and crypto regulatory landscape is set to expand and formulate over the next one to two years with major regulators in the EU, America, Middle East and Africa heading to boardrooms to define cryptos and their activities in a bid to protect their consumers and markets in general from the crypto scams and volatility. The crypto industry is one of the most dynamic industries the regulators have ever experienced, so it will still be an uphill task for them to create standardized regulations for the industry. Therefore, most regulations that will be enforced will have room for progressive adjustments as the industry matures.