Global trend and challenges shaping the crypto regulation agenda in 2023

The crypto industry is facing a pivotal year in 2023, as regulators around the world are ramping up their efforts to provide clarity and oversight for the fast-growing sector. Crypto is becoming more popular and is being used in new ways, as well as the emergence of new use cases and innovations such as decentralized finance (DeFi) and non-fungible tokens (NFTs). This presents both opportunities and challenges for the regulators in charge of making sure it’s used safely and fairly.

How global standard-setters are leading the way

One of the key factors that is influencing the global crypto regulation agenda in 2023 is the role of global standard-setters. Several international organizations and bodies have been actively involved in setting the expectations and guidance for crypto regulation at the global level. For example, the Financial Action Task Force (FATF), the global anti-money laundering watchdog, has issued revised standards and guidance on how to apply its recommendations to virtual assets and virtual asset service providers (VASPs), which include crypto exchanges, custodians, wallet providers, and others. The FATF has also launched a 12-month review to assess the implementation and effectiveness of its standards by its member jurisdictions. 
Another example is the Basel Committee on Banking Supervision (BCBS), the global standard-setter for prudential regulation of banks, which has published its final rules on the prudential treatment of crypto asset exposures, which require banks to hold more capital for higher-risk crypto assets such as Bitcoin and Ethereum. The BCBS has also established a new working group on crypto assets to monitor market developments and coordinate with other standard-setting bodies. A third example is the Financial Stability Board (FSB), which monitors and makes recommendations about the global financial system, which has published a report on stablecoins, which are digital tokens that aim to maintain a stable value by being backed by fiat currencies or other assets. The FSB has identified potential risks posed by stablecoins to financial stability, market integrity, consumer protection, and cross-border payments, and has called for effective regulation, supervision, and oversight of stablecoins at both the domestic and international levels.

How the EU is creating a harmonized framework for digital assets

Another factor that is shaping the global crypto regulation agenda in 2023 is the EU single market for digital assets. The European Union (EU) is at an advanced stage of finalizing its new Markets in Crypto-Assets Regulation (MiCA), which aims to create a harmonized framework for crypto assets across the EU. MiCA will introduce a comprehensive set of rules for issuers and service providers of crypto assets, covering aspects such as authorization, governance, capital requirements, disclosure obligations, consumer protection, market abuse prevention, and supervision. MiCA will also create a new category of regulated tokens called e-money tokens, which are stablecoins that are backed 1:1 by fiat currencies and redeemable at par value. MiCA will also establish a pilot regime for distributed ledger technology (DLT) market infrastructures, which will allow operators of trading venues and settlement systems based on DLT to test their solutions in a sandbox environment with regulatory waivers. MiCA is expected to enter into force by mid-2023, after being adopted by the European Parliament and the Council of the EU.

How national approaches vary across different jurisdictions

A third factor that is influencing the global crypto regulation agenda in 2023 is the divergence of national approaches. While some jurisdictions have either enacted or are on the brink of enacting regulatory frameworks for dealing in digital assets, others have taken a more cautious or restrictive approach. For example, in the United States, there has been progress to advance legislation on digital assets, such as the Digital Asset Market Structure and Investor Protection Act of 2022, which seeks to clarify the regulatory status and treatment of different types of crypto assets under existing laws. However, the timing and outcome of such legislation remain uncertain, as different regulators have different views and mandates on how to regulate crypto assets. The U.S. Securities and Exchange Commission (SEC) recently included the regulation of emerging technologies and crypto assets as one of its 2023 priorities, and intends to examine whether crypto companies meet appropriate standards of care when making recommendations or providing investment advice. The SEC has also been pursuing enforcement actions against unregistered securities offerings involving crypto assets, such as initial coin offerings (ICOs) and DeFi platforms. In contrast, some countries such as China have taken a more hostile stance towards crypto activities, banning all transactions involving crypto assets and cracking down on mining operations within its borders. Other countries such as India have also proposed legislation that would prohibit all private cryptocurrencies except for those issued by the central bank.

How to build trust in the crypto space

These developments highlight the need for robust regulatory policy and supervision for the crypto industry, set on a global level but tailored to local contexts and needs. For traditional financial institutions, crypto regulation provides the much-needed clarity and certainty to enter the space and start building their digital asset offerings. For crypto native firms, regulatory clarity may mean having to quickly expand their regulatory expertise and compliance oversight, in line with global financial services regulatory requirements. Trust in the space may be broken right now. While regulation alone cannot solve that, clarity across terminology and application of regulation, along with firms’ enhancements to their risk management capabilities and procedures, is a good starting point.