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The explosion of crypto assets in the marketplace has been unstoppable.In November 2018, KPMG released their white paper “Institutionalization of Crypto Assets” that reported total market capitalization at $211 billion as of October 2018.From a market high of $833 billion in January 2018, PWC and Crypto Valley Association reported the latest value at $323 billion by the end of June 2019.Despite extreme trading volatility, crypto instruments remain a moving force in the new digitized markets.
The reason: trading this new asset class provides lucrative opportunities for both institutional and retail investors.However, there is serious concern over jurisdictional gaps among US and International regulators.
The Financial Stability Board (FSB) issued a May 2019 Report for the G20 Summit that underscores the continuing debate over regulation.Three major concerns were cited in the Report:
1.Regulatory gaps arising when these assets are outside the purview of market regulators and payment system oversight
2.Whether crypto assets were intentionally designed to operate outside established regulatory frameworks
3.The lack of international standards
Many institutional investors and established financial institutions seeking understandable rules, level playing fields and market stability are likewise concerned.
While governments and various international organizations are actively working on addressing investor and consumer protection – market integrity, bank exposures, payments systems, financial stability monitoring and AML/CFT, the lack of a uniform taxonomy and differing regulatory approaches over ICO issuance process, trading platforms and secondary trading of tokes, present clear and present danger to the marketplace.
Will Regulatory Arbitrage be the consequence of varying jurisdictional oversight?
The design of certain crypto assets may arguably fall outside the definition of traditional securities and largely function as a means of payment or exchange.Crypto assets that do not qualify either as securities or derivatives may not be then subject to market regulation.The resulting asymmetries borne out of lack of market transparency, clarity on client asset custody and fundraising documents regulation can lead to gaps, overlaps, and conflicts across various jurisdictions.
In the US, a call for a lead agency to oversee crypto assets has lately been gaining steam.Former Commodity Futures Trading Commission Chairman (“CFTC”) Timothy Massad in his March 2019 Brookings Institute Report “It’s Time to Strengthen the Regulation of Crypto Assets” called for Congress to pass legislation empowering the Securities and Exchange Commission (“SEC”) or alternatively, the CFTC with comprehensive regulation over the offering, distribution, and trading of crypto assets including regulation of trading platforms, custodians (or “wallets”), brokers and advisors.At present, while the SEC maintains jurisdiction over crypto assets that are deemed as securities, the most widely traded types such as Bitcoin are not regulated by the SEC.
Bitcoin and most other virtual currencies are considered commodities regulated by the CFTC.But CFTC oversight falls short regulating the cash market underlying crypto derivatives futures and swaps.Having one agency with comprehensive regulatory power over crypto currency would close this jurisdictional gap.
Europe has an even bigger problem to solve with critical cross-border challenges and the need for harmonization.
Earlier in the year Vladimir Dombrovkis’, EU Commissioner for Financial Services Policy, in his February keynote speech at the Third Fintech Conference in Brussels stated the need for a common EU approach to developing an EU-wide crypto asset regulatory policy.He expressed serious concern that inconsistent interpretation across EU member states can give rise to regulatory arbitrage.Countries like Malta and Luxembourg have led the way in instituting regulatory frameworks over both crypto assets and blockchain, with the UK, Germany and France considering reforms.
The uncertainty created by the absence of an EU-wide regulatory framework may threaten the viability of crypto asset activities in the Region.
Governments in the Asia Pacific Region, Africa and the Middle East continue to work through the evolving crypto asset market developments.Regulators in Hongkong and Singapore have introduced new licensing laws over regulation of crypto exchanges in response to investor concerns.In October 2019, China departed from its long-standing ban on all things crypto with China’s passage of its first cryptography law, currently set to go into effect in January 2020.
Although there is no specific mention of cryptocurrency in the law, cryptography universally is viewed as a key component underpinning cryptocurrency.In Australia recent updates on crypto regulations took effect May 2019 with Australia’s Securities Investment Commission issuing the latest guidance on ICO’s and crypto trading.In the Middle East, Bahrain and Abu Dhabi are competing to becoming cryptocurrency hubs and have developed regulatory frameworks and have licensed cryptocurrency exchanges and brokerages – and where more than a few cryptocurrency startups have sprung up.Blockchain and cryptocurrency adoption in the African region has begun, though still in its infancy, with many governments remaining apprehensive and reserved.
So, what is the path forward towards harmonized regulatory governance in the constantly evolving crypto asset ecosystem? On a macro level, more forward-looking government and non-government risk assessments on crypto asset exposures and their impact on both bank and non-bank financial institutions should be expected.These risk assessments should extend to identifying trends that create systemic risk and threaten financial stability.Focus on the impact of asymmetries need to be evaluated, particularly as they vary significantly across jurisdictions.
Let’s not forget that consumer protection and broader societal risks continue to be paramount considerations in the regulatory narrative.Cybersecurity risks and illicit payments are dominant concerns.Cyberattacks even on smaller crypto assets and those institutions trading them can have broad implications to banking institutions and the overall securities markets.
The lack of transparency by crypto intermediaries create vulnerabilities in the use of crypto payments for any purpose – and cryptocurrencies supporting narcotics, ransom ware, firearms and dark market goods cannot be tolerated.
Regulation cannot ever be “one-size-fits-all”.Regulators worldwide, need to be ever-vigilant, coherent, multi-lateral and current in their approach.But it should be to no one’s surprise that in regulating cryptocurrencies, regulators when independent, will act in self-interest if not with a clear understanding of the unique national legal frameworks in countries and regions.
The elephant in the grass and perhaps monkey wrench in all this, is when governments move into issuing cryptocurrencies themselves, as has Fed Chairman Powell recently speculated for U.S.markets..
