OPINION: Crypto regulation doomed from the start by all-or-nothing approach
Concerns that cryptoassets could pose a threat to financial stability in the future are hindering progress on what is needed right now
Cryptoassets have caught the attention of regulators around the world, with policy frameworks starting to take shape in numerous jurisdictions. Industry consensus is that regulation is the appropriate next step for digital finance, but regulators almost everywhere are taking the wrong approach.
Problematically, policymakers are looking at cryptoassets for what they might be in the future, rather than regulating the space for what it is now and updating the rules as and when needed down the line. The concept of a forward-thinking, technology-neutral approach works well on paper, but in practice, the pressure on regulators to get all the right policies, right now, is significantly hindering progress on the healthy regulation needed to protect investors today.
This approach is the natural result of concerns that cryptoassets could pose a threat to financial stability in the future, but is based on an exaggeration of current risk posed by cryptoassets. All told, cryptoassets only make up a tiny fraction ($1.79 trillion) of the total global market cap, which is well over $100 trillion. Digital finance stands out to regulators as being ultra-volatile, but traditional stocks can be volatile too – as Netflix’s shareholders were abruptly reminded earlier this month when the stock lost 35% of its value in a single day, or as anyone following Elon Musk’s recent forays into M&A would attest.
The UK’s Financial Conduct Authority (FCA) has so far approved only 33 firms registration applications out of more than 150 that applied. Rather than limiting the ability of sub-par players to operate in the sector, this has instead encouraged relocation overseas for companies that can still service UK consumers, away from FCA oversight. In the US, the conversation is so caught up in understanding which regulator should oversee what assets, that actual regulation could be a long way down the line.
In contrast, market participants regularly laud the comprehensive approach taken by EU lawmakers with the Markets in Crypto-Assets (MICA) regulation. However, even for MICA, the golden child of cryptoasset regulation, fresh concerns risk overcomplicating the regulation. The EU parliament recently proposed bringing sustainable finance policies into cryptoasset regulation. Since proof-of-work is both energy-intensive and integral to Bitcoin, this is likely to hinder large bank’s ability to invest in the space if they are subject to ESG requirements.
Encouraging a more sustainable frameworks for cryptoassets is a positive move, but trying to cover so many bases in just one rule set risks running everything off course.
A few weeks ago, the UK announced fresh plans to regulate stablecoins and cryptoasset companies and introduce a Central Bank Digital Currency (CBDC), organising industry engagement events to facilitate this. This attempt to cover all bases at once has received scathing reviews from market participants, who see government promises and FCA actions as fundamentally contradictory.
If regulators take this forward-thinking long-term approach, it will forego the first rule of digital finance – constant innovation. The sector will soon look very different to how it does today, so no matter the rules implied, cryptoassets will change and expand out of regulatory scope, tech-neutral approach or not.
A totally comprehensive one-stop shop isn’t what’s needed right now. Instead, the market needs the first steps of regulation that will be developed and tweaked as things change. If regulators don’t realise that then regulatory efforts will be doomed before they’ve even begun.