The discussion around cryptocurrency’s future cannot be had without talking about the controls needed to make the asset more secure for investors. In truth, this may be the single biggest challenge to market growth.
In light of recent calls for increased clarification around regulatory frameworks – for fiat money as well as cryptocurrency – it is important to ask what ‘good’ regulation would look like, however. By understanding how regulatory controls can support a healthy market, organisations and jurisdictions can both establish the best controls for security and investor confidence.
Firstly, it is important to consider the backdrop behind these controls. In the aftermath of high-profile data breaches and a diversification in asset classes being introduced to financial systems, cryptocurrency has been forced to improve its effectiveness in the market while still offering compelling investment opportunities to traders.
In October last year, a statement from the Financial Action Task Force (FATF) acknowledged the need to regulate virtual assets without stifling the innovation they offer. Similarly, the 5th Anti-Money Laundering Directive (5MLD) outlines the EU’s intention to tighten its grip on money laundering, with a clause acknowledging virtual currencies as a key consideration.
Despite these increased controls, cryptocurrencies have faced numerous data hacks which have made headlines, doing little to help displace fears around the asset’s legitimacy. While cryptocurrency remains an unregulated market for now, looking to various regulatory systems across the world can inform the best practices for jurisdictions to follow.
Learning from others
Contrary to popular opinion, smaller jurisdictions are more likely to have more robust and sophisticated regulatory frameworks in place, by virtue of their ability to implement more specific, tailored rules that acknowledge individual use cases for different asset classes. This means that countries such as Malta and the U.A.E actually have some of the most effective regulatory systems in the world.
By contrast, large and segregated nations with jurisdictional-specific regulatory systems – such as the USA – are likely to have fragmented regulatory bodies, resulting in a ‘postcode lottery’ of regulation. As a result, loopholes often exist within those regulatory frameworks, which banks can navigate to their own advantage.
What the crypto market can learn
It is important that the balance between fair regulation and industry growth is kept relatively even. In practice, that means that a ‘good’ regulatory system looks at risk systemically, ensuring that the market is not over-regulated. After all, too many controls can form a barrier to new market entrants.
For many regulators, the prospect of regulating digitally native startups is an intimidating one. It therefore may seem simpler to apply a blanket approach, rather than take the time to invest in more nuanced rules. The FCA is making progress in this regard, having made steps to acknowledge new market entrants through sand-boxing in the industry. For cryptocurrencies – an asset that is also technically complex in nature – this idea of slowly testing its introduction to mainstream regulation will be a practical approach.
The ultimate goal in achieving regulatory clarity, not just for cryptocurrencies, but also for fiat money, would be an international consensus on what ‘good’ regulation looks like. Guidelines for different kinds of regulation need to fit the changing dynamic of financial services and accommodate new entrants. Ultimately, that will be the best approach to striking the right balance between innovation and regulation.
This is a contributed article by Erik Wilgenhof Plante, CCO, BeQuant