How Regulation is Propelling Trust in the Digital Asset Industry

Since digital assets were launched, they have received intense attention from retail and institutional investors globally and have achieved notable adoption milestones. This progress has occurred even with the different approaches taken by regulators who are still refining laws for digital assets across global jurisdictions.

The growing popularity of digital assets as an investment and trading vehicle has paved the way for the increasing number of worldwide exchanges. Apart from exchanges, a plethora of platforms that facilitate digital assets have been developed, such as digital wallets. While the mainstream population is increasingly adopting the blockchain-powered assets, regulations are still catching up.

Roadblocks in regulation vary by countries

Standardization and mass scale adoption is still greatly hindered by the absence of regulations in various countries. While some countries are creating regulatory frameworks, others are entirely ignoring or avoiding its adoption. This makes it challenging to have universal standards and also allows for manipulations and unethical practices.

“Digital assets themselves already have an intrinsic need to be regulated, as they are tied to fiat currency. Compliance needs to be taken into consideration, and this will allow for greater adoption of cryptocurrency,” says Hendrik Henderson, Chief Business Development Officer of PARSIQ, a platform that provides automation solutions for businesses to manage their internal workflows, mitigate risks, and provide flexibility in working with blockchain data.

Thankfully, laws and regulations are being passed by international bodies to help cope with the increasing popularity of cryptocurrencies for mainstream adoption.

The EU’s 5AMLD

Last January 10, 2020, the European Union’s 5th Anti-Money Laundering Directive (5AMLD) was signed into law. This new legislation will ostensibly serve to increase security within the EU’s borders and will also have a direct impact on cryptocurrencies. The proclamation of 5AMLD marks the first time that digital asset service providers will fall under regulatory acumen.

The most notable changes touched by the 5AMLD on the current KYC requirements are now rewritten in many stringent terms. This includes mandatory monitoring of all transactions and filing of Suspicious Activity Reports. For EU-operating exchanges, KYC not only requires a valid ID but strict proof of identity by various means.

The United States’s Cryptocurrency Act of 2020

Apart from the EU’s 5AMLD, the United States introduced a bill, the Cryptocurrency Act of 2020. To sum up, it proposes to decrypt crypto-asset regulations and attempts to solve the tension between regulators, issuers, and investors for clarifying definitions on digital assets and cryptocurrency.

The bill has a three-part categorization of digital assets by types and the regulatory bodies responsible for overseeing each type. Crypto-currency is now a representation of US currency resting on a decentralized ledger managed by the Department of the Treasury acting through the Financial Crimes Enforcement Network (FinCEN). Crypto-commodity is economic goods and services with full or substantial fungibility resting on a blockchain overseen by the Commodity Futures Trading Commission (CFTC). Lastly, Crypto-security is equity, debt, and derivative instruments that rest on a blockchain governed by the Securities and Exchange Commission (SEC).

Malaysia’s digital asset guidelines

Early this year, the Securities Commission Malaysia has published the country’s guidelines on digital assets, specifically regulatory frameworks for token sales. All digital assets in the form of token offerings must be carried out only on platforms approved by the commission. These guidelines also include the requirements that token issuers must meet.

To issue a token in Malaysia, the platform operators must seek authorization from the commission along with a minimum paid-up capital of 5,000,000 ringgits (US$1.23 million). Among other requirements, they must also carry out necessary assessment and due diligence to verify the compliance of the issuer, its board, the token offered, and the announcement details.

Regulations promote trust and confidence

“With a clear path of compliance and regulation, the trading platform will comply with the applicable law and regulation, and the trading platform will be more transparent. The concerns of the security of a crypto exchange will be relieved,” says Sheldon Xia, Chief Executive Officer at BitMart, a global leading digital asset trading platform.

If more and more countries enact clear regulations, confidence with digital assets will continue to grow. This will help in building trust for mainstream investors. “Trust is important, and this can only be built with transparency, as well as regulation,” Henderson added.

The growing demand for digital assets has resulted in the need for global regulations to help in its continued adoption. With all the current laws and regulations in place, more and more people will put their trust and confidence in digital assets. “With a more comprehensive framework of regulation, the maturity of the crypto market will also increase, which will benefit the market as a whole,” Xia concluded.