5min read
Published on: Jul 1, 2024
#Crypto 360
#Regulations
Since the launch of the first cryptocurrency, Bitcoin, in 2009, the space has seen much innovation accompanied by many grey areas. This has been enough to keep cryptocurrency regulation authorities worldwide in a constant search for the best framework. So, what has changed to date?
Cryptocurrency regulation is gradually improving globally, with a tendency towards increased security. However, this process could be faster and sometimes involves many argumentations, which means crypto firms must constantly try to meet the new legal requirements.
For the crypto industry to move forward, it needs solid crypto regulation frameworks. Below, we will review the present regulatory framework, its implementation challenges, the latest updates, and more.
Cryptocurrency regulation began with the launch of Bitcoin, the world’s first cryptocurrency, after the 2009 global financial crisis. In the beginning, the world of virtual currencies operated in a legal vacuum, or the ‘wild west’ of finance, where the pace of innovation outstripped that of policymaking. This period of little regulation was when cryptocurrencies thrived, raising concerns about security, legal issues, and stability.
The critical need for regulation was realised when the G20 finance ministers supported the FSB and IMF recommendations. These recommendations, directed at attaining a common approach to global crypto policies, emphasised the global community's commitment to appropriately incorporating cryptocurrency into the global financial system.
The financial regulators’ approach changed significantly in India when the Reserve Bank of India (RBI) first prohibited using crypto transactions. However, this ruling was reversed in 2020 by the Supreme Court, which was a big win for crypto enthusiasts.
The government stepped up and started implementing a crypto tax on profits, suggesting the authorities’ gradual understanding and regulation instead of a complete ban. This shows how cryptocurrency regulation is still in its early stages and is not merely black and white, but a shift towards more and better-defined laws and regulations across the globe.
Over the last few years, the cryptocurrency industry has been increasingly regulated as governments worldwide try to minimise risks and protect investors. The emphasis has been placed on regulating cryptocurrency exchanges, the main doors to virtual assets. Authorities have taken some measures, including licensing, AML KYC, and cybersecurity measures, to improve the safety and reliability of trading platforms.
Also, how virtual currencies should be taxed has become a hot topic. The crypto tax differs massively across countries, making the situation quite complex for the new market participants.
Discussions on CBDCs have also picked up in recent months. Most countries are considering creating digital counterparts to their fiat money. CBDCs can prove revolutionary, bring about shifts in the traditional payment models, and boost financial inclusion, efficiency, and transparency. However, these come with risks, such as privacy infringement, surveillance, and centralisation of power.
The case of the US SEC against Ripple (XRP), where the company was accused of selling unregistered securities, is one of the most significant events regulating cryptocurrencies.
This case has brought into the limelight the issues of how legal systems struggle to categorise virtual assets, especially cryptocurrencies, thus pushing international financial regulators to reflect on how these cryptocurrencies fit into the legal systems.
The collapse of FTX, once one of the biggest exchanges, showed an urgent need for stricter rules. The failure impacted the world, making financial regulators keener on the operation and financial management of cryptocurrency firms. This event has underlined the necessity of regulating the consumer’s assets, consumer protection, and corporate governance in cryptocurrency.
Other important events, like the Mt. Gox hack and the closure of the Silk Road market, also impacted the approach to regulating virtual assets.
While cryptocurrency adoption is rising yearly, precise regulation remains a challenge. Contrary to traditional financial markets, which are governed by a certain set of rules, cryptocurrency regulation is not uniform worldwide. This unequal approach leads to general misunderstanding among market participants and, thus, slower adoption.
Attaining a global regulatory framework is challenging, considering cryptocurrencies' main concept–decentralisation. The introduction of the CBDC is one of the best bets for a regulation that connects the worlds of traditional finance and virtual assets. Most of the new-gen crypto projects are already on the right side of the law regarding regulation. While policies develop, these firms make compliance essential to their strategies while preparing for the future.
