The growth of the cryptocurrency market has been rapid; however, it has been riddled with various trading issues and concerns. Recent events such as the price drop of cryptocurrencies and the bankruptcy of several large crypto companies have made it more critical than ever to establish new rules and regulations for the market. Until now, the market has remained largely unregulated.
The recent failure of the FTX cryptocurrency exchange has highlighted the need for regulation in the cryptocurrency market. This has led to a call for closer monitoring and control over these markets, as new regulations need to be set up to prevent such occurrences from happening again.
Jean-Paul Servais, chairman of the global securities regulator IOSCO, believes that regulating digital assets does not have to be a daunting task. He suggests reviewing the rules that credit rating agencies and market benchmark compilers follow as a starting point for regulation.
As we head into 2023, several regulations are expected to be implemented in the crypto space. Some of these include increased KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance for exchanges, stricter rules for ICOs (Initial Coin Offerings), and more transparency in the trading of digital assets. These regulations are essential to protect investors and promote a safer and more stable crypto market.
This article looks at some of the most important regulations that should be expected in the crypto space as the year progresses.
International Crypto Regulation: Trends to Expect in 2023
IOSCO Will Advocate for Increased Global Cryptocurrency Regulation
The International Organization of Securities Commissions (IOSCO) is a powerful global financial organization with over 100 member countries and the authority to regulate at least 95% of the world’s markets.
According to Reuters, Ashley Alder, chairman of IOSCO, believes IOSCO should regulate the crypto market by 2023. He sees the cryptocurrency industry as one of the “three Cs” that IOSCO should prioritize this year. The other Cs are climate and COVID-19. He wants to form a global group similar to the one for climate finance under the G20 group of leading economies.
Alder believes that cryptocurrency regulation is essential for two reasons.
- Stricter global regulation will combat the ever-increasing cybersecurity challenges.
- 2. Regulation is critical to protecting vulnerable financial investors and climate finance initiatives.
The organization intends to publish guidance on how to apply its principles to digital currency trading to ensure the protection of all stakeholders. They believe this will pave the way for increased transparency in the operations of the cryptocurrency markets, providing investors with the confidence they need to invest in this rapidly-evolving space.
Cryptocurrency Regulation Will Be Tougher Because of the Recent Scandals
The FTX implosion has sent shockwaves throughout the global financial community. There will not only be legal action taken against specific companies or individuals. Many countries and financial regulatory bodies will be inspired to act to protect investors.
According to a Financial Times article, the Financial Stability Board (FSB) plans to expedite its work on developing new regulations in response to the latest cryptocurrency scandal.
More Countries Will Implement and Enforce Cryptocurrency Regulations
Many countries have established cryptocurrency regulations as a result of the exponential growth of the crypto market in recent years. More countries will follow that trend in 2023. It is expected that these rules will differ widely. Some countries embrace cryptocurrency, while others discourage it.
Below is a list of countries to watch for in 2023. These countries have either set up or will set up some form of crypto regulations.
- United Kingdom
The Financial Conduct Authority (FCA) issued a warning to UK citizens in 2021 about social media and the cryptocurrency industry. According to FCA Chair Charles Randell, scammers routinely pay social media influencers to help them pump and dump new tokens based on pure speculation.
According to reports, the UK Treasury intends to implement a regulation that will aid cryptocurrency regulation, with a focus on the operations of foreign companies. It is believed that these restrictions would require FCA registration for foreign companies to operate in the country, and these processes are so complicated that 85% of people who try to do it fail.
- El Salvador
The country’s Bitcoin law recognized cryptocurrency as legal tender in 2021. Businesses were also required to do so.
- Lugano, Switzerland
Plans are in the works to allow citizens to pay local taxes using cryptocurrency.
- Belarus
The country provides tax breaks for individuals who own digital assets.
- Saint Kitts and Nevis
In 2022, the Prime Minister declared cryptocurrencies a legal tender.
- Argentina
The IMF has been outspoken in its opposition to cryptocurrency regulation. Thus, to receive a $45 billion loan from the organization, Argentina agreed to discourage the use of cryptocurrency in 2022. This is a significant development because Bitcoin has been widely favored in a country with already shaky currencies and markets.
- Europe
In 2020, the European Commission proposed regulating markets in crypto assets. The Markets in Crypto-assets Regulation (MiCA) will subject crypto asset activities to the existing EU regulatory framework for financial services.
According to the timeline, the regulations will be fully implemented by the end of 2024 but will take effect (at least partially) in 2023. This proposed law will improve the integrity of the market, protect investors, and ensure the market runs smoothly.
- Singapore
Singapore provides tax breaks for individuals who own digital assets.
- United States
The Securities and Exchange Commission (SEC) of the United States considers cryptocurrency firms as high-risk endeavours.
It issued guidelines in December 2022 requiring companies subject to federal securities law disclosure obligations to disclose direct or indirect relationships with crypto companies that have:
- Declared insolvency
- Filed for bankruptcy
- Excessive redemptions or suspended withdrawals
- Handled unaccounted crypto assets for customers
The International Monetary Fund (IMF) Will Work to Accelerate Global Cryptocurrency Regulation
Since 2021, the International Monetary Fund (IMF) has made significant advances in global cryptocurrency regulation. It proposed the establishment of a Resilience and Sustainability Trust in April 2022.
