Cryptoassets have caught the attention of regulators around
the world, with policy frameworks starting
to take shape in numerous jurisdictions. Industry
consensus is that regulation is the appropriate next step for digital finance,
but regulators almost everywhere are taking the wrong approach.
Problematically, policymakers are looking at cryptoassets
for what they might be in the future, rather than regulating the space for what
it is now and updating the rules as and when needed down the line. The concept
of a forward-thinking, technology-neutral approach works well on paper, but in
practice, the pressure on regulators to get all the right policies, right now,
is significantly hindering progress on the healthy regulation needed to protect
This approach is the natural result of concerns that
cryptoassets could pose a threat
to financial stability in the future, but is based on an exaggeration of current
risk posed by cryptoassets. All told, cryptoassets only make up a tiny fraction
($1.79 trillion) of the total global market cap, which is well over
$100 trillion. Digital finance stands out to regulators as being
ultra-volatile, but traditional stocks can be volatile too – as Netflix’s
shareholders were abruptly reminded earlier this month when the
stock lost 35% of its value in a single day, or as anyone following Elon
Musk’s recent forays into M&A would attest.
The UK’s Financial Conduct Authority (FCA) has so
far approved only 33 firms registration applications out of more than 150
that applied. Rather than limiting the ability of sub-par players to operate in
the sector, this has instead encouraged relocation
overseas for companies that can still service UK consumers, away from FCA
oversight. In the US, the conversation is so caught up in understanding which
regulator should oversee what assets, that actual regulation could be a long
way down the line.
In contrast, market participants regularly laud the
comprehensive approach taken by EU lawmakers with the Markets
in Crypto-Assets (MICA) regulation. However, even for MICA, the golden child
of cryptoasset regulation, fresh concerns risk overcomplicating the regulation.
The EU parliament recently proposed bringing sustainable
finance policies into cryptoasset regulation. Since proof-of-work is both
energy-intensive and integral to Bitcoin, this is likely to hinder large bank’s
ability to invest in the space if they are subject to ESG requirements.
Encouraging a more sustainable frameworks for cryptoassets
is a positive move, but trying to cover so many bases in just one rule set risks
running everything off course.
A few weeks ago, the UK announced
fresh plans to regulate stablecoins and cryptoasset companies and introduce
a Central Bank Digital Currency (CBDC), organising industry engagement events
to facilitate this. This attempt to cover all bases at once has received scathing
reviews from market participants, who see government promises and FCA
actions as fundamentally contradictory.
If regulators take this forward-thinking long-term approach,
it will forego the first rule of digital finance – constant innovation. The
sector will soon look very different to how it does today, so no matter the rules
implied, cryptoassets will change and expand out of regulatory scope,
tech-neutral approach or not.
A totally comprehensive one-stop shop isn’t what’s needed right
now. Instead, the market needs the first steps of regulation that will be
developed and tweaked as things change. If regulators don’t realise that then
regulatory efforts will be doomed before they’ve even begun.
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