Crypto regulatory outlook: Financial risks, data governance and cybersecurity are the focus

Source: TaxDAO

In the new year, regulation in the cryptocurrency field is expected to surge. The rules will be expanded to cover anti-money laundering and counter-terrorism financing risks, the conduct of companies operating in the cryptocurrency space, and regulatory actions regarding token sales.

In the United States, the pace of regulatory action shows no sign of slowing. Similarly, the United Kingdom has introduced a set of rules that equate the sale of crypto tokens with the sale of traditional financial products. Likewise, the European Union will become the first major jurisdiction in 2024 to formally enact a broad set of laws and regulations for the cryptocurrency industry. The Markets in Cryptoassets Act (MiCA) aims to establish harmonized EU crypto regulation and provide legal certainty for digital assets that fall outside the scope of current EU financial services legislation.

Overall, analysts expect areas of focus in 2024 to be beyond the overall trend of increased regulation. They predict that financial institutions will develop stronger risk management frameworks and increase capital and liquidity requirements to reflect the current economic environment. Additionally, the rising importance of data and artificial intelligence in traditional finance and cryptocurrency is expected to increase the need for data governance and model risk management in global cryptocurrency regulation. Analysts also expect sustainability and environmental, social and governance (ESG) factors to take a larger role in international cryptocurrency regulation, while cybersecurity remains a top priority as digital asset platforms remain vulnerable to hackers and scammers the goal of the person.

Let’s briefly explore current cryptocurrency regulations and the expected legislative landscape in 2024 from a geographical perspective.

U.S. Cryptocurrency Regulation

Cryptocurrency regulation in the United States consists of a combination of state and federal regulation, allowing multiple agencies to participate in the control of the industry. These agencies, including the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), largely leverage existing legal structures to regulate digital asset activities.

In 2023, the SEC and CFTC initiated more than 200 enforcement proceedings against cryptocurrency companies. The heightened activity by U.S. regulators comes against a backdrop of an industry rife with bankruptcies, scams, fraudulent operations and illicit financial flows.

As 2023 comes to an end, some players in the cryptocurrency space have criticized regulators, especially the U.S. Securities and Exchange Commission (SEC), for their approach to overseeing the industry. They also renewed calls for policymakers and regulators to clarify cryptocurrency laws and take a more comprehensive approach to rulemaking.

However, these requests were largely ignored. Towards the end of the year, the U.S. Securities and Exchange Commission (SEC) suffered several legal setbacks, notably cases against Ripple (XRP) and Grayscale. But it did have the last laugh. On December 15, regulators rejected Coinbase’s petition to create new rules for the cryptocurrency industry.

Anton Titov, CEO of fiat-to-crypto payment processor Archway Finance, told crypto.news that he believed the SEC’s decision was reasonable. As he explained, the agency’s mandate is to protect investors, maintain market integrity and facilitate capital formation. Therefore, he believes that rejecting Coinbase’s petition is entirely in the interest of investors. “Because this year and next, most people will be exposed to cryptocurrencies only for speculative purposes. Even with utility tokens, speculation equals the ambition to make money, which equals investment. So what that means is that the SEC’s actions are completely consistent with investing. interests of investors and trying to work to maintain market integrity.”

However, Titov noted that the decision also highlights the SEC’s reluctance to fully embrace cryptocurrencies. He believes that the agency believes that Bitcoin and stablecoins threaten established and controllable currency flows. Furthermore, in his view, U.S. regulators are not designed to be an “innovation center” for new technologies such as blockchain and digital tokens, indicating a fundamental disconnect between its mission and the goals of the crypto industry.

However, the growing market size of certain cryptocurrencies, particularly U.S. dollar-backed stablecoins, which have exceeded the $50 billion systemically important threshold, has caught the attention of U.S. lawmakers, leading them to draft More legislative proposals to regulate cryptocurrency activities.

One of the proposals is the bipartisan Responsible Financial Innovation Act (RFIA), which seeks to classify most digital assets as commodities. It would hand over primary oversight responsibilities to the CFTC and establish regulatory requirements for stablecoins.

The Biden administration also issued an executive order outlining the U.S. government’s approach to cryptocurrency regulation. Additionally, a bill passed by Congress in 2021 would impose new reporting requirements for those involved in large-scale cryptocurrency transactions, which would take effect in January 2024.

The Infrastructure Investment and Jobs Act would force any entity that receives $10,000 or more of cryptocurrency in ordinary business operations to report the transaction to the IRS, according to cryptocurrency advocacy group CoinCenter. Failure to report within 15 days of a transaction may result in felony charges. The legislation is self-executing, meaning that enforcement does not require additional regulatory or enforcement measures from any government agency. Once signed into law, it is immediately effective and enforceable. As a result, all U.S. citizens dealing with cryptocurrencies are now subject to the law.

Looking ahead to 2024, many predict that U.S. efforts to pass cryptocurrency laws will focus primarily on two bills: one seeking to regulate stablecoins at the federal level, and the second proposing a comprehensive A holistic approach to cryptocurrency market structure.

