What is the current state of cryptocurrency regulation?
- The total market capitalization of digital currencies is $1.7 trillion and over $90 billion is traded every day.
- Analysts have warned that the industry is so large that it could have macroeconomic consequences if mismanaged.
- Piecemeal approaches to cryptocurrency regulation must be replaced with a globally coordinated framework.
In early March, President Biden signed the long-awaited executive order on ensuring responsible development of digital assets, a high-level recognition of the potential of the cryptocurrency industry.
This executive order commits the White House to participate in research on cryptocurrencies and to engage government departments to collaborate in the creation of a regulatory framework for digital assets. It also outlines a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”
According to the member of the steering committee of the Digital Currency Governance Consortium of the World Economic Forum, Jeremy Alliare“The Executive Order sets out initiatives to explore and engage in constructive problem-solving around known risks that exist with the legacy financial system and the new Web 3 world.”
This exploration, Allaire added, will cover “privacy, security, financial inclusion, global competitiveness for the USD,” and more.
The White House is poised to make a concerted effort to regulate the digital asset industry – given the size and growth of the industry, this push cannot come soon enough.
Today, there are 18,142 cryptocurrencies, 460 cryptoexchanges, and the market capitalization of cryptocurrencies is $1.7 trillion. Every 24 hours, $91 billion worth of crypto is traded, most of it being Bitcoin or Ethereum.
Given the size of the industry and the impending regulatory push, it is now appropriate to take stock of the current state of regulation. In doing so, it will become clear that a globally coordinated approach to regulation is needed.
Cryptocurrency regulation is imperative
As the traditional financial system connects with the burgeoning crypto ecosystem, growing interconnectedness raises concerns about ripple effects that could impact systemic stability.
For some time, cryptocurrency has been seen as a tool for diversification, but tea leaves are starting to read differently. Earlier this year, the International Monetary Fund (IMF) released data indicating a correlation between bitcoin and the S&P 500. This raised fears of a spillover in investor sentiment between the stock market and cryptocurrencies.
Shortly after this analysis, the Financial Stability Board warned of the implications for global financial stability if the current trajectory of growing scale and interconnecting crypto-assets with these institutions continues. However, given the many data gaps that exist when it comes to crypto-assets, a full assessment of the macroeconomic impact is still somewhat out of reach.
Additionally, the nature of the underlying technology of cryptocurrencies is such that it enables cross-border transactions without the need for existing financial intermediaries.
New applications and models such as tokenization, decentralized finance, NFTs (non-fungible tokens) and decentralized autonomous organizations challenge traditional models that describe who is currently considered a “person”, what is the “ value” and how this “value” can be exchanged. . This threatens to come into direct conflict with existing regulations relating to cross-border data flows, intellectual property rights and capital controls. It could also lead to ambiguity in the fiscal environment, while posing a host of other political concerns.
The potential implications of cryptocurrencies for global financial stability and the special nature of the underlying technology show the importance of prioritizing regulatory discussions and decisions, both domestically and globally.
Current regulatory status
According to the World Economic Forum’s Global Future Council on Cryptocurrencies, there has been no internationally coordinated regulation of cryptocurrencies – although international bodies have been working on risk assessment and appropriate policy responses to the rise of cryptos.
Globally, central banks and regulators already have their eyes on this growing trend. Although they share a common goal – to stabilize their monetary systems and drive innovation and economic growth – countries, from China to El Salvador, have already begun to weigh and implement different regulatory options.
For these countries, their objectives seem to be broadly aligned: protecting the consumer, preventing illicit financing, protecting market integrity and promoting innovation. Their approaches vary, however.
While some jurisdictions, such as India, have amended existing laws, others, such as Liechtenstein, have come up with bespoke models. Another approach, apparently favored by the European Union and the United Arab Emirates, proposes setting up entirely new regulators to deal with the industry globally.
These territorial differences, while providing opportunities for jurisdictional arbitrage, create uncertainty and an increased compliance burden for companies operating in the sector. This situation is exacerbated by the lack of common standards and terminologies.
For a truly global coordinated approach, countries and international organizations must work together, learning from each other’s best practices and lessons. In addition to risk assessments and establishing common standards, there is also an urgent need to leverage the technology itself to develop tailored and inclusive solutions, through public-private collaboration.
Blockchain is an early-stage technology that enables the decentralized and secure storage and transfer of information and value. Although the best-known use case is cryptocurrencies such as bitcoin, which enable the electronic transfer of funds without banking networks, blockchain can be applied to a wider range of purposes. It has the potential to be a powerful tool for tracking goods, data, documentation and transactions. The applications are seemingly limitless; this could eliminate intermediaries, potentially reduce corruption, increase trust and empower users. In this way, blockchain could be relevant for many industries.
That said, blockchain also involves significant trade-offs in terms of efficiency and scalability, as well as many risks that are increasingly attracting the attention of policymakers. These include the use of cryptocurrency in ransomware attacks, fraud and illicit activity, as well as the energy consumption and environmental footprint of some blockchain networks. Consumer protection is also an important and often overlooked issue, with cryptocurrency, so-called “stablecoins” and decentralized applications running on blockchain technology posing risks to end users of lost funds and also risks to broader financial stability depending on levels of adoption.
Learn more about the work we’ve initiated on blockchain and distributed ledger technologies – to ensure technology is deployed responsibly and for the benefit of all. We work to accelerate the most impactful blockchain use cases, ranging from making supply chains more inclusive to making governments more transparent, as well as helping central banks explore digital currencies.
The path to follow
The White House executive order is a remarkable step in the right direction to enable interagency collaboration. A globally coordinated approach, encompassing international cooperation around crypto-asset regulation, will be economically optimal, protect consumers, and prevent the misuse of cryptocurrencies for illicit activities.
The Forum’s Digital Currency Governance Consortium, made up of more than 80 organizations and representing various industries and geographies, is working towards this end. It has focused its second phase of work on examining the macroeconomic impacts of digital currencies and developing regulatory approaches to this effect, as stakeholders continue to experiment with these instruments and the adoption of cryptocurrencies. , stablecoins and currencies issued by the central bank.