Crypto – Compliance & Regulation

In part 2 we looked back at the bitcoin halving and the endorsement of bitcoin by a slew of financial institutions. Moving forward we’ll take a short look at compliance & regulation and the impact it’s had on the industry and the countries leading it.

To kick off let’s start by highlighting the levels of adoption and the demand from financial institutions like MicroStrategy, Grayscale, MassMartPayPal and Ruffer Investment were, in addition to other factors, triggered by a swath of crypto industries regulatory reforms, proposals and pronouncements.

In 2020 an Alternative Finance study concluded that:

“regulators’ collaborative dialogue and regulatory interventions in the industry appear to be supporting its growth by providing regulatory clarity and harmonisation on the treatment of cryptoassets and related activities.”

Cambridge Centre for Alternative Finance 3rd Global Cryptoasset Benchmarking Study

The Financial Action Task Force’s (FAFT) follow up review to asses the regulatory progress made by member countries and the private sector acknowledged industry progress. FAFT announced a further Travel Rule review to meet enhanced Travel Rule implementation. They also recognised and concluded the need to identify and monitor new risks in emerging areas such as DeFi, CBDC’s, Stablecoins and P2P transfers.

“They recognised and concluded the need to identify and monitor new risks in emerging areas such as DeFi, CBDC’s, Stablecoins and P2P transfers”

The Financial Action Task Force

Interestingly, in the UK, the Financial Conduct Authority (FCA) decided to ban the sales of crypto derivatives to retail clients from January 2021. This move signified a setback for the UK’s attempts to maintain its primary position as a global fintech centre and arguably raises questions about the FCA’s openness to collaboration. It also comes at a time just after the European Commission proposed a comprehensive Digital Finance Strategy framework, covering cryptocurrency regulation in its Markets in Crypto Assets (MICA) proposal, which is scheduled to come into effect in 2024.

In July the US federal banking regulator the Office of the Comptroller (OCC) confirmed that banks could offer custodial services to crypto investors

US federal banking regulator the Office of the Comptroller (OCC)

On the other side of the water, in America the US federal banking regulator the Office of the Comptroller (OCC) confirmed that banks could offer custodial services to crypto investors. However, not all the news from the US was viewed positively; from the FinCEN proposal to reduce the data collection requirement threshold of MSBs’ to €250 for fund transfers or the news that the SEC would retrospectively charge Ripple with violating US financial laws.

Asian countries strove to lead the field in effective regulation as highlighted by Singapore’s Payment Services Act (PSA).

One of the clearest pictures to capture the global regulatory trend came in the 2020 Cambridge Centre for Alternative Finance 3rd Global Cryptoasset benchmarking study:

“Just over two out of five surveyed firms are licensed or in the process of obtaining a license; these firms are primarily located in Europe”.

2020 Cambridge Centre for Alternative Finance 3rd Global Cryptoasset Benchmarking Study

In conclusion, it found that license holders primarily hold “a crypto-specific license (42%), followed by payment or e-money licenses (29%), and money business licenses (28%). The existence of a crypto-specific licensing regime arises either from the introduction of a bespoke regulatory framework, which specifically regulates cryptoasset-related activities as a standalone activity (e.g. Gibraltar’s DLT Provider licensing regime), or from the retrofitting of an existing law or regulation to include activities dealing with cryptoassets”

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Written By:
Penny Sommerfeld
penny@recruitblock.io