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What is Crypto Regulation?

| January 18, 2024

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crypto regulation

Crypto-assets and their markets necessitate robust regulation and oversight that aligns with the risks they present. The rapid evolution of crypto-asset markets raises concerns that they could, at a certain point, pose a threat to global financial stability due to their scale, structural vulnerabilities, and growing interconnectedness with the traditional financial system. The international nature of these markets also introduces the potential for fragmentation or arbitrage. While the use of crypto assets varies across jurisdictions, the risks to financial stability could escalate quickly, highlighting the imperative for both timely and proactive assessments of potential policy responses and regulatory interventions where existing requirements are applicable.

An effective regulatory framework for crypto treasury management platform and crypto exchanges should ensure that activities involving crypto-assets are comprehensively regulated, taking into account the risks they pose, while also leveraging the potential benefits of the underlying technology. In cases where crypto-assets and intermediaries perform economic functions equivalent to those in the traditional financial system, they should be subject to regulations guided by the principle of “same activity, same risk, same regulation.”

Crypto as an non-regulated asset-class

Fundamentally, crypto assets are digital codes stored and accessed electronically, without necessary backing from physical or financial collateral. Their value may or may not be stabilized by pegging them to fiat currencies or other valuable items. The electronic life cycle of crypto assets introduces a full spectrum of technology-related risks that regulators are actively working to integrate into mainstream regulations. These risks include cyber threats and operational challenges, evidenced by notable losses due to hacking or inadvertent loss of control, access, or records.

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Initially, concerns about these risks might have been mitigated if the crypto asset system had remained closed. However, this is no longer the case, as the crypto world now mirrors various functions in the financial system, including leverage, liquidity provision, lending, and value storage.

The diverse actual or intended uses of crypto assets attract the attention of multiple domestic regulators, each with distinct frameworks and objectives—ranging from consumer protection to safety and soundness or financial integrity. Additionally, various crypto actors, such as miners, validators, and protocol developers, pose a challenge to traditional financial regulation due to their unique roles and characteristics.

Entities operating in financial markets typically operate under specified conditions and defined scopes, with associated governance and fiduciary responsibilities. However, these principles may not seamlessly translate to participants in the crypto ecosystem, where identification can be challenging due to underlying technology or casual and voluntary involvement. Regulatory challenges also extend to addressing conflicting roles concentrated in centralized entities, such as crypto exchanges and crypto custodian platforms.

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Moreover, as national authorities strive to develop a crypto treasury management regulatory framework for both companies and various activities in the crypto ecosystem, they must also take a stance on the underlying technology’s alignment with broader public policy objectives—such as addressing the significant energy consumption associated with “mining” certain crypto assets.

Applying existing crypto asset management regulatory frameworks to crypto assets, or creating new ones, is a formidable task for several reasons. The crypto world evolves rapidly, and regulators face challenges in acquiring the necessary talent and skills to keep pace amidst stretched resources and competing priorities. Monitoring crypto treasury management and trading markets is further complicated by patchy data, making it challenging for regulators to track the multitude of actors not subject to typical disclosure or reporting requirements.

Outlook of different jurisdiction towards crypto institutions

Cryptocurrency has been a contentious topic since its introduction, with varying perspectives among countries on its decentralized nature. Legal status and regulations around cryptocurrency asset management platforms differ across nations, and the use of cryptocurrency for anonymous global transactions has raised concerns for governments worldwide. Some officials are wary due to the lack of control and potential illicit ties associated with cryptocurrency.

Certain countries have introduced cryptocurrency regulations under their anti-money laundering and counter-financing of terrorism laws (AML/CFT) to curb the misuse of cryptocurrency for such purposes.

Let’s explore the legal status of cryptocurrency in different countries:

United Kingdom (UK)

The UK does not have specific legislation for cryptocurrency or cryptocurrency custodians but does not consider it legal tender; rather, it’s treated as property. The Financial Conduct Authority (FCA) regulates licensing for authorized cryptocurrency-related businesses. The UK applies firm rules, and businesses seeking a license must adhere strictly to them. Crypto trading in the UK is subject to taxes, following corporate tax rules.

United States (U.S.)