The Clairity for Payment Stablecoins Act, sponsored by House Financial Services Committee Chairman Patrick McHenry, may be one of the first legislative items to be addressed in 2024. The bill passed the committee stage in July despite concerns from the White House and several powerful Democrats about provisions that would allow regulators to approve stablecoin issuances without the Federal Reserve’s involvement. However, SEC Chairman Gary Gensler compared stablecoins to money market funds and suggested that those funds pegged to the U.S. dollar should fall under his agency’s jurisdiction, which observers believe may pose an obstacle to the smooth passage of the stablecoin bill.

The second bill, the 21st Century Financial Innovation and Technology Act, may also face challenges because it proposes to shift more responsibilities to the CFTC and require regulators to establish rules for digital assets as they transition from securities investments to commodities. Clear route.

Similarly, the potential approval of a Bitcoin ETF could increase the legitimacy of the cryptocurrency industry. Several asset managers, including BlackRock, Fidelity and WisdomTree, are vying for a spot Bitcoin ETF, which is subject to approval from the U.S. Securities and Exchange Commission (SEC), but it has not yet been approved.

Finally, the 2024 elections could have a significant impact on digital asset legislation, with lawmakers’ attention likely shifting from cryptocurrency regulation to re-election campaigns.

UK Cryptocurrency Regulation

Since 2020, UK law requires cryptocurrency companies to register with the Financial Conduct Authority (FCA) and comply with the 2017 money laundering, terrorist financing and funds transfer regulations.

However, in October 2022, as part of the UK government’s wider strategy to make the country a global hub for crypto technology and investment and enable regulators to respond more quickly to developments in the sector , the House of Commons voted to allow the Treasury to regulate cryptocurrencies as financial instruments under the Financial Services and Markets Act 2000.

In addition, the government released a consultation paper in early 2023 seeking advice on regulating the cryptocurrency industry. Following the completion of this work, Whitehall has stated its intention to subject various digital assets, including utility tokens and unbacked exchange tokens, to similar regulation to traditional financial assets.

The rules governing cryptocurrency advertising and sales are also changing in the UK, with the Treasury combining cryptocurrency promotions with other types of financial advertising. Additionally, the FCA imposed further restrictions on the sale, marketing and distribution of crypto derivatives (excluding security tokens).

Additionally, as in the United States, stablecoins are expected to come under greater regulatory scrutiny in the UK. Government programs make them a recognized method of payment. Observers predict that this could be achieved in large part by expanding existing electronic money and payments legislation.

XReg partner Nathan Catania said in an interview with crypto.news that the UK’s regulatory approach to stablecoins will play a crucial role in the country’s financial future. Catania highlighted the UK's proactive approach to addressing key regulatory risks and said the country is ensuring issuers maintain low-risk, liquid and secure reserve assets. "Overall, the key regulatory risks have been addressed. These include ensuring that issuers maintain reserve assets and that these assets are low-risk, liquid and safe instruments. The protection of customer assets and other prudential requirements will ensure that UK issuances Stablecoins are safer for consumers to use.”

However, Catania also identified potential obstacles in the way stablecoins are regulated overseas. Most stablecoin activity in the UK involves foreign-issued assets, specifically Tether (USDT) and USD Coin (USDC). He said that even into 2024, the impact of the regulatory framework on the listing and trading of these stablecoins on UK cryptocurrency exchanges remains unclear.

In addition, the analyst also expressed concern that the stablecoin system may not be able to expand into the field of peer-to-peer payments. He believes this could impact the UK’s cryptocurrency markets and exchanges, potentially limiting consumer choice while protecting consumer interests. As such, he believes the UK must maintain a careful balance when crafting future cryptocurrency legislation.

European Cryptocurrency Regulation

With the implementation of MiCA, the European cryptocurrency legislative landscape has taken a major leap forward. This regulatory framework represents the first attempt to harmonize the cross-jurisdictional regulation of digital assets and their related activities within the EU. MiCA is a key link in the European Commission’s broader strategy to integrate cryptocurrencies and blockchain technology into the financial services industry. MiCA forms the basis for EU cryptocurrency regulation, aiming to synchronize the different laws of individual member states and strike a delicate balance between encouraging financial innovation and mitigating the unique risks posed by various types of digital assets.

By 2024, cryptoasset service providers (CASPs) and cryptoasset issuers (CAIs) operating within or across the EU will have to adhere to a unified rulebook, replacing the hitherto disconnected countries frame.

As the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) develop supervisory technical standards (RTS), implementation technical standards (ITS) and guidelines, the application of MiCA is expected to Further improvements in the new year. At the same time, EU member states will also deploy their own legislative tools to support the rollout of MiCAR, RTS, ITS and guidance.

The outlook for Europe in 2024 is that EU Member States’ National Competent Authorities (NCAs) will intensify their efforts to regulate the authorization and supervision of CASPs, CAIs and traditional financial services providers involved in MiCAR regulatory activities Guidance and expectations.

