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The regulation of cryptocurrency is a rapidly evolving and diverse landscape. Anyone with any knowledge about the space knows how challenging it is to regulate. Nonetheless, a lot of efforts are being made by regulators to tango with the cryptos.
Six Reasons Why Regulating Cryptocurrency is so Difficult
There are a number of reasons why regulation is so hard to come by when it comes to crypto assets. Below is a quick rundown of the biggest hurdles regulators are facing:
Many crypto assets, such as Bitcoin, are decentralized and operate on a network of computers across the world rather than being controlled by a single entity. This makes it challenging for governments in regulating crypto in the same way that they regulate traditional financial institutions.
Some crypto assets, like Monero, offer a high degree of anonymity, which makes it difficult for regulators to track transactions and identify those who are using the network.
Lack of a global legal framework:
There is currently a lack of standardized legal frameworks around the world for regulating crypto assets. This makes it difficult for governments to develop effective regulations for the industry.
The technology behind many crypto assets, such as blockchain, is complex and not fully understood by many regulators, making it difficult for them to develop effective regulations.
The crypto asset market is constantly evolving, with new assets and technologies being developed all the time. In most cases, regulators find it hard to keep up with the ever-evolving dynamics of the digital asset industry.
Crypto assets are also quite difficult to be classified, and while they are often perceived as being part of the same basket, i.e. asset class, the fact remains that “crypto assets” consist of a few subsets of asset classes.
As of today, there are no universal laws for regulating crypto. However, some central authorities, like the Financial Action Task Force (FATF) are interested in cryptocurrency and have suggested some regulatory measures to keep users safe.
How is the Financial Action Task Force Helping Governments in Regulating Cryptocurrency?
The Financial Action Task Force (FATF) is an intergovernmental organization that sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. The FATF is based in Paris, France, and has 38 member jurisdictions, including most of the major financial centers of the world.
In the digital asset industry, the Financial Action Task Force is particularly interested in understanding the potential risks and vulnerabilities that digital assets may pose in money laundering and terrorist financing activities, as well as the underlying potential benefits and opportunities that they may offer to improve the state of capital markets.
So far, FATF has issued a number of guidance documents and recommendations related to the use of cryptocurrency and virtual assets, which are designed to help countries and financial institutions assess and mitigate the risks associated with these assets. Some of the key areas of focus for the FATF in this regard include the need for adequate customer due diligence and record-keeping, the development of new crypto regulations, effective frameworks and supervisory regimes, and the promotion of international cooperation and information sharing.
One of the FATF recommendations is the “Travel Rule,” which requires financial institutions to collect and exchange customer information when sending or receiving funds – to check fraud and money laundering.
The Global Travel Rule (GTR) also known as the “Crypto Travel Rule” is a framework for exchanging information about the origin and destination of certain cross-border transactions. It is designed to help combat money laundering and terrorist financing by enabling authorities to trace the movement of funds across borders.
As of 2019, the Financial Action Tax Force implemented the GTR, which requires virtual asset service providers (VASPs) to collect and transmit certain information about transactions involving the movement of virtual assets between VASPs or between a VASP and a natural person. This includes the name, address, and other identifying information of the sender and recipient, as well as the amount and type of virtual asset being transferred. This acted as one of the pivotal moments in the digital assets industry towards regulating cryptocurrency.
But not all countries have directly adopted it, some jurisdictions have implemented it through national legislation and regulatory frameworks. In Switzerland, the GTR is implemented through the Swiss Money Laundering Act and the Swiss Financial Market Supervisory Authority (FINMA) guidelines on combating money laundering and terrorist financing in the financial sector. In Singapore, the GTR is implemented through the Monetary Authority of Singapore’s (MAS) Payment Services Act and its Notice on the Prevention of Money Laundering and Terrorist Financing in the Virtual Asset Service Industry. In Canada, the GTR is implemented through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its associated regulations, as well as guidance from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Digital Economy in Need of International Frameworks
Image source: Bitcoin Global Macro
Approach Still Differs from Country to Country
Evidently, several countries have taken different approaches to regulating cryptocurrency. Some countries, like Japan and Switzerland, have taken a more permissive approach and have recognized cryptocurrency as a legitimate form of currency. They have also put in place regulatory frameworks to ensure that cryptocurrency exchanges and transactions are properly monitored and taxed.
Other countries, such as China and India, have taken a more cautious approach and have banned or restricted the use of cryptocurrency. These countries often express concerns about the potential for money laundering and other financial crimes, as well as the potential for cryptocurrency to undermine the stability of their financial systems.
Generally, the regulatory landscape for cryptocurrencies is still relatively young and is likely to continue to evolve and change over time. Most government regulations on cryptocurrency around the world today seem to be focused on implementing taxes and preventing theft, scams and money laundering. However, the broader aspects of how regulators must approach regulating the digital assets class remain very dispersed.
The FTX Saga – A Wake Up call for regulators
The unfortunate series of events leading to the collapse of FTX this year has had a significant impact on the crypto community. What happened with FTX is a long tale that leaves a sour taste and begins with a protagonist (or should we say the villain) – Sam Bankman-Fried. Sam created Alameda Research a few years ago. Then, he built a reputation in the crypto community as a thought leader and, over time, was seen as the mayor of crypto. He co-founded the FTX exchange alongside Gary Wang. After years of running what seemed like legitimate businesses, Coindesk revealed that most of Alameda’s funds were FTTs (tokens native to the exchange). At first, different people had varying opinions about what that meant in general. But things went downhill from that time until FTX declared that the exchange was hacked, and now it is bankrupt. Then, coincidentally, Sam skipped town. The entire thing was a mess and highly suspicious. The feds swooped into action immediately. Currently, Sam is in FBI custody for fraud, and Caroline (former Alameda chief) is choosing to cooperate with the feds and provide information into what went down.
Since the FTX saga and previous heart-wrenching events like the Luna collapse, the SEC and other regulatory bodies around the world have resolved to monitor the crypto market very closely. While these will increase the barrier to entry into the blockchain world, it is necessary to prevent recurrences and protect citizens.
Despite the outcry against regulation, incidents like these motivate regulators to intensify their efforts and create more legislation for regulating cryptocurrency. Rather than protest, the crypto community should embrace the regulation of cryptocurrency and find common ground for a safer decentralized future.
Emerging themes for Regulation in the future
There are some key themes that are emerging as the way forward for regulation in the crypto world. One key theme is the need for clarity and consistency in regulation. Many people do not fully understand how cryptocurrencies and the underlying blockchain technology work. This makes it difficult for regulators to effectively oversee and regulate the industry. To address this, there is a need for clear and consistent guidelines and regulations that can provide a clear framework for the industry to operate within to ensure successful regulation of cryptocurrency.
Another key theme is the need for balanced regulation. While it is important to ensure that the industry is properly regulated to protect consumers and prevent fraud, it is also important that the regulation of cryptocurrency leaves room for innovation and growth. Overly burdensome or restrictive regulations could stifle innovation and hinder the development of the industry.
A third key theme is a need for international coordination. Cryptocurrencies and blockchain technology are global in nature, and different countries have taken very different approaches to regulation. This can create a patchwork of different regulations that can be confusing and create barriers to entry. To address this, there is a need for international coordination and cooperation to create a more cohesive and consistent global regulatory framework.
Overall, the way forward for regulation in the crypto world will require a balance between clarity and consistency, balanced regulation that allows for innovation and growth, and international coordination. By addressing these key themes, regulators can create a framework for regulating cryptocurrency that allows for the continued development and growth of the industry while also protecting consumers and preventing fraud.