In 2024, Crypto Regulation is Key to Boosting Participant Confidence

While the United States continued its reactionary posture toward the crypto space throughout 2023, last year saw many countries take more hardline approaches toward industry oversight and enforcement. The European Union formally passed its long-awaited Markets in Crypto-Assets legislation, or MiCA, which set in motion the implementation of a legal framework for key dimensions of the crypto ecosystem. Much like the workplace safety standards that helped correct cruelties of the Industrial Revolution, MiCA’s standardized language establishes ecosystem conduct with the aim of increasing stability and participant trust.

In similar moves, Hong Kong, South Korea, and Singapore all passed sweeping policies to define how cryptocurrency companies can conduct business in their regions. In Hong Kong, a new licensing regime went live in June 2023 that imposed financial and regulatory restrictions on exchanges, while greenlighting a limited menu of services for retail customers. While some critics bemoaned the high application costs as a barrier to entry for aspiring companies, the new process would officially legalize basic retail trading. In turn, greater due diligence was implemented for builders, business, and tokens alike, requiring background checks and clean bills of financial health to qualify. Prior to this decision, Hong Kong-based participants relied on unregulated platforms to access the digital economy, often at their own peril.

Also in June, South Korea accelerated its oversight of the crypto space by passing omnibus legislation that combined 19 pending bills aimed at ramping up participant protections. The Act on the Protection of Virtual Asset Users tightened restrictions for virtual asset service providers’ (VASPs) handling of customer funds and information and mandated oversight through regular reporting. Rules for “self-issued virtual assets” appear in response to the shell game accounting practices that caused countless participants hardship. Perhaps more importantly, the law confers power on the Financial Services Commission (FSC) to enforce these regulations through imprisonment, sanctions, and fines for bad actors. After successful passage, these policy changes are now set to take effect in July 2024.

Later in August, the Monetary Authority of Singapore (MAS) announced a finalized version of its legal framework for stablecoins, and how they can interact with the traditional economy. In addition to clearly defining stablecoins, the body outlined its regulatory reach as pertaining to “single-currency stablecoins (SCS) pegged to the Singapore Dollar or any G10 currency, that are issued in Singapore.” This allowed the MAS to set broader rules for SCS transactions and redemption that placed the onus of compliance on token issuers while establishing clear mechanisms for enforcement. By dispelling another legal gray area, retail and institutional participants alike can transact with greater certainty and peace of mind after high-profile collapses.

Back in London, the Financial Conduct Authority (FCA) is cracking down on crypto companies in an effort to root out scams and potential fraud. In addition to protecting consumers by maintaining the integrity of financial markets, the FCA holds service providers accountable for adhering to regional standards. While the regulator imposed a host of requirements to ensure crypto companies are operating above-board, many of the latest policy updates have concerned messaging. Centered primarily around the marketing of crypto products and services, the FCA’s intersectional guidelines propose a unique topographical environment that appears to disqualify the bulk of common industry practice. This includes the use of promotional incentives, affiliate program activities, and “refer a friend” bonuses, all of which must pass review by an approved third-party.

It’s amidst this climate that the U.S. opened the floodgates to Bitcoin ETFs, as outlined above, despite maintaining an overall standoffish posture toward the rest of the ecosystem. The institutional flip-flopping of SEC precedent, after causing uncertainty and litigation, now appears to be setting the stage for greater cross-pollination between digital assets and financial behemoths. Those playing close attention to the choreography of asset managers and regulators leading up to the approval saw how raw financial will can influence the wheels of bureaucracy. However, it’s crucial to note that the embrace of specific financial instruments, in the case of Bitcoin ETFs, does little to resolve the absence of legal foundations necessary to adequately regulate the crypto ecosystem.

From a bird’s eye view, this realignment toward greater regulatory policy is a dominant, worldwide trend. According to a report by TRM Labs examining “21 jurisdictions representing approximately 70% of global crypto exposure,” governments are beginning to turn a critical eye toward the digital economy. The crypto analytics firm discovered that “[i]n 2023, 80% of these jurisdictions moved to tighten crypto regulations, and almost half specifically progressed consumer protection measures.” If these percentages denoted the chance of precipitation, it would be foolish to not carry an umbrella. In light of such a seismic change in climate, industry leaders are being left with little choice but to start dressing for the weather. Looking ahead in 2024, TRM Labs drew up key dates and landmark decisions to illustrate how the regulatory landscape will continue to evolve throughout the year. While an element of uncertainty remains in the air due numerous election cycles, it should be clear that crypto is becoming more regulated across major jurisdictions.

While this timeline highlights the electoral vulnerabilities that could serve to undermine efforts toward regulation, industry leaders must embrace and support these measures. To that end, it’s also crucial to question those who see any interference by the government as a detriment to innovation. There’s a growing movement in tech circles for generative regulations that encourage developers to reach further in their renderings of products and systems. This attitude will be essential going forward as crypto platforms decide how to operate in the increasingly defined world of digital asset regulation. As more markets have clear rules and penalties in place, companies will be forced to tailor their services by region or comply with the steepest guidelines platform-wide. Barring a step backward to legal gray zones and black swan events that could (and should) have been prevented, these are the paths forward for ethical crypto providers.

Better yet, these provisions should be celebrated as concrete solutions to the rampant mismanagement of customer funds and outright fraud that’s occurred in recent years. Most jurisdictions currently exploring heightened regulations have experienced the implosion of a homespun crypto hero, and are not in any rush to re-live such trauma. That’s why many of these legislative packages set their sights on common sense measures that demarcate official oversight and lean heavily on consumer protections. It’s at this crossroads that crypto leaders could choose to send a strong message by working with officials to ensure a smooth transition. Rather than just asserting user-centric values in mission statements, the industry should embrace and be receptive to regulation if it means protecting and growing the global crypto community. As we’ve seen, words can only go so far to remedy actions. Therefore, leaders must refrain from pushing empty platitudes, and instead focus on concrete ways to boost participant confidence.

These changes are inevitable, and the crypto ecosystem would be wise to anticipate and work to accommodate their implementation. Undoubtedly, there will be some that choose to leapfrog expectations, forever seeking the next regulatory lillipad amenable to their unique situation. Where fringe services may continue to operate outside official oversight, retail exchange is gaining legal architecture at a rate that will outpace even the nimblest of entities. With each legislative victory portending greater control in an official capacity, eventually, there’ll be nowhere left to hop. But then again, it’s a tough sell to lobby for customer trust after fleeing regulation to the point of running out of road. To avoid such a humbling and exhaustive process, companies should strive to ensure their services meet all jurisdictional requirements, or risk the consequences.