Smart regulation needed to rebuild trust in crypto

Rapid growth requires significant regulatory attention

The crypto industry had a historic 2022. Between macroeconomic headwinds, a bear market, insolvencies of major exchanges and providers (such as FTX and BlockFi), which were preceded by the staggering collapse of stablecoin TerraUSD, the global crypto market capitalisation fell to $858bn in early December from highs of $3tn.

It’s easy to lose sight of the big picture on the back of a year punctuated by so many challenges. Around 10% of people around the world own digital assets. Crypto and blockchain technologies have proven their value in addressing real-world challenges for millions in financial services and beyond.

Growth in blockchain technology is also set to become a core differentiator for economies and a key measure of international competitiveness in the next decade for attracting foreign direct investment, cultivating innovation and creating jobs. Investor appetite and sentiment around the technology’s potential clearly substantiate that vision.

The top 10 global crypto and blockchain venture capital funds raised over $12.5bn in 2022, making it a record-breaking year for fundraising activity in the industry despite a noticeable dip in the second half of the year. The dip follows a resilient first half and mirrors the more significant and persistent year-long retreats in other sectors that were instigated by the broader macroeconomic and geopolitical environment.

Crypto appears to be at a regulatory tipping point in many places around the world. Governance, consumer protection and security remain the top concerns, understandably accentuated by recent events and/or lingering misconceptions around the technology.

Financial stability and integrity are also top of mind for regulators. Although cryptoassets account for only a small portion of global financial system assets, with a total market capitalisation of under $1tn in June 2022, their rapid growth makes a strong case for significant regulatory attention.

At this important juncture, the right balance is crucial to allow for responsible innovation and growth. A digital assets regulatory framework should:

  • maximise user protection and successfully eliminate bad actors
  • favour simpler technologies that deliver tangible solutions to the most pressing needs
  • provide clarity and avoid duplication or conflict with other regulations
  • adopt a proportionate and risk-based approach as the industry and technology continue to mature and
  • create a level playing field to enable world-changing innovation.

The backdrop of challenges and rapid growth arguably made 2022 the busiest year to date for crypto policy-making, accelerating the need for regulatory clarity to protect consumers. The industry saw a flurry of global regulatory and legislative developments as well as standard-setting activity and industry action.

The European Union published its Markets in Crypto-Assets regulation, the first and most comprehensive digital assets regulatory framework to date – although it doesn’t enter into force for another year. In the US, the work put in motion by the March 2022 White House executive order resulted in the US’s first ever comprehensive framework. The UAE, Saudi Arabia, Bahrain and most Brazil have also introduced crypto regulations.

Moreover, a lot of guidance has been put forth by global standard-setting bodies on different areas, such as the Financial Stability Board’s framework, International Organization of Securities Commissions’ roadmap, Financial Action Task Force’s guidelines for virtual assets and the Basel Committee’s recommendations. In 2023, there will be a lot of swift movement by countries to implement these proposals. There will also be a lot of focus on areas that were left out of scope by MiCA and other frameworks, such as decentralised finance and non-fungible tokens.

Exchanges around the world have also been proactive and quick to launch their own voluntary initiatives to reassure consumers, increase transparency and (re)build trust in the ecosystem. Examples include publishing wallet addresses, proof of reserves and launching recovery funds.

With proper guardrails in place, Web3 can improve the lives of millions of people by transforming financial services and beyond – but only smart regulations and serious industry efforts can (re)build the trust needed to make it happen.

Rana Kortam is Director, Global Public Policy at Binance.

This article was originally published in the Digital Monetary Institute annual 2023.

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