As cryptocurrency enters mainstream society, they require a strong regulatory framework to encourage institutional investments. Adequate regulations ensure transparency and accountability while protecting against market manipulation.
MiCA provides a clear definition for crypto assets and specifies data collection requirements for exchanges and wallets, which should facilitate regional expansion for CASPs.
Clarity
Regulators attempting to develop crypto regulations recognize the value of clarity as a critical driver of progress. Without an understanding of how crypto is regulated, innovation may become severely limited. Luckily, several avenues exist for creating this clarity in the marketplace.
Securities laws provide extraordinary transparency and clarity regarding cryptocurrency, yet the industry regularly complains of the SEC’s unpredictable and inconsistent approach to regulation.
In addition, the Financial Stability Board (FSB) issued high-level guidelines that seek to foster global regulatory consistency and clarity when it comes to stablecoins. These can serve as models for national authorities when creating their own regulations.
Gibraltar provides an example of an explicit legal framework designed to support firms focused on cryptocurrency. Their regulations cover licensing requirements and the protection of both consumers and businesses alike. Meanwhile, in the U.S. they recently made moves clarifying that national banks and savings associations may provide custody services for cryptocurrency, providing much-needed assistance for an increasingly volatile market. Lastly, money transmission and anti-money laundering rules apply equally between exchanges and personal wallets that store private keys.
Legitimacy
Legitimacy is a fundamental aspect of all power relationships, whether formal or informal. It can be created through procedural aspects or the quality of political institutions and decisions they take; for example, democratic states owe their legitimacy to their ability to provide justice and other moral goods to its citizens.
CBDCs could offer an innovative digital alternative to traditional financial and contractual systems, making them accessible and usable by both experienced investors as well as newcomers alike. Furthermore, their lower transaction costs and greater transparency and security could prove useful for international payments as well as domestic ones.
However, it should be remembered that the crypto industry has an overwhelming desire to keep its regulatory framework as flexible as possible in order to meet public perception and attract new players. Thus, governments should adopt a broad, technology-agnostic approach when considering regulation; this will allow policy-makers to adjust accordingly as technologies evolve while also enabling authorities to focus on combatting fraud and price manipulation in crypto markets.
Market Stability
Volatility of cryptocurrency markets makes it challenging for investors to secure stable investments. Therefore, clear regulatory guidelines which strike a balance between innovation, protecting investors, and market stability are vitally important for the future of crypto assets – such as creating innovative regulatory sandboxes or providing more comprehensive risk assessments on crypto related activities.
Crypto markets and DeFi currently do not pose direct threats to financial stability; however, as they evolve they could create new forms of systemic risk that pose challenges to regulators in terms of increased interlinkages to regulated financial systems, high leverage markets unregulated markets as well as difficulties associated with new types of entities and businesses that operate within them.
Due to increased interest in crypto-asset regulation, regulators have developed a preventive framework. They have started monitoring risks within crypto markets; published guidance for crypto exchanges and market integrity; as well as working together with other standard-setters on applying principles for stablecoin arrangements (Financial Stability Board), prudential treatments of bank exposures to them (Board of Governors of the Bank of International Settlements), decentralised finance arrangements (International Organization of Securities Commissions) etc. Additionally, such regulation involves monitoring risks from global macroprudential regimes.
Access to Financial Services
Cryptocurrency regulations exist primarily to provide investors with protections and transparency in an asset class plagued by fraudulent activity, reduce financial crime risk, facilitate inclusion by making cryptocurrency more accessible to mainstream investors, and facilitate inclusion by making cryptocurrency more widely used by mainstream investors. A regulatory framework must address how digital assets are created, bought, sold and traded; additionally it must consider how digital assets integrate with existing financial systems.
Under the new regulation, virtual asset service providers must verify and collect client identities as part of an effort to prevent money laundering and terrorist financing. Virtual asset exchanges will need to report transactions to FinCEN while crypto brokers must report all gains/losses when filing their taxes returns.
The EU’s move puts it a step ahead of its US counterpart, which has yet to establish formal cryptocurrency regulations. Yet it remains uncertain whether its proposal can be effectively enforced; therefore, ensuring its uniformity is essential so as to fill gaps between various national regulators and prevent fragmentation of the Single Market.
Innovation
Cryptocurrencies’ meteoric rise and integration into mainstream financial system has spurred greater regulatory scrutiny; however, their unique qualities make establishing rules to govern them quite complex.
Clear and comprehensive regulations can foster innovation within the crypto space while protecting investors and maintaining market stability. Unfortunately, crafting such regulations is an extensive and expensive undertaking that takes considerable resources to complete successfully.
One key area of regulatory focus is addressing money laundering, terrorism financing and other illegal activities. To do this, exchanges must identify their customers and limit how many accounts an individual can hold at centralized exchanges. Furthermore, the Treasury Department has started sanctioning foreign cryptocurrency exchanges and blocking transactions with them in an effort to prevent cybercriminals from receiving illicit profits.
Regulators must remain abreast of the rapid development of crypto technology. New innovations can revolutionize money and payments, yet can present risks to investors and markets. Therefore, regulatory frameworks must be flexible enough to accommodate such shifts while protecting both investors and society at the same time.