The U.S. operates under a dual governance system, with varying laws for cryptocurrency across different states. Some states, like New York, have been supportive of cryptocurrency and have implemented licensing frameworks, such as “BitLicense,” since 2016. While regulations vary among states, the overall stance in the U.S. is positive towards the trading community, making cryptocurrency and custodian crypto-platforms legal.

Canada

Canada adopts a cryptocurrency-friendly stance, treating cryptocurrencies as items for income tax purposes. Income or capital gains from cryptocurrency transactions must be reported to the Canada Revenue Agency (CRA). Canada has shown motivation in crypto regulations, becoming the first country to accept a bitcoin-traded fund (ETF). Crypto exchanges in Canada are considered money service businesses and fall under the Proceeds of Crime and Terrorist Financing Act, requiring registration under the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

European Union (EU)

The EU, consisting of 27 member countries, faces complexities in legislation at the union level. Most EU countries have adopted a soft regulatory framework for cryptocurrency. In 2020, the European Commission proposed legislation to regulate virtual assets, aiming to prevent fragmentation of financial regulatory frameworks and ensure secure access to cryptocurrency and different types of crypto currency wallets.

Countries where cryptocurrency is banned: China, Bangladesh, Egypt, Morocco, Nepal, Iraq, Tunisia, Qatar.

Anti-Money Laundering (AML) and Know Your Customer (KYC) Rules

In the swiftly evolving realm of cryptocurrency, proactively addressing financial risks is of utmost importance. There is widespread acknowledgment that ensuring AML/KYC compliance in the crypto ecosystem is increasingly crucial. This involves addressing key aspects such as monitoring crypto transactions, adhering to the Travel Rule in the crypto world, and protecting against crypto scams.

Regulators have taken note of the distinctive challenges posed by digital assets and crypto treasury management platforms. They have responded by establishing robust crypto asset management frameworks for cryptocurrency regulation. These crypto regulation frameworks encompass specific guidelines and obligations aimed at combating activities related to anti-money laundering within the crypto space.

For crypto exchanges and cryptocurrency wallet indian/ global providers, a comprehensive understanding of the intricacies involved in AML and KYC compliance processes is indispensable. As the crypto industry continues to grow, navigating the intricate landscape of financial security and regulatory requirements becomes vital to ensure transparency and foster trust among stakeholders.

Licenses Crypto Institutions can get to become regulated

A cryptocurrency license is an official document that authorizes businesses to participate in the cryptocurrency market, issued by regulatory agencies overseeing financial operations in specific countries.

Every business involved in crypto-related activities is required to hold the relevant license. This ensures that the crypto company can uphold the security of its customers’ crypto assets and adhere to relevant laws. Various types of crypto licenses, such as exchange, hardware wallet for cryptocurrency, and crypto custodian licenses, exist, and the criteria for obtaining one can vary significantly from one country to another.

Ensuring Legal Adherence

Securing a crypto regulation is crucial to avoiding legal complications. Crypto exchanges operate within a heavily regulated industry, making noncompliance a high-risk endeavor.

The absence of a valid cryptocurrency license exposes exchanges and cryptocurrency asset management firms to potential legal consequences, including substantial fines and the possibility of business closure. Possessing a license ensures strict adherence to all pertinent rules and regulations, enabling crypto treasury, custodian, exchange, and management businesses to operate within the bounds of the law without the threat of legal repercussions.

Building Trust and Credibility

Obtaining a cryptocurrency license plays a pivotal role in establishing a company as a reliable and credible entity in the eyes of customers. Consumers are more inclined to utilize the services of an exchange upon discovering that the company holds a legitimate license. This assurance signifies the exchange’s legitimacy and the protection of customers’ funds.

The credibility of cryptocurrency exchanges and cryptocurrency custodian receives a significant boost through licensing, indicating that the company has successfully undergone thorough regulatory scrutiny.

Facilitating Banking Relationships

Additionally, a cryptocurrency exchange and custodian crypto license can streamline the establishment of banking partnerships. Given the perceived risks associated with crypto activities, many banks are cautious about engaging with businesses in the cryptocurrency market by providing financial services. However, gaining credibility through a valid license is instrumental in fostering trust with banks, ultimately paving the way for essential banking relationships crucial to the success of any cryptocurrency exchange.