Cryptocurrency Regulation in Asia

While China completely bans the use of cryptocurrencies in 2021, several of its neighbors have taken steps to embrace the industry , the region’s regulatory landscape shifted to focus on consumer protection and transparency in the industry.

Singapore is leading the way in 2023, with the Monetary Authority of Singapore (MAS) announcing new rules aimed at protecting individual traders, which will come into effect in mid-2024. The rules include limiting access to credit for cryptocurrency transactions, prohibiting incentives to encourage trading, and prohibiting the use of locally issued credit cards to purchase cryptocurrencies.

Meanwhile, Hong Kong has adopted a more liberal approach, welcoming cryptocurrency companies and launching its own cryptocurrency licensing system. Hong Kong seeks to establish itself as a global hub for virtual assets by implementing a comprehensive regulatory framework, with more work expected to be completed by 2024. Currently, Hong Kong regulators classify cryptocurrencies into security tokens and utility tokens, with the former falling under the jurisdiction of the Securities and Futures Commission (SFC).

Japan has been laying the foundation for the growth of the crypto economy, even considering web3 as a key pillar of its economic roadmap. From a regulatory perspective, cryptoassets in Japan are divided into several categories: cryptoassets, stablecoins, security tokens, and other categories such as NFTs, each governed by different legislation. The holding and sale of cryptocurrencies is regulated by the Payment Services Act (PSA), which imposes no specific prudential requirements on digital assets. However, service providers are required to maintain a specific percentage of customer funds in a highly secure manner (such as cold wallets). The PSA amendments in June 2023 further clarify the status of fiat-denominated stablecoins, distinguishing them from other digital assets. Currently, regulations limit stablecoin issuers to banks, remittance agencies, and trust companies, while intermediaries must register with regulators and adhere to strict AML/KYC guidelines.

Expectations for 2024 indicate that the cryptocurrency space will continue to grow as regulation and clarification within the cryptocurrency space continues to increase, creating a safer and more conducive environment for cryptocurrency-related activities.

Global Cryptocurrency Regulation

The rest of the world is not lagging behind when it comes to cryptocurrency legislation. PwC’s Global Cryptocurrency Regulatory Review 2024 lists more than 40 jurisdictions with some form of cryptocurrency rules.

From the perspective of cryptocurrency regulation in various countries, outside the EU, only the Bahamas, Cayman Islands, Japan, Mauritius, Singapore and the United Arab Emirates have comprehensive cryptocurrency legislation, covering everything from licensing, registration and Travel rules to stablecoin processing.

Many other countries are still developing frameworks to include them on the cryptocurrency regulatory map, with countries such as Qatar, South Africa, Taiwan, and Canada all engaging in varying degrees of ongoing regulatory activity, including discussions and consultations on cryptocurrency laws. and pending implementation.

Elsewhere, Australia has actively developed a regulatory framework for the cryptocurrency industry. As part of a multi-stage reform agenda, the Australian government released a token mapping consultation document in February, laying the foundation for subsequent regulatory measures.

In addition to Australia, the UAE has also made great strides in cryptocurrency regulation, becoming one of the first jurisdictions to have comprehensive cryptocurrency laws. In view of the rapid expansion of the virtual asset ecosystem, the UAE government has delegated regulatory authority to the Securities and Commodities Authority (SCA) and the Central Bank of China (CBUAE), creating an environment conducive to the development of the crypto industry.

Meanwhile, New Zealand has taken a more cautious approach, focusing on how existing regulations apply to cryptocurrencies and crypto service providers before developing new specific legislation.

Recognizing that the crypto industry is still in its infancy, the New Zealand government has emphasized the importance of adaptive rules that can evolve with the industry and be consistent with global crypto regulation.

On the other hand, South Africa is planning its cryptocurrency regulatory journey. Observers in the country say South Africa is keen to learn from the experiences and models of other jurisdictions, including those outside Europe and the United States, as it attempts to understand the complexities associated with cryptocurrency regulation.

Expert Outlook

This “Cryptocurrency Regulatory Map” highlights the global trend towards developing tailored regulatory measures for the cryptocurrency industry.

Upcoming cryptocurrency regulations are expected to further refine and strengthen these measures, fostering a more robust and sustainable cryptocurrency market where innovation can flourish under the oversight of regulators.

In sharing his outlook for 2024, industry analyst Anton Titov predicted that MiCAR will be implemented across the EU, resulting in a unified anti-money laundering policy across all member states. He also believes non-EU countries such as Britain, Switzerland and the United States may comply with the standards. Beyond the EU and the United States, he predicts a shift in the rest of the world’s perception of cryptocurrencies. He predicts that Indonesia’s potential new president may be more open to cryptocurrencies and believes that India may welcome more foreign companies into the local market. This will involve establishing a framework consistent with bank policy on how people invest and trade domestically and across borders. However, he also predicts that privacy on the blockchain will continue to be prohibited and viewed negatively, even in commercial transactions. Nonetheless, he believes that the emergence of the first central bank digital currencies (CBDC) on the market, while not fully realizing Satoshi Nakamoto’s vision of financial autonomy, will send a strong message about the inevitability and regulatory approval of blockchain technology.