4 min read
Published on: Jan 10, 2024
#Regulations
#Blockchain
2023 saw the crypto sector being subjected to intense scrutiny at the hands of regulators from across the world. We saw governments pushing strict directives to put the sector under its purview within the wider financial sector.
The crypto sector projected itself as a decentralised rebellion against the traditional financial sector. However, the collapse of exchanges such as FTX tarnished the reputation of the sector, accompanied by frequent hacks in the space, which led to users losing millions of dollars.
The frequency of such incidents was the main reason behind the interference of global financial regulators. It was about time someone took charge of what’s been happening and controlled the high risks associated with these occurrences.
As the crypto space keeps expanding, we can expect to see a more prominent focus on regulatory landscape.
The U.S. has proven to be one of the most active enforces of penalties and legal action against crypto companies in 2023, as authorities looked to counter bad practices in the industry, especially after the collapse of FTX. So, who’s behind all these regulatory changes?
The Securities and Exchange Commission (SEC) is an independent federal regulatory body in the United States that looks after the securities market, keeping in view the interest of investors.
In the U.S., the financial status of crypto assets is the biggest question. In fact, the SEC has labelled most of the crypto assets as securities even as crypto bodies are challenging the designation.
It all started when the SEC charged Ripple (XRP) in December 2020 for raising more than $1.3 billion through the sale of an unregistered security, XRP. The matter went to court and in July 2023, the final ruling was delivered.
As per the ruling, the sale of XRP tokens to retail investors on an exchange didn’t constitute a sale of securities.
However, the sale of XRP tokens to institutional investors constituted a sale of securities, the act being a violation of securities law.
In June 2023, the SEC charged two of the world’s largest crypto exchanges, Binance (BNB) and Coinbase (COIN), for acting as unregistered securities exchanges and offering unregistered securities for sale.
Among the cryptocurrencies designated as securities in these two lawsuits are Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Sandbox (SAND), Decentraland (MANA), and Algorand (ALGO).
Meanwhile, we are yet to see how the SEC will look at the applications of spot Bitcoin (BTC) exchange-traded fund (ETF).
The global crypto industry is eagerly awaiting the judgements in these cases too as the crypto market in the U.S. is still the largest in the world as per a Chainalysis report.
Source: Chain Analysis
The European Securities and Markets Authority (ESMA) is the regulatory body that oversees financial markets in the European Union (EU). The regulator has taken charge to regulate the burgeoning crypto sector too.
The ESMA is set to introduce the Markets in Crypto-assets (MiCA) regulation across the EU in 2024.
It is one of the world’s foremost comprehensive legal frameworks for crypto assets. Its goal is to foster an innovative and dynamic cryptocurrency sector while upholding customer interest.
With a MiCA license, crypto-asset service providers (CASPs) can operate across the 27-nation bloc.
MiCA was first proposed by the European Commission in September 2020. This was followed by two years of rigorous negotiations involving different stakeholders.
The European Parliament passed MiCA in April 2023.
Thereafter, the EU’s Council unanimously passed it in May 2023.
The ESMA is now inviting input from stakeholders over the regulation.
However, the ESMA continues to treat cryptocurrency as a risky asset. In July 2023, ESMA Chair Verena Ross warned that:
“There will be no such thing as a safe crypto-asset.”
Source: ESMA
MiCA is expected to come into complete effect by December 2024. It is already being hailed as a model template that should be followed by regulators in different jurisdictions.
As per Chainalysis, Central, Northern, and Western Europe (CNWE) was the world’s second largest crypto economy during July 2022- June 2023, behind only North America.
Dubai is one of the seven Emirates that comprise the United Arab Emirates (UAE). In March 2022, Dubai’s ruler HH Sheikh Mohammed bin Rashid Al Maktoum announced the Dubai Virtual Asset Regulation Law. The law established the Virtual Asset Regulatory Authority (VARA) as the crypto regulator of the Dubai region.
VARA intends to promote the UAE as a “regional and international hub” for virtual assets.
VARA issued its Full Market Product (FMP) regulations in February 2023 that apply to all crypto service providers. These regulations ensure licence-specific and activity-specific enforcement in the crypto sector of Dubai.
As per these regulations, exchanges need to obtain a licence and approval from VARA to offer crypto services in Dubai. Those failing to do so could face fines of up to AED 10 million ($2.7 million) under the law.
Blockchain.com, Crypto.com, Hex Trust, OKX, Binance, and Laser Digital are among the leading crypto exchanges that have secured licences from VARA.
Things haven’t been all well for crypto exchanges as the regulator has gone after violators. OPNX, the exchange established by the founders of failed hedge fund Three Arrows Capital (3AC), was reprimanded and fined $2.7 million by VARA for a market offence.
VARA also suspended BitOasis' conditional license in July 2023 for failing to meet standards.
In September 2023, Chainalysis published a report on crypto adoption in the Middle East & North Africa (MENA). The report highlighted how the UAE is leading the region in regulatory clarity. It sees a lot of crypto activity taking place on decentralised finance (DeFi) protocols.
