By Rajagopal Menon
Crypto has come a long way since its early days as a fringe technology used primarily by computer geeks. Today, it has become more than just “magic internet money” used by supercoder nerds; it is fast becoming a viable alternative to traditional financial systems. With the rise of cryptocurrencies like Bitcoin and Ethereum, and the emergence of stablecoins, non-fungible tokens (NFTs), and decentralised finance (DeFi) platforms, it is clear that the world is on the cusp of a financial revolution. However, the survival and success of this new financial order depend on one crucial factor: global crypto regulation.
Cryptocurrencies are decentralised digital assets that operate using blockchain technology. They have been designed to be independent of traditional financial institutions and government control. This innovation and the disruptive characteristic has made them attractive to investors, but also created significant challenges for regulators. Policymakers struggle to monitor risks from this evolving sector which could cause financial stability risks.
The need for global regulation
One of the most significant challenges facing the cryptocurrency industry is the lack of global regulatory frameworks. Cryptos do pose challenges on a macro level – such as dollarisation of a country’s economy; it could impact the foreign exchange rate. On a micro level, the lack of clear and comprehensive regulations has made it challenging for investors to determine which platforms are safe and legitimate. Institutional money has by and large stayed away from the crypto space because of lack of regulations. It has also made it difficult for governments to monitor and regulate the industry effectively.
The importance of regulatory certainty
The adoption of cryptocurrencies and stablecoins will most likely be correlated with the level and quality of regulation in a given jurisdiction. Regulatory certainty influences economic behavior, and as such, the US and EU are making strides to provide initial direction. Countries that have clear and comprehensive regulations for cryptocurrencies are more likely to attract investment and innovation in the industry.
Benefits of global regulatory frameworks
A global regulatory framework for cryptocurrencies would provide several benefits. Firstly, it would bring order to the markets and help to instill consumer confidence. Secondly, it would lay out the limits of what is permissible and provide a safe space for useful innovation to continue. Thirdly, it would help to prevent illegal activities such as money laundering and terrorist financing by creating a transparent and accountable system.
International institutions working on regulations
The International Monetary Fund (IMF) has started discussions around the regulation of cryptocurrencies. The IMF’s mandate is to safeguard the stability of the international monetary and financial system, and crypto assets are changing the system profoundly. The IMF has stressed that the regulation of crypto assets should be comprehensive, consistent, and coordinated to safeguard the stability of the financial system.
Other international organisations are actively working on setting global standards for cryptocurrency regulations. These include the Financial Stability Board, or FSB, the Bank for International Settlements, or BIS, and the Financial Action Task Force, or FATF. The FSB is planning on revealing its crypto regulation recommendations sometime this summer, and already there is a lot of nervous chatter about the regulations proposed by the BIS and the FATF. Much of the regulation already exists for traditional financial institutions. These just need to be adapted for the crypto industry. Effective crypto regulation can take time and requires caution, collaboration, and neutrality across systems and countries.
The race for crypto investments
In fact, the global race to attract crypto investment has intensified in recent years as more countries recognize the economic potential of crypto. Many countries are vying for the title of “most crypto-friendly” and are competing with each other to attract investment by enacting clear and favourable regulations. The most crypto-friendly countries in 2023 include Portugal, Malta, Argentina, Switzerland, and Luxembourg. Closer to home, Singapore has clear regulations, and Dubai is regarded as one of the most crypto friendly nations. Ukraine just passed a law setting up a framework for the cryptocurrency industry, and Nigeria, South Africa, and Kenya are the leaders in Africa when it comes to using cryptocurrencies.
Industry worries on regulation
The major worry for the crypto industry is if regulations prove to be excessive. Another worry is that it might include a commitment to ESG, which is a way of investing that was made by the WEF and is supported by powerful private organisations like BlackRock and Bank of America.
The good news is that even if the finished cryptocurrency regulations fall short, they can always be modified. Institutional investors will eventually try to get rid of bad crypto laws, especially those about DeFi and privacy. For the institutions to come, regulations are needed.
Conclusion
In conclusion, the lack of clear and comprehensive regulatory frameworks for cryptocurrencies has been a significant challenge for the industry. The development of global regulatory frameworks would provide several benefits, including bringing order to the markets and helping to instil consumer confidence. Additionally, a global regulatory framework would create a transparent and rules based system. Make no mistake: once crypto regulations are implemented in important jurisdictions throughout the world, institutional investors will have the confidence to allocate historic amounts of capital to crypto. Indeed, these laws may serve as a catalyst for the next bull market.
The author is vice-president, WazirX