FTX, Celsius and Terraform Labs have all capitulated spectacularly, and the world’s two largest exchanges, Coinbase and Binance, are both currently facing SEC lawsuits.
With such a promising industry causing real people to lose real money, it is important that regulatory bodies strike a perfect balance if they wish to see genuine innovation in their economy. The UK, US and EU have all embarked on their regulatory journey, with some making more progress than others. What is the state of play in each of these economic zones?
UK: Striking the balance
In Andrew Griffith’s (Economic secretary to the Treasury) own words, the government’s firm ambition is for the UK to be “home to the most open, well-regulated, and technologically advanced capital markets in the world.” Delivering on this ambition requires the government to take proactive steps to harness the opportunities of cryptocurrencies and their underlying technology.
The UK made a good start, with the Financial Conduct Authority (FCA) taking the lead. In 2019, the FCA classified certain cryptocurrencies as “specified investments,” subjecting them to regulatory requirements. This classification ensured that crypto-related businesses comply with anti-money laundering (AML) and know-your-customer (KYC) protocols, promoting a secure and transparent ecosystem.
In July 2022, the UK Treasury unveiled its proposed crypto legislation, modifying and extending the existing rules for banking and payment systems to cover digital assets. On Thursday 29th June 2023, the Financial Services and Markets Bill (FSMB) finally received royal assent and has been passed into law. For the first time in the UK, crypto will be recognised as a regulated financial activity under this new act, reflecting the government’s plan to make the UK a crypto hub. These proposals initially focus on fiat-backed stablecoins in particular and will eventually allow properly regulated stablecoins to be used as a payments mechanism. Whilst significant, this is only a step in the path to making the UK a fully-fledged crypto hub.
New specific rules, according to Andrew Griffith, can be expected around April next year, with the UK desperate to catch up with the EU’s MiCA legislation. However, Griffith has said that the UK’s regulation will be more widespread than the EU’s, so perhaps it is worth the wait.
EU: Pursuit of Harmony
Recognising the need for comprehensive crypto regulation, the European Union has taken steps towards harmonisation through the Markets in Crypto-Assets Regulation (MiCA), which was passed into law in May 2023. Lawmakers say that MiCA will protect investors and preserve financial stability while allowing innovation and fostering the attractiveness of the crypto sector.
A major challenge for the EU, more so than the UK or US, was reconciling the diverse regulatory approaches within the EU. Each member state has its own stance on cryptocurrencies, which resulted in regulatory fragmentation. Coordinating and consolidating these varied approaches into one piece of legislation was a challenge, but a crucial one to create a unified and supportive environment for the crypto industry within the EU.
So far, the EU is the most advanced in its regulatory journey, being the only one of the three to have actual legislation. With the UK not far behind, the onus falls on the US, the most advanced economy in the world with the most stringent and robust regulatory system, to get its act together and catch up.
US: Patchwork of Perspectives
The United States presents a complex regulatory landscape for cryptocurrencies due to the involvement of multiple regulatory agencies. The Securities and Exchange Commission (SEC) regulates the offer and sale of all securities, whilst the Commodities & Futures Trading Commission (CFTC) oversees the derivatives market. The disputes between the two agencies over which should regulate the crypto market in the US have been very public, with Gary Gensler, Chair of the SEC, being at the centre of all this publicity.
Due to this, progress on crypto regulation in the US has been slow. The lack of a unified federal regulatory framework in the US has led to a patchwork of state-level regulations. Proposed legislation, put forward by the US House Financial Services Committee and the House Agriculture Committee is expected to be put forward into the House this year. This Bill is a bipartisan effort to address both securities and commodities regimes and issues that are hard to fix on either side.
A number of bills made progress on Capitol Hill last year, however, due to disagreements between Republican and Democrat lawmakers, they never came to fruition. Senators on both sides of the aisle hope that this new bill will be able to drum up bipartisan support and be ratified before the 2024 election. If the US wishes to be at the forefront of the new digital economy, new regulation should be passed soon, to ensure it does not fall further behind the UK and EU.
As things stand
Crypto regulation has become a critical aspect of the global financial landscape, shaping the future of digital assets. Looking at the UK, EU and US, it is clear that each has taken a different path towards crypto regulation. Due to different political and regulatory complexities in each country, legislation has taken a bit longer than the industry wanted. However, all three are firmly on their way to regulating crypto which will protect consumers, and foster innovation within this industry.
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