Cooperation on a global scale

Worldwide, research and development efforts are ongoing to establish regulations for different types of crypto currency. Numerous countries are in the process of formulating policies and legislation, although progress varies due to different reasons. Some nations have implemented partial cryptocurrency regulations, while others are actively working to comprehensively regulate the entire cryptocurrency space. For instance, in the U.S., crypto exchanges are already subject to regulations. Meanwhile, within the EU, laws are evolving to mandate that crypto service providers identify and prevent illicit uses of cryptocurrency.

Changing microeconomics of crypto regulations

As cryptocurrency plays an increasingly prominent role in the global investment landscape, countries have adopted diverse approaches to regulating this asset class. The European Union took the lead by implementing measures mandating crypto asset management service providers to identify and prevent illicit uses of cryptocurrency. In the United States, the Biden administration provided clarification on cryptocurrency use and regulation in 2022, setting the stage for the development of the digital dollar. Meanwhile, various countries apply different classifications and tax treatments to cryptocurrency.

How the future of crypto can evolve with better regulations 

The trajectory of cryptocurrency’s future will inevitably be influenced by the unfolding regulatory landscape. While the United States is just one among numerous jurisdictions grappling with how to navigate the realm of crypto, its pivotal role in global financial markets adds significant weight to legal battles involving platforms like Coinbase and Binance.

The repercussions of such legal actions were immediately evident, with several cryptocurrencies mentioned in the Coinbase lawsuit experiencing substantial value declines. In response, various institutions began adopting more cautious approaches. For instance, Robinhood, a widely-used investment app that has expanded into the cryptocurrency space, announced on June 9 that it would cease supporting transactions involving Cardano, Solana, and Polygon (MATIC) in response to actions taken by the Securities and Exchange Commission (SEC).

The idea of regulating cryptocurrencies similarly to other investment products categorized as securities may seem reasonable, considering the established precedent for stocks. However, cryptocurrencies have evolved into a distinct asset class without a comprehensive regulatory framework overseeing them. Consequently, categorizing them as securities and subjecting them to crypto regulation isn’t as straightforward as filling out a form, especially since such a form does not currently exist.

This classification could leave creators of cryptocurrency projects with limited options for keeping their products on the market. A case in point is the SEC’s settlement with the crypto exchange Kraken in February 2022, where allegations regarding its unregistered security staking program led to a $30 million payment and the cessation of the program as part of the resolution.

Conclusion

Despite cryptocurrency’s existence since 2009, governments and regulators are still in the process of devising effective governance strategies. It is imperative to safeguard consumers and businesses from fraudulent activities, necessitating the implementation of preventive measures against illicit uses of cryptocurrency. Although progress is underway in many countries, the process is slow and often surrounded by controversy.

FAQ

How Are Payments with Bitcoin Different than Credit Cards? 

Bitcoin transactions resemble cash exchanges, occurring directly between individuals without the involvement of financial intermediaries. While credit cards enjoy widespread acceptance, the process involves numerous intermediaries between merchants and customers, each charging fees for what they consider essential services.

Who Is the Crypto Regulator?

The Financial Conduct Authority (FCA) oversees the licensing of authorized businesses in the cryptocurrency asset management sector, including exchanges, within the currency system. Stringent rules are in place, and entities seeking a license must adhere rigorously to these regulations.

Are There Any Regulations on Crypto?

Within the existing legal framework in India, Virtual Digital Assets (VDAs) are neither explicitly regulated nor prohibited. Individuals and entities are permitted to possess, invest in, and engage in transactions involving VDAs, provided they adhere to the prevailing laws.

What are the challenges in regulating cryptocurrency?

One of the primary challenges faced by regulators is the precise classification of existing cryptocurrencies. The advent of crypto assets is a direct result of recent advancements in digital technology, introducing new opportunities for barter, investment, and financial transactions.

Why is regulation important in crypto?

Governments are acknowledging the necessity of addressing investor protection, market integrity, and potential risks linked to cryptocurrencies. Therefore, it is crucial to strike a balance between cryptocurrency regulation and innovation to guarantee the growth and sustainability of the industry.

What is the new regulation for crypto?

In the latest Union Budget for 2022, the Finance Minister introduced a tax framework for virtual or digital assets, encompassing cryptocurrencies. Investors in cryptocurrencies are obligated to disclose their computed profits and losses as part of their income reporting.

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