Crypto Should Reconsider Its Relationship With Regulators, And Vice Versa
Andy Meehan says more collaboration is needed between industry players and regulators to advance “sensitive” regulation and ensure the public is properly educated.
It’s no secret that the past twelve months have seen an unprecedented acceleration in interest and adoption in cryptocurrencies. While it can be difficult to estimate the total number of crypto users, let alone in a particular jurisdiction, there is little disagreement that many of the countries with the highest growth in adoption of crypto crypto is found in Asia, and the vast majority of that growth to date has been from retail users.
The forces driving adoption across Asia also represent a sampling of the different justifications for cryptocurrency’s place in the financial sector – from an inflation hedge to a payment method for the unbanked. or underbanked to a financial asset (relatively) free from any government control to an alternative investment. Likewise, regulatory responses to cryptocurrencies across the region also represent the spectrum of potential approaches – from laissez-faire to fully regulated regimes to outright bans.
None of this should be surprising given the challenges of regulating financial products based on brand new technology and the lack of consensus on what even that financial product stands for: is it a currency? a payment instrument? merchandise ? security? Unfortunately, these different approaches have led to considerable FUDs (Fear, Uncertainty, and Doubt) for the cryptocurrency industry, users, and regulators.
They have also created an environment where regulatory arbitrage is possible, and even rewarded in the short term, sometimes to the detriment of unsophisticated users seeking yield but lacking an understanding of the risks associated with cryptocurrency and the products in which they could invest. But this regulatory landscape is changing rapidly.
The rapid adoption of cryptocurrencies and cryptocurrency-backed products by retail investors has undoubtedly sparked a marked increase in interest in the space from regulators. Over the next twelve months, the industry will also see a marked increase in the participation of institutions, including traditional financial institutions that are used to operating in a highly regulated environment.
Such institutional adoption would appear to be an additional incentive for regulators to speed up the establishment of the kinds of regulatory frameworks these institutions are familiar with, in order to attract or retain these institutions and their potentially significant cryptocurrency-related businesses. .
Certainly, not everyone associated with the cryptocurrency industry will welcome these developments. There are legitimate concerns about whether the approaches of regulators will stifle innovation or erode the privacy or decentralized nature of cryptocurrencies. And, of course, at least part of the industry will resist any facet of government surveillance or control.
But many industry leaders recognize that sensible regulation is a necessary element to increase cryptocurrency’s adoption and perception of legitimacy, and ultimately to achieve one of crypto’s holistic goals of provide a universally accepted alternative to traditional banking services.
Likewise, many regulators admit that given the decentralized nature of blockchain and the level of adoption that crypto has already reached, at least peer-to-peer cryptocurrency transactions are likely to stay out of the way. the dominance of regulators. But to date, most regulatory responses have been to lump crypto under the same regulatory framework that applies to other financial instruments, even if this leaves the industry with no practical way to comply.
It therefore seems that regulation and cryptocurrencies must not only learn to coexist but also to collaborate to bridge the gap between their respective positions. Recent exchanges between some of the industry’s most influential cryptocurrency exchanges and regulators, however, have suggested that this crevasse may be more of a crevasse.
Build a bridge
So how do we start to build this bridge? While there will certainly be those on both sides who take an extreme stance, there is a lot of commonality to be shared by the 80% of us in the middle. We should start there, with two key policy goals that the majority of us should be able to agree on.
First, the public must be convinced that cryptocurrencies are not vectors for money laundering, terrorist financing and other forms of criminal activity, or at least no more than fiat money. Granted, the early days of Bitcoin saw an inordinate percentage of transactions used for illegal activities, as is often the case with new products and technologies when the speed of development exceeds the speed of regulation.
But since cryptocurrency has become more widely adopted, illicit transactions now represent less than 1% of total Bitcoin transactions. And unlike cash, the immutable nature of blockchain and the increased sophistication of surveillance technology means that crypto transactions, despite their pseudonym, are much more transparent and traceable than cash.
But which controls are best suited to identify, mitigate, prevent and report potential criminal activity is still a matter of debate. While it is tempting to apply the same toolbox that has been used in the traditional banking world for decades, everyone’s interests would benefit greatly from an open and honest discussion between industry players and regulators to Whether cryptocurrency and the blockchain technology behind it justifies a new approach to anti-money laundering regulation.
Second, the public must have confidence in the integrity of cryptocurrency products and markets. Although transparency is an inherent characteristic of cryptocurrency, there is an educational gap between a minority of crypto enthusiasts with in-depth knowledge of the industry and significant influence in the market, and a growing population of investors. who may not fully understand the products offered or the potential risks. they present.
The result may fuel the perception that cryptocurrency is riddled with fraud, or that markets are being manipulated for the benefit of “whales” at the expense of retail investors. Together, the industry and regulators can work to ensure that the public is properly informed about cryptocurrencies and crypto-backed products, and that both are traded in well-functioning markets where users trust. that they are on an equal footing.
The adoption of cryptocurrency by a large part of the public is upon us. As a result, widespread crypto regulation is inevitable. It remains to be seen whether this regulation will be tailored to the unique characteristics of the cryptocurrency and whether the cryptocurrency industry will rule out any predisposition to take an antagonistic stance against regulation. But for the benefit of all concerned, it is worth the investment of time and resources, and a dose of humility – on the part of both industry and regulators – to get it right.
Andy Meehan is the Compliance Director for Asia-Pacific operations at Singapore-based Gemini.