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Regulators have come a long way since they first started to study cryptocurrencies, and their approach is now changing towards a more holistic view.
Not long ago, most of the regulators had a very limited understanding and knowledge of how digital assets work and what products are on the market.
The picture has changed significantly since then and it is now very different from what it was even two years ago, David Carlisle, director of policy and regulatory affairs at Elliptic, said at a FinCrime event last week (January 26).
This is in part due to the work by the Financial Action Task Force (FATF), which constantly called out regulators to work together with private sector actors, “to consider a holistic approach to new technologies, taking into account its potential as well as its limitations”.
Understanding crypto
The crypto space is changing very quickly, and although few can keep up with those changes, regulators are making a very good effort and they have been “extremely fast” in learning, according to Carlisle.
There are, however, various challenges to which regulators are now turning their attention.
For instance, since cryptocurrency adoption became widespread, the exchange of digital currency to and from fiat money has become much easier and faster.
Such an interconnectedness between digital assets and the traditional banking system means that the impact of the product has scaled up and could have significant effects on the wider financial system.
Regulators are now increasingly looking at the implications of cryptocurrencies from the aspect of financial stability.
Most recently, the U.S. Presidential Working Group, comprising the main federal financial regulators and the Treasury, proposed to establish bank-like regulations for stablecoins issuers as they believe the digital asset could pose systemic risks in payments.
In addition, the palette of crypto products is constantly changing. Today, crypto includes not only Bitcoin and cryptocurrencies, but also products such as non-fungible tokens (NFTs) and decentralised finance (DeFi) and their application is growing by the day.
Legislators and policymakers are now looking at ways to address these issues, Katie Fry-Paul, associate at Taylor Wessing, said.
Regulators are currently working to keep up with the NFT and DeFi space, enhance their understanding of these products and their use cases to identify which regulatory frameworks should apply to them.
In that context, the Bank for International Settlements (BIS) released a paper last December, arguing that DeFi is an illusion as a certain degree of control, or centralised management, is inevitable on a programmed network. In a January speech, BIS general manager Agustín Carstens spoke sceptically about the elusive promises, and practical manifestation, of decentralised networks.
From understanding to engagement
Despite this fast-changing space, regulators are working to get up to speed on this extremely fast, Carlisle stressed.
“I am incredibly impressed with how quickly it has been done,” he added.
Although 18 months or two years ago many regulators had difficulties with understanding how the market works, they have done a great effort to really educate themselves, Carlisle said.
“One of the things regulators are getting to understand is not just the features of crypto and how the firms they supervise operate but they are starting to recognise that there are aspects of the technology that they can harness for their own purposes and benefit.”
For instance, an increasing number of regulators around the world have started to use blockchain analytics in their monitoring and supervisory activities.
Although some use blockchain to assess the suitability and riskiness of new licensing applications among crypto businesses in their jurisdictions, others use blockchain analysis to enforce and investigate violations of their existing rules.
Less than two years after regulators started to educate themselves in the crypto space, they are now thinking “more holistically” about blockchain and are using blockchain data “to inform their decision-making”, Carlisle added.
