The crypto industry has come a long way since the launch of Bitcoin in 2009. From Bitcoin being criticized as a gimmick in the early days to crypto market surpassing US$3 trillion in value last November, there have been significant milestones reached in crypto with increased mainstream adoption — we have seen countries such as El Salvador and Central African Republic accepting Bitcoin as legal tender, luxury brands like Gucci and Balenciaga starting to take crypto payments, and the creation of new financial products around crypto such as Bitcoin futures.
With the adoption and usage of crypto assets gaining traction, regulators around the world are now stepping up efforts to regulate this space. For some in the crypto industry, the increased regulatory scrutiny is perceived to be an impediment and worse, at odds with the original premise of crypto as being permissionless, borderless and free from government oversight. However, despite increased regulations, at a fundamental level, the underlying public blockchain that enables cryptocurrencies will always continue to be permissionless and borderless. What has changed is the moment we build use cases upon a permissionless blockchain that involve a touchpoint with fiat currencies, regulations would come into play since fiat currencies have historically been subject to a multitude of financial regulations. Even in the decentralized finance (DeFi) space, with more infrastructure being built around decentralized identifier (“DID”) and with its application for performing know your customer (KYC) and anti-money laundering (AML), this would likely be regulated eventually.
Regulations in the crypto space so far have been varied with regulators taking divergent views of how different cryptocurrencies should be regulated. Some view it as “securities,” some view it as “commodities” and others as “payment tokens.” Broadly speaking, global regulators have leaned toward assessing whether the crypto is a security or commodity in determining their regulatory approach. In general, the laws and regulations for securities are stricter and would typically require registration and disclosure. In comparison, commodities are relatively less regulated, but derivatives of commodities are tightly regulated with reporting requirements. In this regard, with the creation of crypto derivatives, further regulatory obligations could be triggered, e.g., regulatory reporting requirements in some jurisdictions.
As regulators navigate their way around the crypto industry, it is evident that their main purpose is to ensure a sound and robust regulatory ecosystem for the crypto world. And in fact, most regulatory regimes emphasize the importance of common pillars such as AML/KYC processes, cybersecurity and more recently, investor protection. That being said, regulators are also cognizant of “over-regulation,” and we have seen regulators taking the approach that some areas ought to be left unregulated. For instance, if you look at the non-fungible token (NFT) space, we have seen regulators in certain jurisdictions explicitly announce their position to not regulate NFTs. Instead, they have taken the approach to warn retail investors on the speculative nature of NFTs. And this applies to GameFi use cases as well. Indeed, to engender a targeted, risk-based, “smart” regulatory regime, crypto firms have an important role to play in working alongside respective regulators to share and provide industry feedback and knowledge.
While excessive and fragmented regulations could potentially impede innovation in the crypto space, many tend to overlook or underestimate the benefits compliance and regulations could bring to the table. Despite increasing adoption of crypto by the mass public, the majority of the population still has limited understanding of the fundamentals of crypto and blockchain technology. To many, the crypto industry is still viewed as the “Wild West” despite crypto’s increased popularity and adoption of crypto assets globally. With regulations and regulators progressively issuing crypto licenses and registrations, and with greater harmonization of global standards, we will be a step closer to the legitimization of digital assets and eventually make crypto an integral part of the mainstream financial system.
Beyond the aim of ensuring a stable and sound ecosystem with sufficient investor protection, compliance is in fact beneficial and a strategic advantage for crypto firms. With the right compliance and control framework, crypto firms are better able to gain access to the customers, investors and shareholders they want to attract. These key stakeholders tend to be interested in the firm’s compliance with the relevant AML rules as well as security of their digital assets. Hence, having a strong compliance culture including tone from the top, hiring employees with the appropriate regulatory expertise and having in place best-in-class compliance systems and processes are critical for crypto firms. Further, it is important to note that compliance is not a one-time exercise but rather a continuous and ongoing process. As the industry grows, it is important for crypto firms to continuously review and grow their compliance framework to ensure that their controls are commensurate with the risks posed by the scale and size of their operations.
As responsible players in the ecosystem, crypto firms should not be afraid of regulations and compliance but instead embrace the fact that regulatory compliance is critical to establishing the mainstreaming of crypto around the world. Crypto industry players should continue to work closely with regulators to develop fair frameworks that will encourage and support innovation while maintaining trust, transparency and security for all stakeholders within the ecosystem. Ultimately, crypto can play a pivotal role in accelerating financial inclusion around the world.