The writing is on the wall: regulation is coming for crypto. While a small handful of nations have already introduced specific cryptoasset legislation over the past few years, it looks as though the world’s major powers are gearing up to introduce substantial new regulations and laws.
This point was brought home forcefully by remarks made in mid-January by European Central Bank (ECB) President Christine Lagarde. Speaking to Reuters, she said “there has to be regulation” of crypto at a global level, mostly due to the fact that bitcoin and other coins are used for “totally reprehensible money laundering activity.”
However, according to Chainalysis, the criminal share of all cryptocurrency activity fell from 2.1% (USD 21.4bn) in 2019 to 0.34%, or USD 10bn in transaction volume in 2020.
In either case, together with recent actions from the US Treasury and Financial Crimes Enforcement Network (FinCEN), such overtures suggest that crypto is due for a legislative reckoning sooner or later, with nations using the excuse of money laundering to bring it more fully within their oversight.
Aims and motives
“As crypto has gained mind and market share among institutional and individual investors over the past year, it’s natural that international regulatory bodies would increase their scrutiny and potential oversight,” said Blockchain Association executive director Kristin Smith.
For Smith, there’s no single motive as to why regulators are now beginning to push more strongly for regulation. Rather, “a confluence of factors” have come together to push them to bring crypto within the purview of the wider financial system.
“And the reaction to that legitimacy and growth may manifest itself in defensive moves to protect sovereign financial institutions, or a reach to augment international financial power by developing national blockchain systems, as in the case of China. The basic point is that crypto has become too large a force to be ignored,” she added.
Other figures are less sanguine. For Bambos Tsiattalou, a lawyer and founding partner at the London-based Stokoe Partnership Solicitors, the overarching intention of regulators isn’t to make crypto ‘respectable,’ but to suffocate it.
“The ECB is now looking into the possibility of creating its own digital euro … [m]any of the world’s major powers are making similar moves. Their overall intention appears to be to regulate the existing private cryptocurrencies out of existence as they make way for their own official digital currencies,” he told Cryptonews.com.
Tsiattalou acknowledges that the focus of the ECB in particular on money laundering is somewhat hypocritical, given that high-denomination banknotes such as the EUR 500 bill are notorious as money-laundering tools. However, he suspects regulators are determined to hamper crypto as far as possible.
“The proposed state-backed digital currencies will be supported and managed by major central banks and the resources of major states,” he said, suggesting that businesses and consumers will much prefer these to decentralized cryptocurrencies. “Further regulation will also undermine the speculative value which some have unwisely placed in cryptocurrencies.”
While regulators, banks and governments will no doubt aim to reduce the illegal use of cryptocurrencies (at the very least), it’s not entirely clear when we can expect new regulations to arrive.
“In the US, as in many other countries, any major legislation is likely to be focused on controlling the pandemic and the attendant financial crisis, so we don’t expect any major legislation dealing specifically with crypto in the next few months. However, if and when the pandemic begins to wane, we think there will be new bills introduced in the later months of the year,” said Kristin Smith.
In the case of the EU, Bambos Tsiattalou also expects movements to be slow, with the proposed regulatory regime for crypto-assets not likely to come into force until 2024.
“The eventual EU regime looks set to require companies offering a cryptocurrency in the EU to have a physical presence in the EU, while significant governance and capital requirements are also proposed. It seems unlikely that any aspects of the proposed regime will be rushed into force this year, unless acute risks to financial stability or consumers begin to emerge,” he said.
Elsewhere, Tsiattalou added that other nations may copy the FinCEN/US Treasury reporting rule for transactions to/from personal wallets:
“That regulation could well come into force this year. The fearful reaction from cryptocurrency advocates shows the serious impact which this regulation could have on the industry as a whole.”
However, as reported, American crypto advocates are breathing a collective sigh of relief after new United States President Joe Biden announced, via an official communication, that he would be freezing all active agency proposals – a move that will include a much-maligned “unhosted” wallets regulatory proposal put forward by the former Treasury Secretary Steven Mnuchin.
Impact on crypto
Looking at the bigger picture, opinion is split on whether the inevitable drift towards greater regulation will benefit or harm crypto.
“In the long term, this is probably a good thing for crypto-assets, because greater regulation means a spot in the mainstream, and gives investors greater confidence when buying the asset. However because this is a nascent market, we can expect any regulatory interventions to increase price volatility in the short term,” said Laith Khalaf, a financial analyst at UK-based broker AJ Bell.
On the other hand, Bambos Tsiattalou said that substantially restrictive regulations will be the death knell for crypto.
“The wave of regulation which is now heading for cryptocurrencies will ultimately reveal that cryptocurrencies have no real intrinsic value and are fundamentally without substance. More stringent regulation will therefore cause the speculative market for cryptocurrencies to crash,” he said.
However, when this “cryptocurrencies have no intrinsic value” argument arises, BTC supporters stressed that Bitcoin’s utility lies in the fact that it allows people to store value outside of any currency system in something with a provably hard-capped supply, which is more easily verifiable than gold, and then to transport that value easily across the world. “Bitcoin is the best at what it does. And in a world of negative real rates within developed markets, and a host of currency failures in emerging markets, what it does has utility,” according to popular generalist investor and Swan Bitcoin, a BTC investing app, advisor, Lyn Alden.
In either case, with the bitcoin price apparently dropping in response to initially unfavorable remarks from incoming US Treasury Secretary Janet Yellen, it’s clear that the market will continue reacting to regulation-related news. (P.S. Later, Yellen’s position on cryptocurrencies was clarified: “I think it is important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system.”)
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