The rapidly evolving nature of the crypto market has posed stark challenges for regulators in understanding the underlying technology and subsequently devising informed policies and procedures. This evolution is also characterized by a shift from isolation to collaboration in terms of global regulation.
In an exclusive interview with global regulatory expert and author Nirvana Smith, she said, “There’s really been a push for international cooperation, which I think will continue and really establish some kind of common standards.” This transformation has been necessitated by the global demand for oversight in the cryptocurrency markets, particularly from regulators in the United States.
In fact, Kevin O’Leary of Shark Tank fame, in a recent Fox Business appearance, voiced concern that US regulatory obstacles incongruent with international norms could drive crypto innovation out of the US. He said, “Where do you think all this innovation is going to go? It’s going to go to the UAEUAE. It’s going to go to Abu Dhabi.”
Regulatory Challenges In The Cryptocurrency Market
The international landscape for cryptocurrencies presents diverse regulatory obstacles. Given their unique nature and technological underpinnings, a primary challenge is determining their legal classification. “Many countries have grappled with how to apply traditional financial regulatory structures to these distinct digital assets,” stated Smith. “Should they be categorized as currencies, securities, as was done in the US by the SEC with regards to ICOs; or perhaps they warrant an entirely new classification tailored to their uniqueness?”
The second challenge is the understanding of the underlying technology, blockchain, that powers cryptocurrencies. This complex, decentralized, and distributed ledger technology requires a deep understanding for effective regulation. It is pivotal for regulators to comprehend this technology thoroughly, to avoid crafting regulations that could potentially stifle innovation or overlook potential risks.
The third challenge presents itself in the form of taxation. The quasi-anonymity that cryptocurrencies offer makes third-party reporting arduous, thus posing a significant challenge to the implementation of taxation. Policymakers are tasked with creating mechanisms that can effectively monitor and tax cryptocurrency transactions. Despite the potential revenue from cryptocurrency taxation, the risk of evasion of VAT and sales taxes poses a greater threat.
Consumer protection in the face of potential scams, specifically with the advent of initial coin offerings and decentralized finance platforms, forms the fourth challenge. The proliferation of these new financial technologies exposes consumers to new risks and potentially fraudulent activities. Consequently, regulators need to put the necessary safeguards in place to protect consumers against these possible risks.
The fifth challenge lies in the outdated mindset among regulators. There is a tendency to apply traditional financial services regulatory approaches to the cryptocurrency market. However, given the unique nature of cryptocurrencies, they necessitate a unique regulatory approach.
Lastly, the self-interest of individual countries and financial institutions poses a significant challenge to creating a fair playing field. Smith said, “We want to have smart regulations in place, not stupid regulations that suppress competition or stifle innovation. We still want to be innovating and having competition, because that’s how the economy’s going to churn.” The future of cryptocurrency regulation should focus on collaboration, global standards, and a balanced approach promoting innovation while ensuring responsible growth.
The Case For International Cooperation And Common Standards
In their recent joint report, the International Monetary Fund and the Financial Stability Board cautioned against blanket bans on cryptocurrency activities. They argue that such broad prohibitions could lead to the migration of activities to other jurisdictions, thereby creating spillover risks. Instead, they propose comprehensive regulations and targeted restrictions to mitigate the associated risks.
Due to the global nature of cryptocurrencies, cross-border coordination is crucial. According to Smith, each country has its regulations, but these could have global implications, thus highlighting the need for international cooperation and common standards. She adds, “Cryptos are inherently global, and obviously each country has its own regulations, but the international community is realizing those regulations could cause ramifications elsewhere.”
The shift from isolation to collaboration in the cryptocurrency regulatory landscape is a clear indication of the industry’s maturation. The persistent pursuit of self-interest is gradually giving way to a more cooperative approach, with a focus on establishing effective, intelligent regulations. With that said, recent progress indicates the future of cryptocurrency regulation will be characterized by increased international cooperation, the creation of global standards, and a balanced regulatory approach that does not stifle innovation but ensures its responsible growth.
