Cryptocurrencies and other digital assets, long a secondary issue for most governments, now sit at the top of the agenda for regulators and financial policy-makers. US President Joe Biden’s administration has set out its goals for ensuring the responsible development of digital assets, saying consumer protection, national security and US leadership in global finance were at stake. The European Union’s proposed markets in cryptoassets (MICA) directive has cleared its first major parliamentary hurdle while European Central Bank President Christine Lagarde is urging accelerating the launch of a digital euro.
This attention is welcome but turning it into effective regulation will not be easy. Cryptoassets, like bitcoin and stablecoins pegged to fiat currencies like the dollar, are now worth a little over $2tn. They offer the possibility of better and cheaper financial services that empower individuals. However, they also pose potential risks to people and the financial system. Public policy must find the right approach that encourages innovation while mitigating risks. Finding ways to channel this activity for broad societal benefit is critical, but these assets are newer than the core laws and regulatory principles that govern the financial system, and do not fit easily within existing frameworks.
The Oliver Wyman Forum’s new paper provides a high-level guide to some of the key issues, which apply across the globe, and uses the probable outcomes in the US as an illustrative example. The big questions include:
- Should digital assets be encouraged, discouraged or channelled in some way?
- Are new laws and a new regulator needed for digital assets?
- How do central bank digital currencies and decentralised finance fit in?
- What is the role of enforcement actions versus enhanced regulation?
- How can adequate global coordination be achieved?
The most pressing issue is the biggest: are digital assets good or bad for society? Policy-makers in the US and around the world remain divided on whether to regard cryptoassets as inherently speculative, akin to Dutch tulip bulbs in the 17th century, or whether they contain the seeds of useful technological transformation despite frothy excess, like dot-com companies in the late 1990s.
The answer to that question will have important ramifications. Believers in the utility of digital assets are likely to approach regulatory matters with a desire to balance risk reduction against the potential for innovation, much as existing bank capital requirements try to enhance safety without driving business away from banks to less regulated entities. Skeptics of digital assets, meanwhile, would come down heavily on the side of risk minimisation.
Differences are already emerging on whether new laws and new regulators are needed to oversee digital assets. While the EU aims to have its MICA directive in force by 2024, the US and many other jurisdictions are planning to use existing laws and regulators. That leaves important questions unresolved, notably in the US, where many digital assets firms would prefer to be regulated by the Commodity Futures Trading Commission rather than the Securities and Exchange Commission.
These differences heighten the need for common global standards and approaches, including the taxonomy issue of how to decide whether a particular digital asset is a security, commodity, currency or collectible.
It’s too early to say whether these assets will fulfil the promises of their backers, but the market is too big and the potential ramifications and trade-offs are too great to ignore. The war in Ukraine has thrown some of these issues into stark relief, with activists promoting the use of cryptocurrencies to send humanitarian aid to the affected population while US and European governments seek to limit their use to evade financial sanctions.
With the pace of change in the digital transformation of money accelerating, a broad debate is needed to forge a consensus on the key questions of how to regulate this activity. The future of money is ours for the taking.
Douglas Elliott is Partner at Oliver Wyman and Leader of the Future of Money Initiative, the firm’s think tank, at the Oliver Wyman Forum.