As Dubai emerges as a prominent crypto hub, the role of VARA is only going to get more crucial.
Source: Chainalysis
In April 2022, the then Chancellor of the Exchequer of the United Kingdom, Rishi Sunak, announced, “It’s my ambition to make the UK a global hub for cryptoasset technology.” Sunak became the Prime Minister of the UK later that year.
As per the above mentioned Chainalysis report, the UK was CNWE’s biggest crypto economy. The country received an estimated $252.1 billion in crypto from July 2022 - June 2023.
Source: Chainalysis
Nonetheless, crypto regulation is still not very relaxed in the UK. The Financial Conduct Authority (FCA) oversees the crypto market as a part of the broader financial market in the UK. Firms selling cryptocurrencies must register with the FCA to operate in the country.
In June 2023, the FCA introduced tougher rules for crypto agencies to market crypto assets in the UK. Advertisers are required to add “clear risk warnings” while promoting cryptocurrencies. Agencies violating these laws could face a prison time of two years, a fine or both. The rules came into effect on 8 October 2023.
Several global crypto firms such as the United Arab Emirates-based Bybit and the U.S.-based Paypal decided to halt their services in the UK until their activities are compliant with the latest promotion rules.
In November 2023, the FCA along with the Bank of England published proposals to regulate stablecoins. Investor protection and preventing money laundering are the chief goals of these proposals, as per the regulatory bodies.
The country is about to approve the Financial Services and Markets Bill (FSMB) that would treat crypto as a regulated activity. It would also grant the FCA more power to set rules around crypto.
Crypto promotion rules, in tandem with the FSMB, make crypto trading fairly regulated in the UK. The role of the FCA in this regard would only grow now in coming years.
In Singapore, cryptocurrency is designated as “digital payment token” (DPT) to be regulated as a part of the broader financial system by the Monetary Authority of Singapore (MAS), Singapore’s central bank.
The Payment Services Act 2019 grants the MAS the rights to regulate crypto exchanges in the country.
Since Singapore treats approved cryptocurrencies as capital market products, crypto exchanges need to receive a capital market services (CMS) license by the MAS to operate in the island state.
The MAS brought crypto offerings under the purview of the Securities and Futures Act (SFA) 2001 in May 2020.
In March 2022, the MAS issued Notice PSN02, popularly known as the Crypto Travel Rule. As per the rule, crypto asset issuers must perform customer due diligence (CDD) and report suspicious transactions.
In November 2023, the MAS even announced that it was initiating tests around tokenization use cases. It is a part of Project Guardian which also includes Japan, the United Kingdom, and Switzerland.
Major global exchanges such as Coinbase, Ripple, Upbit, and Crypto.com recently received license from the MAS.
As per an order issued by the Singapore High Court in July 2023, a crypto asset is a property.
In fact, London-based consultancy firm Henley & Partners put Singapore in the first position in its Crypto Adoption Index published in September 2023.
Source: Henley
India secured the top spot in Chainalysis’ 2023 Global Crypto Adoption Index. India also emerged as the world’s second largest crypto market by raw estimated transaction volume.
Source: Chainalysis
However, the country sits at the fence when it comes to crypto regulation. Moreover, India’s Finance Minister and the Reserve Bank of India (RBI), India’s central bank, have often taken different stances on crypto.
Finance Minister Nirmala Sitharaman remarked in April 2023 that a global consensus on crypto regulation is necessary. But the RBI Governor Shaktikanta Das has time and again called for a complete ban on crypto.
The bank had warned of the risks of crypto trading in 2013 itself. Nonetheless, India introduced a 30% tax on gains from crypto trading and a 1% tax deducted at source (TDS) on crypto transactions in the 2022 Union Budget.
However, the RBI launched a Central Bank Digital Currency (CBDC) pilot in December 2022.
India recently hosted the G20 where the Financial Stability Board (FSB) and the International Monetary Fund (IMF) published a synthesis paper on global crypto policy.
Soon after, India’s Economic Affairs Secretary Ajay Seth announced the country’s intention to frame crypto regulations. He added that the RBI’s stance needs not be viewed as a binary decision.
It will be interesting to observe if the RBI will be flexible in its stance on crypto as other government bodies in India pursue a conciliatory rather than a combative approach to crypto.
The global crypto market is expecting the approval of spot Bitcoin and Ethereum ETFs in the U.S. quite soon. As the biggest crypto market in terms of volume, the U.S. SEC’s stance vis-à-vis cryptocurrency affects the markets globally.
As crypto assets become more popular and gain mainstream adoption in 2024, we expect financial regulators from different parts of the world to pull up their socks. In particular, we should also watch out for the approach of Canadian Securities Administrators (CSA), Japan’s Financial Services Agency (FSA), Australian Securities and Investments Commission (ASIC), and South Korea’s Financial Soervices Commission (FSC) towards crypto.
Regulators can no longer dismiss crypto as a marginal instrument. However, it is a double-edged swrd for crypto as its coming under increased regulatory purview essentially violates the industry’s underlying principle of decentralisation. But it seems that’s the price for going mainstream.
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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.
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