The crypto markets have reached a crossroads, and actions taken by financial regulators and companies will determine the further development of the industry. Cooperation between the representatives of the crypto sphere and regulators will develop a cryptocurrency regulation framework that fosters innovation and prevents the manipulation of the crypto markets, fraud, and other financial crimes.
Participation by both sides in discussions about compliance and policymaking will ensure that the resulting rules and regulations are practical and reasonable.
The term “crypto regulation” is somewhat paradoxical because the market was created based on the principles of decentralised peer-to-peer transactions. However, when the regulators ask for more control, the market will have to shift slightly from such directions.
Various parts of the world are progressing at different rates in regulating crypto, with the EU leading the way with MiCA. In the US, development has been relatively slow, and the SEC has primarily relied on enforcement actions while conflicting with the CFTC. In 2023, the EU and the UK made major progress in their cryptocurrency regulations.
The UK is acting step by step: the new regulatory framework was introduced this year, and its consultation was closed in February 2024. The shape and details of new rules and their implementation are not yet specific, but cryptocurrency will be watched and controlled more in the future.
As the industry navigates this transition in 2024, below are three key trends likely to shape the regulatory landscape:
Recently, we have started to see the integration of blockchain and decentralised finance (DeFi) within traditional financial systems. The approval of Bitcoin ETF in the US exemplifies this trend, showing a decreasing gap between the two. However, we can expect that more and more crypto firms will hire financial regulation experts to gain an advantage over competitors.
With regulatory pressures growing, we have seen many new crypto firm hires recruited from traditional financial regulation institutions to prevent violating the latest rules and regulations.
Aggressive actions against crypto firms showcase tighter restrictions on the industry. From October 2022 to September 2023 alone, the SEC imposed about $5 billion in penalties on various crypto firms for different cases, including non-compliance with AML laws and selling unregistered securities.
It is no secret that the emergence of new technology needs new regulation. To overcome these challenges, crypto firms will turn to traditional finance and law experts to meet the new and changing regulation needs.
The most common argument is that cryptocurrencies are either securities or commodities and will not help provide long-term stability to the market. Effective regulation implies profound knowledge of the crypto market and open feedback from partners about new suggestions.
Despite falling in the same category, cryptocurrencies exhibit different characteristics. When the whole ecosystem is governed by one set of rules, there will be tension between regulators and market participants. For example, stablecoins and cryptocurrencies are not the same because they have different uses and require different regulations.
Every coin does not need regulation; however, the laws need to be specific to the characteristics of the crypto market and its applications.
2024 will be decisive as a large part of the world's GDP is in the hands of a country set to conduct elections. New management usually means new laws, which could significantly impact the market.
Recommended Read: Crypto Voters Are Casting an Impact on the 2024 U.S. Election
In the UK, Prime Minister Rishi Sunak has referred to the UK as a country that is open for business and has backed plans for developing the crypto and blockchain industries. His government has supported most of the critical elements of stablecoins by the Financial Services and Markets Act. However, since opinion polls suggest that there may well be a change in government after the next general election, there may be no complete set of new rules until after the election.
Likewise, in July, the House Financial Services Committee approved a major bill to promote a regulatory framework for cryptocurrencies in the US. However, its journey through Congress will be lengthy, given that the focus will soon turn to the presidential race.
Cryptocurrencies are decentralised, making it difficult for regulators to enforce compliance. This poses a challenge to regulators because, on the one hand, they have to encourage innovations, while on the other hand, they must ensure that investors are protected and the financial systems are stable.
Industry players can, therefore, assist in formulating proper regulatory systems that foster innovation without jeopardising investors’ protection and financial system stability.
These events can change the market outlook, trading conditions, and investment opportunities. As a trader or investor, you should be informed about regulatory changes to minimise your chances of being scammed or fined. Together, we can create a stable and secure future for cryptocurrencies while making them more adaptable.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
Join the community to receive exclusive market analysis and updates!
Ignite your financial journey with BitDelta's diverse asset classes.
