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Regulation can strengthen investor protections and curtail illegal activities, yet also comes at a price, necessitating participants to adhere to rigorous rules and stay alert for policy updates.
Switzerland takes an especially progressive approach to cryptocurrency regulation. Its laws include provisions covering provenance verification and intellectual property rights protection as well as registration of digital assets as securities.
European Union
European Union countries recently passed the first global set of rules designed to broadly regulate crypto assets. The Markets in Crypto Assets (MiCA) regulations place regulatory obligations on issuers, service providers, and exchanges as well as seeks to combat money laundering by expanding requirements regarding transfer information for crypto assets.
MiCA introduces a “passport” right that permits any crypto business approved by EU regulators to operate across all EU member states. Other provisions of MiCA include prescriptive organisational and disclosure rules; requirements concerning safekeeping client funds and outsourcing arrangements; conduct and prudential requirements as well as conduct/prudential requirements.
Baker McKenzie’s Olivier Van den Broeke believes EU regulations can assist the industry in building credibility. If more regulated and better supervised companies exist in an industry, investors will gain more trust. Furthermore, Van den Broeke believes EU rules on anti-money laundering and countering the financing of terrorism will have broad application worldwide due to FATF standards being internationally accepted.
United States
As cryptocurrency investments and hedges became mainstream investments and hedges against weak currencies in 2022, regulatory authorities across Europe and Asia made efforts to bring formal regulations into play for this emerging industry. While some jurisdictions aimed at outlining a comprehensive definition of crypto assets for their jurisdictional regulations, others chose technology-agnostic frameworks which can adapt as the sector develops.
In the US, FinCEN’s guidance on crypto regulation has focused on applying its anti-money laundering and countering financing of terrorism (AML/CFT) obligations to business models involving convertible virtual currency (CVC), such as exchanges, brokers, multiple signature wallet providers and kiosk operators who accept CVC.
The United States is a leader in efforts to provide financial stability in the cryptocurrency industry, with regulators from the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Trade Commission coming together to establish rules. However, many risks remain in this marketplace that federal regulators have yet to address; millions of investors have experienced losses due to market manipulation, hacking, or other opaque business practices that were never addressed adequately by regulatory bodies.
Japan
Japan requires cryptocurrency exchanges to register with the Financial Services Agency (FSA) and comply with AML/CFT regulations. Domestic exchanges must also meet safety standards to protect customers, such as keeping only enough customer funds in hot wallets for daily operations and placing the rest in cold storage; foreign exchanges cannot operate here unless they abide by these rules.
Following massive hacks at Coincheck and Zaif, the Financial Services Authority tightened security protocols and demanded crypto exchanges segregate their own assets from those belonging to customers. Furthermore, they are working on creating guidelines for applying their Travel Rule on virtual asset service providers.
Japan remains a pioneering force in the crypto industry despite regulatory hurdles, leading innovation through non-fungible tokens (NFTs). NFTs are unique pieces of data built using blockchain technology that can be traded for significant sums. While NFTs do not constitute securities under PSA regulations, they could instead fall under FIEA instead.
Australia
Australian Government approach to crypto regulation shows a pro-innovation ethos. Beginning in 2022, they started work on developing a cryptocurrency licensing regime and exploring options for an Australian central bank digital currency (CBDC).
As a response to the collapse of FTX, which left consumers without access to their cryptocurrency investments, the government is taking steps towards imposing rules regarding custody arrangements at exchanges as well as licensing requirements. Furthermore, anti-fraud measures and price manipulation rules may be introduced as protection measures for consumer investments.
Cryptocurrency regulations in Australia mandate that any entity operating a cryptocurrency-based exchange must register with AUSTRAC, Australia’s financial intelligence agency. Registration entails identifying and verifying users as well as meeting AML/CTF obligations; failing to do so could incur heavy fines on operators and individuals. Australia’s deliberate approach to cryptocurrency regulation ensures consumer protection while encouraging innovation within the industry, something which could prove valuable elsewhere as well.
