The growing adoption of crypto assets and their integration with financial services and traditional financial asset classes and markets now makes a global consensus on the regulation of crypto assets imperative. TradFi companies have begun to realize that they need crypto to survive and succeed in the future, heralding a convergence of TradFi and DeFi innovation – with many governments and regulators working hard to consolidate their positions as leading financial centers worldwide. At the same time, attitudes towards regulation differ significantly across the world, ranging from lax to enforcement-focused – a patchwork approach that has stifled innovation in some jurisdictions and undermined global stability. The legal system has also filled this gap, clarifying that cryptoassets can be “property” in the English law case AA v Persons Unknown who held Bitcoin (2019), and therefore that theft and loss can result in gives rise to exclusive remedies for victims. Property rights are essential to enable access to interim remedies, such as a global freezing order. Statutory clarification has followed following the case law findings, with an innovative Property (Digital Assets etc.) Bill currently being considered by the UK House of Lords, which will allow for further statutory confirmation of rights ownership of this new asset. class. Other jurisdictions, including Dubai’s DIFC, have also recently proposed codification of ownership rights over digital assets. Yet despite these important advances, tokenized capital markets and liquidity remain hampered by liquidity silos and lack of interoperability. Given the borderless and rapid nature of innovation in crypto-asset markets, regulatory clarity and global consistency become paramount if we are to harness the full potential of these exciting technologies.
A fragmented regulatory approach
The crypto asset landscape and regulatory response has changed significantly in recent years. THE Financial Action Task ForceThe FATF’s recommendation that virtual asset service providers should be supervised in all FATF-compliant jurisdictions has been widely adopted to tackle the most obviously high-risk areas of the crypto asset ecosystem: exchanges and depositaries. While this response is essential to avoid creating safe havens for bad projects that could quickly spread to other jurisdictions, it does not help in areas such as consumer protection, market integrity or governance of the market and, moreover, it still leaves significant gaps in repairs. victims of crypto crimes seeking to recover their assets. Without appropriate regulatory frameworks in place to help service providers create a responsible business model, the risk of exchanges failing persists. At the same time, good and responsible projects are left behind, facing costly legal barriers and uncertainty that prevent them from mobilizing investments and creating and developing innovative new products.
Progress in developing new regulatory frameworks
Regulators in some jurisdictions have sought to interpret existing financial securities legislation and regulate certain crypto assets as types of financial instruments. Sometimes this represents a step closer to clarity, but there remain significant divergences in interpretive approach. Working with crypto assets typically involves numerous consultations with lawyers on token classification. A consultation document from European Securities and Markets Authority earlier in 2024 found that the boundaries of the definition of a “financial instrument” for the purposes of MiFID II vary between Member States, illustrating some of the fundamental scoping challenges for regulators in this rapidly evolving area. Countries are also examining IOSCO Policy Recommendations for Crypto and Digital Asset Markets (November 2023), however, these high-level principles still require regulators to undertake detailed interpretive work to integrate all principles and outcomes into existing and new regulatory frameworks. The IOSCO recommendations provide a useful starting point, but for many countries there is still much work to be done to implement and operationalize the key principles.
Meanwhile, inconsistent and disparate models of crypto asset regulation across the world hinder the potential for innovation, from both traditional and new market participants, and expose consumers to risks. For countries seeking to take the lead in this area, a race is on to put in place the kind of appropriate, elegant, principled and proportionate framework that can unlock growth-generating innovation in capital markets. . For countries that succeed, there is a clear and valuable global economic advantage (especially since the US has now begun to swim in these waters) with a crypto-friendly US now exploring more ambitious in crypto regulation. Indeed, as CBS News reports, the new chairman of the Securities and Exchange Commission will be Paul Atkins, generally considered a defender of the crypto sector, including in recent studies by the Securities and Exchange Commission. Financial Times.
The opportunity for regtech
Effective use of data could transform the way regulators oversee these areas. Although regulators may be concerned about the lack of centralized order book information that facilitates supervision of traditional markets, with the right tools, regulators can deploy powerful analytics to make their supervision of digital asset activities and much more effective consumer adoption. Crypto networks generate a lot of data that regulators can use to improve the speed and effectiveness of monitoring and enforcement. This invariably involves using a combination of AI and predictive analytics. This is not a challenge that can be solved with a single silver bullet, but rather, as algorithmic trading models and AIxCrypto technology continue to evolve at the speed of light, regulators must develop their own internal capacity and strengthen their capacity to apply data-driven technologies and regulations. to gain near real-time insight into the evolving risk landscape in their jurisdictions. It is therefore incumbent on regulators to develop strong in-house expertise to understand the new crypto asset business models being adopted and keep pace with rapid innovation in crypto asset services. Internal staff expertise, including crucial data analysis skills, will be essential to gaining visibility into distributed information networks, whether new proprietary TradFi systems or decentralized ecosystems.
Why act now to regulate cryptocurrency markets?
If there was ever a crucial time for crypto asset regulation, it is now. Markets are growing rapidly, alongside consumer awareness and adoption. Global standard-setting bodies such as UNIDROIT and IOSCO, BIS, FATF and FSB have issued robust guidance, alongside new Basel Framework requirements for the prudential treatment of crypto-asset exposures. There is now enough certainty around business models to allow regulators to create rules that will shape relevant and appropriate governance. Data analytics and AI are fundamental assets in the crypto asset regulation toolbox. Effective use of data will be essential for imposing regulation in complex and rapidly changing systems, including maintaining market stability and managing potential risks to financial stability as markets develop and mature. This requires regulators to develop not only new skills but also different working models and, while it is tempting to rely on third-party data service providers, these companies have their own business objectives that do not align perfectly meets the requirements of regulators. Regulators must develop their own data analysis capabilities and create a core team that understands the impact of crypto assets and AI and the likely implications on markets in the future. A strong internal resource that understands emerging systemic and operational risks will enable regulators to future-proof, keep pace with innovation and, above all, ensure the global consistency they urgently need.
Now is the time for jurisdictions to develop a robust regulatory framework for crypto assets and optimally position themselves for the future of digital assets and financial markets.
