The need for crypto regulation is a burning topic nowadays. On one hand, crypto is decentralized, anonymous, and borderless. On the other hand, users need protection and clarity, therefore, there is a need for a clear and transparent regulatory framework.
But how can crypto be regulated? What steps are made to make it happen? And how a global regulatory framework can impact crypto development?
Let’s explore this in the article.
Some History
The idea of a global currency evolved long before the first cryptocurrency was launched. In 1959, Robert Triffin proposed the idea of a global currency but from the tech point of view, it was not realistic.
When in 2009, Satoshi Nakamoto announced Bitcoin, he could merely believe it would succeed. But now, we have the global cryptocurrency ecosystem, with Bitcoin being available everywhere. Even the countries that ban cryptocurrency cannot stop it from being accessible, even if it is illegal.
Global Regulation for a Global Currency
Cryptocurrency operates based on its own protocols, it is not restricted to a specific territory and is decentralized. On the contrary, the existing regulation is designed for centralized controlled financial ecosystems. It means that the existing regulation cannot be applied successfully to crypto.
A new regulatory framework is needed that would be clear, transparent, and borderless.
Efforts to Regulate Cryptocurrency
There are already several attempts to regulate cryptocurrency. Some countries have advanced with it, others are taking the first steps, and some are trying to solve the issue with the crypto regulation by banning cryptocurrency.
EU and MiCA
The European Union adopted a transparent and comprehensive regulatory framework on markets in crypto assets (MiCA) in June 2023. The regulation is valid for the entire EU territory and is aimed at regulating the crypto market and is expected to provide the citizens with protection, financial inclusion, and stability when operating with crypto.
According to MiCA, cryptocurrencies are one of the main applications of distributed ledger technology, and they can deliver significant benefits to all market participants.
MiCA applies to the following sectors:
- Custodial wallets
- Exchanges that perform crypto-to-crypto operations and operations involving fiat
- Crypto-trading platforms
- Crypto-portfolio managers and crypto-asset advising companies
- Asset-referenced tokens (including stablecoins that are backed by commodities or currencies)
- E-money tokens (backed by a fiat currency)
- Other types of tokens including utility tokens.
dApps (DeFi operates with dApps and thus, it refers to DeFi, too), and most NFTs are still not regulated. Even though under MiCA, NFTs issued in big batches can be considered fungible and thus require authorization, the majority of NFTs are not regulated.
The SEC
The USA uses the Howey test developed in 1946 to determine whether an instrument can be qualified as an investment contract security or not. If the asset is considered a security, it falls under the Securities and Exchange Commission (SEC) jurisdiction, if not - it is considered a commodity and is under the Commodity Futures Trading Commission (CFTC) jurisdiction.
All securities are regulated according to the Securities Act. In 2019, the Securities and Exchange Commission introduced a framework for investment contract analysis to adjust the existing regulation to the innovative financial model and to help determine what assets can be considered securities. But until now, there is no clarity in the regulation - a fact that causes multiple misunderstandings between regulators and the major crypto players.
Perspectives for the Future
Even though now, only the first steps are made toward comprehensive crypto regulation, there is already significant progress that will boost further crypto development.
Considering that cryptocurrency is borderless, countries shall agree on a unified regulatory framework that would work all around the world. It will not only provide crypto users the needed protection and security but will enable people all around the world to benefit from crypto:
- to enjoy direct transfers without intermediaries
- to send and receive funds within seconds
- to preserve their anonymity when sending or receiving funds
- to own their crypto assets without being afraid that an account can be blocked or frozen.
In the long run, it will lead to mass crypto adoption and eventual replacement of the traditional financial system by decentralized finance.