The IMF is concerned about cryptocurrencies’ inadequate disclosure and oversight and their lack of strong operational governance and risk practices. The group worries that the cryptocurrency market could be used to launder money or pay for terrorist activities.
While the IMF’s concerns about cryptocurrencies are shared by many people around the world, its solution is unique. It seeks a globally coordinated effort to supervise cryptographic activities and standardize data with standard rules that cross all borders.
The IMF wishes to see a comprehensive global solution implemented as soon as possible before regulations become fragmented and difficult to enforce.
Fundamental Issues That Must Be Addressed Before Crypto Regulations Can Be Implemented
Lawmakers must answer a couple of questions before they can make and enforce crypto regulations. Their answers to these questions will determine the sector’s future and if their countries will benefit from the tremendous potential of the technology.
Is Cryptocurrency Considered a Commodity or a Security?
According to Gary Gensler (Securities and Exchange Commission Chairman), cryptocurrency is a security. The Howey Test, based on a 1946 Supreme Court decision in SEC vs. W.J. Howey Co., defines securities as money invested in a common enterprise with the expectation of profits from the efforts of others.
The SEC announced in May 2022 that it would crack down on cryptocurrencies by doubling the size of its Crypto Assets and Cyber Unit. In a statement from September 2022, Gensler said that promoters are marketing, and investors buy most of these tokens because they are promoting or expecting profits based on the work of others. In this case, the SEC would have to register cryptocurrencies.
The big question of how to classify crypto still needs to be answered. Industry players and regulators need a standard view of what cryptocurrencies are before the regulations take full effect.
What Legislative Options are Available?
As the crypto market continues to evolve, the question of regulation has come to the forefront of the industry. Most important is the question of how strongly the industry should be regulated.
Some experts, like economist and professor Stephen Cecchetti of Brandeis International Business School, argue that cryptocurrency should not be regulated. Cecchetti believes that implementing a separate structure for supervising and regulating crypto won’t make the financial system more secure.
Cecchetti suggests that new rules should only limit the amount of exposure that traditional leveraged intermediaries have to the crypto world rather than making new laws and rules to regulate cryptocurrency. Some fear that new regulations would encourage financial activity to shift away from traditional finance and into the less-regulated cryptocurrency world.
Democratic Senator Elizabeth Warren has called for stricter rules for crypto. He thinks the recent failure of the cryptocurrency exchange FTX, which filed for bankruptcy in November 2022 after losing billions of dollars in customer deposits, shows how stricter oversight is needed.
Two Senate bills have been introduced in the United States to address this issue. The first, sponsored by Michigan Democrat Debbie Stabenow and Arkansas Republican John Boozman, would require all digital commodity platforms, including trading facilities, brokers, dealers, and customers, to register with the Commodity Futures Trading Commission (CFTC).
This bill would grant the CFTC more authority to regulate the crypto industry than the Securities and Exchange Commission (SEC). Additionally, it would prohibit abusive trading practices, require the disclosure of any conflicts of interest, mandate strong cybersecurity measures, and call for reporting suspicious transactions.
The second bill, introduced by Senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York, would classify digital assets as commodities, securities, or ancillary assets. As defined in the bill, ancillary assets are cryptocurrency tokens whose values fluctuate but do not provide the owner with any financial benefits such as profits or revenue shares.
This bill would require cryptocurrency issuers to make certain disclosures to the SEC and classify digital assets as commodities, subject to CFTC regulation. This would help ease tensions between the SEC and other federal agencies.
The Impact of Regulations on Cryptocurrency Investment
The implementation of regulations in cryptocurrency investment could have significant effects. One of the key benefits of these regulations would be the creation of a framework that promotes transparency through disclosures.
This transparency framework is essential for institutional investors, who require risk-management strategies for each investment. However, cryptocurrencies currently lack the necessary transparency to create such risk profiles. Therefore, introducing regulations could greatly benefit institutional investors.
For instance, the lack of transparency surrounding the algorithmic stablecoin TerraUSD (UST) led to a substantial decrease in UST prices in May 2022, which in turn affected its sister coin LUNA and BTC prices as well.
Some cryptocurrency exchanges have begun implementing proof-of-reserves, which displays a snapshot of assets at a specific time to address investor concerns. While this is a step in the right direction, it is essential to note that it does not provide ongoing updates on assets.
In Conclusion
- The cryptocurrency industry is poised for a major comeback after a significant financial setback it experienced in 2022. With new regulations set to take effect, the industry is on the brink of a significant shift towards increased safety and security for investors.
- However, financial regulators must set up a suitable risk assessment framework to ensure that cryptocurrencies are regulated properly. This framework should include independent audits as well as stress testing of on-chain data.
- Regulations limiting the use of exchange tokens for lending to cryptocurrency companies could be implemented to protect customers. They should include measures that could stop exchanges from freezing withdrawals, which leaves traders without access to their money if the exchange goes bankrupt.
- Is the crypto industry hopeless due to the crypto winter? We don’t think so because the industry could recover and even promote wider adoption of decentralized finance in traditional financial markets by implementing appropriate regulations.
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