Expert opinion

Wayne Jones on crypto regulatory framework and guidelines governments should follow

Governments worldwide are grappling with the challenge of regulating cryptocurrencies, as these digital assets pose a unique set of issues that demand a new regulatory framework. Central entities and lawmakers face significant hurdles on the road to crypto regulation, including the lack of consensus on the definition of virtual currencies. 

The difficulty lies primarily in distinguishing between legitimate and fraudulent crypto activities and the need to balance innovation and consumer protection.

Despite these challenges, governments cannot afford to ignore the fast-growing crypto market, which has reached a total market capitalization of over $2.5 trillion as of October 2023. Investors and traders flock to cryptocurrencies to store value, hedge against inflation, and seek high returns in a low-interest-rate environment.

How governments should handle crypto regulations

However, many investors feel that governments need to go the right way regarding regulating crypto. According to a survey conducted by Fidelity Digital Assets in 2022, 71% of institutional investors believe that governments are not doing enough to provide clear regulatory guidelines for cryptocurrencies.

In crypto regulation, guide, don't control

Governments cannot control cryptocurrencies. Instead, they should focus on guiding the development of the industry through clear and consistent regulatory frameworks that protect consumers, prevent fraud and money laundering, and foster innovation.

As the IMF notes, "Crypto assets have emerged as a direct consequence of recent technological and social developments and are a part of the digitalization of finance." Governments should seek to understand how crypto works, engage with industry stakeholders and develop policies that support its growth while minimizing its risks.

Regulate institutions, not people

Traditionally, governments have exercised control over their citizens through banks and other financial institutions. However, with the rise of cryptocurrencies, this control is slipping away. Crypto allows people to transact directly with each other, bypassing banks and other intermediaries.

Governments must realize that this power shift is irreversible and find new ways to maintain regulatory oversight over the financial system. Instead of controlling the people, they should focus on regulating the institutions that enable crypto transactions, such as exchanges, custodians, and other service providers.

Develop comprehensive regulatory frameworks

Governments must develop comprehensive regulatory frameworks covering all industry aspects to effectively regulate crypto, from initial coin offerings (ICOs) and exchanges to wallets and smart contracts. These frameworks must be clear, consistent, and adaptable to changing circumstances as the crypto market evolves.

Regulatory bodies should work closely with industry stakeholders, consumer groups, and other interested parties to develop these frameworks, ensuring they balance innovation and consumer protection. They should also provide clear guidelines on reporting requirements, taxation, and anti-money laundering (AML) and know-your-customer (KYC) procedures.

Keep up with technological advances

As the crypto industry continues to innovate, governments must keep up with technological advances and adapt their regulatory frameworks accordingly. This requires ongoing engagement with industry stakeholders, regular updates to regulatory guidelines, and a willingness to experiment with new approaches to regulation.

Governments must invest in research and development to better understand how crypto works, its risks and benefits, and how it can be integrated into the financial system. By staying ahead of the curve, governments can ensure that their regulatory frameworks remain practical and relevant in a rapidly changing environment.

Learn from other countries

Finally, governments can learn from the experiences of other countries that have already started regulating crypto. However, regarding that specific statement, it’s easier said than done. On one hand, certain countries’ leaders are open to crypto adoption, while others are somewhat against it.

Let’s draw a contrast among the most prominent voices, in terms of states, that have impacted cryptocurrency regulation:

United States

The U.S. Securities and Exchange Commission (SEC) has taken an aggressive approach towards regulating crypto, treating many digital assets as securities subject to its jurisdiction. The SEC’s Chair, Gary Gensler, has received much criticism for his opinions on various digital currencies, and lawmakers are now holding him into account for the lengthy and rickety crypto regulation process.

President Joe Biden has publicly stated his support for crypto use in the country while pledging to crack down on illegal activities involving virtual currencies.

No matter how unfair it seems, most financial regulators in the country believe digital currencies are doing more harm than good. The presentiment crypto holds in the eyes of these watchdogs feels like it’s doomed to fail. That said, the U.S. crypto community deserves a standing ovation for their unwavering support towards the success of the assets.

Cryptocurrency is not a white knight to the financial world; nothing is ever that clean. But if the United States is to adopt virtual currencies, they all must accept that bad things happen to good people, and when push comes to shove, concerning crypto, the good surely outweighs the bad.

China

Chinese financial regulators have taken a more cautious approach, banning ICOs and cracking down on crypto exchanges. We should all understand one very concrete fact: China is against using bitcoin, not blockchain technology.

The country is still adamant about creating its native Central Bank Digital Currency(CBDCs), which is likely why it limits using other virtual currencies. 

El Salvador

El Salvador made history in September 2021 by becoming the first country to adopt bitcoin as its second legally recognized national currency, alongside the U.S. dollar. This groundbreaking decision was made after a vote in the Legislative Assembly.

The initiative involved buying Bitcoin with public funds and requiring all businesses to accept the cryptocurrency. The move was championed by El Salvador's president, Nayib Bukele, who saw it as an opportunity to spare the population from paying fees, foster crypto adoption, and potentially attract investment.

However, the adoption of Bitcoin as legal tender has not been without controversy. The International Monetary Fund (IMF) highlighted that this move raises several macroeconomic, financial, and legal issues that require careful analysis. Furthermore, there were reports of protests by citizens who were mistrustful of the new policy.

The hurdles will be there whether we try to regulate crypto or not. Nothing worth having comes easy.

Going the long way isn’t necessarily the right way

After living with us for over a decade, it’s not the time to start denying crypto is here to stay, bear market and all notwithstanding. That said, even though some regions have made admirable steps, no jurisdiction has been successful in regulating crypto-related activities. We shouldn’t give up but rather try to embrace the future of finance. 

Effective crypto regulation requires a balanced approach that supports innovation while protecting consumers and preventing fraud and money laundering. By guiding, not controlling, the development of the industry, focusing on regulating institutions rather than people, developing comprehensive regulatory frameworks, keeping up with technological advances, and learning from other countries, governments can create a regulatory environment that supports the growth of cryptocurrencies as a legitimate asset class.