It has been 12 years since the launch of Bitcoin. Though regulators around the world are still struggling to properly regulate the growing industry, it has become a priority. Many supervisory bodies are studying the sector to tame the wild decentralized sector.
Talks for crypto regulations are now going on at the top levels of governments in many countries. While smaller jurisdictions like Gibraltar, Malta, the UAE, Estonia and Lithuania are promoting their crypto-friendliness, China became the first major economy to impose a blanket ban on all crypto-related activities in the country.
But, in 2022, the eyes will be on the United States as it has remained one of the largest crypto markets.
“I expect 2022 to be the year where US policy around crypto is bound to become clearer,” said the Chief Executive Officer at Tradier, Dan Raju. “There is bipartisan alignment on the need for overall crypto regulation .”
However, regulations in the country might face some roadblocks due to the overlapping areas between state and federal frameworks. Though there is no clarity around crypto regulations in the country at a federal level, states like Wyoming have passed crypto-friendly laws.
The Need for Regulations
“Regulators have already expressed that their focus would be to create rules based on the same retail investor-centric approach and structures that are in place to manage traditional listed securities. The volatile nature of crypto will force policymakers to stay focused on the issue in 2022,” Raju added.
Another factor that is pushing regulators towards crypto regulations is the growing involvement of institutional players in the sector. Several hedge funds are taking big positions with cryptocurrencies .
“Early signs for how regulators will approach crypto regulations point to positive,” Adam Grealish, the Head of Investments at Altruist, told Finance Magnates.
“The SEC appears to want to work with crypto assets, not regulate them out of existence, and we have seen more institutional investors bolster protocol adoption. But, these risks are always evolving, and there’s certainly interest.”
Additionally, governments are concerned about the losses in their tax revenue that could have been collected if crypto were already regulated. However, tax agencies are compelling locally regulated crypto exchanges and citizens to disclose all crypto transactions. But, the main focus of regulations will be to protect the interest of retail investors.
Raju added: “There is also pressure from popular retail trading platforms, particularly equity broker-dealers who are contemplating larger crypto offerings but are waiting for compliance guidelines before they broadly offer crypto products.”
Utility or Security
The largest question ahead of the regulators will be defined if cryptocurrencies fall under the category of utility tokens or security tokens. In the United States, Bitcoin and Ethereum are categorized as commodities, but other cryptocurrencies do not fall under this category.
This also allows the Securities and Exchange Commission to go against some of the largest crypto projects: it is currently fighting a legal battle with Ripple over the status of the XRP token. The verdict of that case will clarify the status of a broader range of cryptocurrencies in the country.
Ban in Line?
While we have the example of China, we also have El Salvador that became the first country to name Bitcoin a legal tender. However, many major countries do not want to be liberal with cryptocurrencies. India and Russia showed signs to follow China’s path as the first has reportedly drafted a bill to ban crypto completely, while the second wants to curb crypto investments.
Such moves have the potential to bring short-term havoc in the market, but in the long run, the market stabilized and continued its upward movement. For instance, China, which was the largest crypto market before the 2017 ban, failed to cripple the market despite the ban.
Justin Giudici, the Head of Product at Telos Foundation, said: “India and Russia banning cryptocurrencies should not be cause for much alarm, as China took the same course of action this past Fall. The bans are being done preemptively to protect the stability of their financial institutions. The banning of cryptocurrencies in Russia is particularly interesting because it makes it more difficult for cybercriminals in the area to receive payment.”
However, countries like the United Kingdom are focusing on tightening local control and anti-money laundering rules on crypto platforms. This will allow the circulation of cryptocurrencies but will break the anonymity of the industry.
“While some jurisdictions may seek to ban crypto outright, it is unlikely to become a standard regulatory approach,” said Chris DePow, the Senior Advisor of Financial Institution Regulation & Compliance at Elliptic. “Crypto activity cannot be effectively stopped, merely criminalized. Such criminalization is counterproductive to those who would seek to reduce instances of blockchain-based financial crime, as it eliminates all of the good actors and leaves only those who will willingly break the law.”
“A more suitable approach is the implementation of strong regulatory compliance controls and the establishment of industry groups and self-regulatory organizations that may promote best practices among crypto businesses and associated persons. Bans also stifle technological innovation and do a disservice to the global underbanked, who benefit from the intermediate nature of crypto. Only through public-private engagement and good-faith debate can the innovative promises of crypto come to fruition without posing a significant risk of facilitating the illicit activity.”
