Crypto Regulation Or Administration – Fin Tech

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Regulation and transparency have always been seen as a
fundamental requirement in order to legitimize cryptocurrencies and
crypto-exchanges. The crypto sector is currently viewed by many as
the digital Wild West. The fear that cryptocurrencies
and crypto-exchanges act as a medium for financial crimes, such as
money laundering, has always been prevalent in the minds of
investors and regulators alike.

The FTX saga will have done nothing to quell those fears. In
light of the revelations regarding FTX’s balance sheet, lack
of transparency and bankruptcy filings, the userbase, including a
number of pension funds, is currently unable to withdraw funds from
the platform leaving them questioning when, or if, they will ever
see those funds again. The fallout on both an institutional and
retail level has been huge with investors starting to pull back
from the crypto-market and advising caution going forward. While
FTX has almost certainly set the development and progress of the
crypto sector back significantly, it has sparked renewed and
increased calls for tighter and more transparent regulation to the
space.

Prior to the FTX meltdown, international regulation in the
crypto space was, and is, largely un-unified and is ultimately
still being developed. For example, the UK’s crypto
regulation consists of a Financial Conduct Authority (FCA)
registration requirement for all cryptocurrency exchanges,
providing services to UK users, for the purposes of money
laundering prevention. The UK also requires financial regulations
for cryptocurrencies if they fall under the FCA’s regulatory
sphere established by the Financial Services and Marketing Act, the
UK’s Anti Money Laundering regime, the Payment Services
Regulations 2017 and the Electronic Money Regulations. As such, in
practice, assets like e-money tokens are regulated but exchange and
utility tokens are not. While greater levels of regulatory
oversight are being considered and proposed, most recently through
an amendment to the Financial Services and Markets Bill (currently
being approved by parliament), regulators are ultimately playing
catch-up.

In the US regulation is treated differently. The sale of
cryptocurrencies tend to only be regulated if the sale amounts to a
sale of a security under state or federal law, is considered money
transmission under state law or facilitates a money service
business. The Securities and Exchange Commission generally has
regulatory authority over the issuance or resale of any token that
constitutes a security, with the Commodity Futures Trading
Commission also being granted regulatory powers. However, each
state has their own laws, referred to as blue sky laws, which are
not always aligned with federal law. This can at times cause
confusion, resulting in regulators being unable to produce a
workable or transparent framework for dealing with and handling
cryptocurrencies. Again, like the UK, the US has produced an
Executive Order in relation to ensuring the responsible development
of digital assets. While a positive step, regulatory change has
been slow. That lack of speed has contributed to entities such as
FTX going unchecked and has certainly slowed the pace at which
regulatory bodies can police and punish illegal activities such as
money laundering.

In addition to the lack of regulatory unity, as has been noted
by the International Monetary Fund, terminology used to describe
the many different crypto related activities, products and
stakeholders is not globally harmonized. This can create further
uncertainty and disharmony between jurisdictions trying to
effectively regulate cryptocurrencies and crypto-exchanges. In the
wake of FTX, what the space requires is more robust regulation
alongside the harmonizing of terminology, a sentiment shared by
Binance CEO Changpeng Zhao, who has called for new but
stable and clear industry regulations.

What we are starting to see in the UK, no doubt spurred on by
FTX, is an understanding by law-makers that current regulatory
controls and measures are not targeted or clear enough. The
amendment to the Financial Services and Markets Bill, currently
with parliament, aims to give the FCA powers to regulate not only
stable coins, but also promotions for all crypto assets, and outlaw
companies that are not authorized to operate in the country. This
update to the law will move the UK more inline with the European
Union’s stance on crypto assets. While certainly a positive
step, what the industry likely needs to see is greater clarity and
transparency regarding the rules and regulations, designed to
protect consumers and investors, as opposed to heavier handed
regulations and enforcement practices.

Further to this, despite the historic sentiment of crypto
companies and exchanges being anti-regulation, in practice this has
not necessarily been the case. A growing number of companies have
in fact been working and or speaking with law makers and regulators
in order to bring greater transparency, clarity and sensible
regulation to the space. Companies are starting to see the need for
more robust and clear regulation if they are to alter the current
negative public opinion and add a greater level of legitimacy to
the industry. Looking at the UK government, in order to facilitate
clear and transparent crypto regulation they have created entities
such as the Crypto-assets Taskforce. The taskforce will look to
speak with companies and industry stakeholders, compile the
relevant information and advise the government on crypto centric
regulation along with the risks and benefits posed by crypto-assets
and distributed ledger technology.

In order for cryptocurrencies and exchanges to succeed and
develop in the long term there needs to be an appropriate level of
regulation and transparency, as well as an increased focus on self
regulation, industry codes of conduct and best practice. On both an
institutional and consumer level the appetite and desire for
cryptocurrencies are clear for all to see. While recent
developments have knocked market confidence and trust in the
sector, the renewed calls for regulation may help to rejuvenate a
sector rife with controversy and stamp out illegality. The task for
law makers and regulators is continuing to propose and implement
regulations that add a greater degree of transparency to the space.
Greater transparency will go a long way to alleviating investor
fears in light of FTX and will help to solidify cryptocurrencies as
the disruptive technology they were always touted to be.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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