Overzealous regulation “could damage crypto” say experts

Regulation must encourage crypto development, not suffocate it, experts say

Graphic of law and justice statue holding bitcoin                                 
Overzealous regulation could hurt innovation, experts argue – Photo: Shutterstock
                                

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From the Biden administration in the United States hiring a “crypto czar”, to the Bank of England voicing concerns around stablecoins, regulators across the globe are discussing how to tame the Crypto Wild West.

Will regulation kill the crypto hype? A panel hosted by the Financial Times tried to get to grips with this subject.

While the panellists concurred that a clampdown would not kill the hype, they argued it could damage the still-nascent ecosystem if not carried out in the right manner. The panel, consisting of Yoni Assia, founder and CEO of eToro, Giles Keating, a board member at Bitcoin Suisse, Ian Taylor, executive director for Crypto UK, Marcus Hughes, European MD for Coinbase, and Richard Levin, a legal expert in the crypto space, discussed a range of issues relating to crypto regulation and possible roadblocks that authorities may face.

Is crypto regulated? 

Attempting to fit crypto into pre-existing regulatory frameworks, the panellists agreed, would undoubtedly fail. Crypto, Hughes asserted, must be viewed through a different lens, examining the value in this novel phenomenon, before clamping down on it, in order to ensure its potential for continued innovation remains viable.

Fitting a square peg into a round hole, the speakers concurred, simply would not do.

Hughes also argued that while regulation in terms of financial crime is comparably clear cut and already adhered to by many crypto platforms, other types of regulation must be imposed in a more piecemeal fashion.

Assia reiterated the importance of distinguishing between the networks and the gatekeepers, arguing that while the former cannot be regulated, because of their decentralised nature, the latter can, and in many cases already do, impose self-regulation. He said that eToro, for example, has always treated crypto in the same way as any other security, imposing the same anti-money laundering (AML) and know your customer (KYC) policies in order to counter financial crime. Assia stressed the importance of crypto gatekeepers to take an active role in self-regulation.

Hughes said it was important to look at what crypto regulation is aiming to achieve and suggested that regulation should serve to imbue confidence in the space and provide appropriate guardrails to protect customers. He argued that regulators, when attempting to develop a regulatory framework, must contend with the fact that the space is moving so fast, and what may be appropriate today may be outdated tomorrow.

Defining instruments

The panellists discussed how the difficulty of establishing a cryptocurrency regulatory system is compounded by the fact there are so many different types of crypto assets, which all require different types of classification. NFTs, for example, must be treated distinctly from stablecoins, which in turn cannot be treated the same as Bitcoin.

Problematically, there is no definitive consensus on which brackets crypto assets fall into, making it difficult to know which governing body should take ownership of them. In many cases, crypto assets fall into many different classifications depending on the way you view them, from currency to commodity to security. Such problems are typified by the fact that the Securities and Exchange Commission in the United States (SEC) views crypto as a security, while the US Commodity Futures Trading Commission (CFTC) views Bitcoin as a commodity, the US Treasury calls it a currency and the Internal Revenue Services (IRS) defines cryptocurrencies as property for federal income tax purposes.

Compounding this complexity is the fact that each instrument is completely different. An NFT, for example, cannot be treated in the same way as Tether, which in turn cannot be dealt with Cardano. Furthermore, new assets are constantly being created which further elude definition.

The speakers also raised the important question: who or what should be regulated?  Should the token be regulated? The owner of the token? The issuer of the token? The network? Or perhaps the platform?

Levin, who called the process of establishing a regulatory framework “a messy exercise”, discussed how difficult regulation is while there is no agreed upon definition of the assets.

Global phenomena 

Traditional monetary policy and regulatory frameworks are meted out on a national level; cryptocurrency, however, is truly international, the panel agreed.

This means, according to Hughes, countries must work together to arrive upon an understanding of who to regulate, what to regulate and how to regulate it.

Problematically, if there is no consensus on a national level, it is even more difficult to imagine a clear-cut path to establishing a worldwide consensus.

Taylor did however raise the fact that information about these different instruments has begun to be disseminated across different jurisdictions and countries.

Increased communication

Levin cited the importance of regulators and crypto platforms improving dialogue in order to move in a productive direction.

The crypto ecosystem has tended to, rather unsurprisingly, view regulators in less-than-favourable terms, perceiving their existence as a threat to two core features of crypto: privacy and decentralisation. This, in turn, has hindered the ability for meaningful discussions to take place.

Levin said that regulators should modify the way they approach the process, claiming that while their needs are at a macro level, the ecosystem requires direction in a more bottom-up manner. 

He discussed the fact that a constructive dialogue would involve crypto platforms adapting their attitude around regulation asking, “how to make laws work rather than say they don’t work”.

Safeguarding innovation

While all the panellists agreed that cryptocurrency regulation was required to reduce the risk of the ecosystem being used for criminal purposes, Assia and Keating highlighted the importance of not overregulating the space, which could in turn curb innovation and exclude individuals who could benefit most from the ecosystem.

For example, Keating argued, very stringent measures applied to unbanked individuals who may not have an address, could end up curbing crypto’s democratising potential.

Financial freedom

Assia emphasised how integral it is to view this now $2trn industry with a broad lens, discussing how the emergence of crypto has raised important questions around what financial freedom means.

The eToro founder spoke about how crypto has brought up pertinent questions around why, in this globalised world, financial rules remain tied to locality. He stressed the importance of regulators taking into account the value of crypto and not enacting any overzealous crypto laws and policies that would destroy its unique proposition.

Crypto regulation 2021

While any decisive decisions on the part of authorities in regard to crypto regulation has thus far proved elusive, it will be interesting to see how the dialogue develops in the coming months and years. 

 

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