Saving Our Crypto Assets? Industry vs. Regulators

Governments across the globe are deciding the fate of crypto. As with any government sanctioned action, there comes a commensurate pushback. The approach to regulating the crypto industry varies from a more liberal to downright conservative. 

Places like Switzerland and Dubai have marketed themselves as crypto-friendly destinations with favorable regulation, while the US and the UK are taking a more cautious approach. Just to get an idea about the way US legislators are dealing with cryptocurrencies, much of what the US Securities and Exchange Commission (SEC) has done thus far involves applying existing regulations to the crypto industry, which were formed several decades after the Howey Test - one of the key tests to determine whether something is a security or not.

US haunted by FTX’s shadow

Not too long ago, US lawmakers were cashing campaign checks while working alongside cryptocurrency’s biggest players – on regulating it. It is understandable that in the wake of the FTX collapse, the regulators find themselves in a bit of a panic mode. The Treasury Department has quietly shifted to damage control, placing calls to other large crypto exchanges to assess the risks of a broader contagion.

What’s more, when it comes to those in charge of deciding the fate of crypto regulation, they have a skeleton in the closet to fess up to: FTX. Congress' FTX problem is that 1 in 3 members received cash from crypto exchange's bosses. In fact, the session on the legislation began with 196 U.S. lawmakers who took direct contributions from Sam Bankman-Fried and other former FTX executives.

According to an industry insider that covers the US market, “a lot of members of Congress have assumed that the digital asset industry could be on the back burner because it’s immature”. “But it’s growing faster than people recognize. And now with Elon Musk announcing that he might use Twitter as a payment platform, this industry is much more mature than people realize and It’s time to regulate it.”

As a result, the SEC has moved on some industry big players. Coinbase was warned by SEC that it had identified potential violations of U.S. securities law. The SEC also unveiled fraud and unregistered securities charges against crypto founder Justin Sun and celebrities that endorsed the digital coins he was pushing. The SEC is at the time of this writing in legal disputes with a number of other companies including Ripple, Genesis and Gemini.

Europe taking a more progressive action … mostly

In the meantime, Europe is emerging as a leader in terms of setting clear regulations and rules that would allow crypto companies and traditional finance alike to embrace crypto.

Europe’s The Markets in Cryptoassets or as it is commonly known, MiCA law required the agreement of all 27 nations that make up the EU. This is rather remarkable considering the U.S. has one government and they are still dragging their feet.

MiCA will apply directly across the European Union (EU) without any need for national implementation laws. This will ensure customers harmonized access to the innovative crypto-asset markets across the entire EU single market.

The Markets in Crypto-Assets regulation has four essential objectives:

- Ensuring legal certainty by establishing a sound legal framework for crypto-assets in its scope that are not covered by existing financial services legislation;

- Supporting innovation and fair competition in order to promote the development of crypto-assets by instituting a safe and proportionate framework;

- Protecting consumers, investors and market integrity in consideration of the risks associated with crypto-assets; and

- Ensuring financial stability, with the inclusion of safeguards to address potential risks to financial stability.

Furthermore, MEPs approved with 529 votes in favor to 29 against and 14 abstentions, the first piece of EU legislation for tracing transfers of crypto-assets like bitcoins and electronic money tokens. The text –which was provisionally agreed by Parliament and Council negotiators in June 2022- aims to ensure that crypto transfers, as is the case with any other financial operation, can always be traced and suspicious transactions blocked.

The so-called “travel rule”, already used in traditional finance, will in future cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer.

The UK: an island onto itself

Europe’s happier crypto narrative diverges a bit on the British aisles. Around 10 percent of UK adults hold or have held crypto-assets, according to HM Revenue & Customs. This number has got the attention of regulators.

In a May 17 House of Commons Committee report, the U.K. Treasury Committee “strongly recommended” regulating retail crypto trading and investment activity as gambling, consistent with the principle of “same risk, same regulatory outcome. ”Unbacked crypto-assets – often called cryptocurrencies – are not supported by any underlying asset. They are the most prominent form of crypto, with Bitcoin and Ether alone accounting for two-thirds of all crypto-assets.

The MPs recognize that technologies underlying crypto-assets may bring benefits to financial services, particularly for cross-border transactions and payments in less developed countries, and call on the Government and regulators to keep pace with developments so potentially productive innovations are not unduly constrained.

The Committee is also concerned that regulating consumer crypto trading as a financial service – as proposed by the Government – will create a ‘halo’ effect, leading consumers to believe this activity is safe and protected, when it is not.

The Committee concluded that cryptocurrencies pose significant risks to consumers, given their price volatility and the risk of losses. Given retail trading in unbacked crypto more closely resembles gambling than a financial service, the MPs call on the Government to regulate it as such.

Who is winning the slippery slope?

It seems that Europe has clearly taken the lead when it comes to introducing customer and industry-friendly regulation. The EU has approached the problem by establishing a sound legal framework for crypto-assets in its scope that are not covered by existing financial services legislation – and supporting innovation and fair competition. In addition, the EU lawmakers built-in the inclusion of safeguards to address potential risks to financial stability.