When cryptocurrencies stole the spotlight a few years ago, formal regulation was slow to track the explosive growth.  Initial coin offerings (ICOs) and new cryptos came into the forefront with ‘dot-com’ bubble speed until early 2018, when the U.S. Securities and Exchange Commission (SEC) slapped the wrists of lawyers advising the crypto ICOs which caused the US-based legal advisors to change their advice on the applicability of SEC rules to ICOs.   From that point on, we’ve seen markets tumble amid continued pressure from the SEC both with regards to coin offerings and the prolonged delay of a bitcoin ETF even as other countries adopted innovative regulations to encourage the new market.

Also significant in terms of affecting market sentiment at that time, however, was China’s shadowy stance toward crypto, beginning in September 2017 when it announced a crackdown on coin offerings and crypto trading.  While the bulls among us were drinking Chinese tea, waiting for the right time to gain a foothold, Beijing announced that blockchain is now a strategic part of China’s future. China’s Premier Xi Jinping “called for greater levels of research and investment into blockchain” during a meeting with officials. The reported Chinese plans in this space look to enable China to dominate the ecosystem.  What is even more significant, however, is the Chinese response post-Libra announcement to create “a government-controlled digital currency.”

While the China story keeps changing, the US story does as well.  As Jonathon Ganor points out, “It appears that U.S. regulators might be altering their stance on cryptocurrencies. This could be a form of response to China, which has recently embraced blockchain technology. … Fear of being left behind technologically might have registered among American politicians and regulators.” 

Unified Standard Required

Whatever the case, global regulatory and compliance authorities in the Western world will have to create a unified and standardized system that allows this new system of exchange of value to flourish while following international regulatory norms.

While the financial behemoths – the US and UK - consider crypto to be a grey area with regulation pending or not, some European countries have moved ahead.  For example, the French President Macron commented recently on the need for a European digital currency and some regulation with the Fifth Anti-Money Laundering Directive, which is slated for implementation in January 2020.  Switzerland already accepts crypto as legal tender and has a well-defined regulatory environment for crypto products. Peripheral European countries such as Malta, Gibraltar, Lichtenstein, Estonia as well as Bermuda have established clear guidelines for blockchain/crypto to enable projects to move in their ‘safe’ regulatory space.

In some regards, these approaches don’t need to plow entirely new ground. For example, the G-7 in its recent report on stablecoins explained that “[T]he fundamental concept of ‘same business, same risks, same rules’ applies. Thus, regulatory approaches have to be globally consistent, and any gap or inconsistency should be identified and addressed.”

Further progress is being made via the Financial Action Task Force, which released its final draft of recommendations for cryptocurrency service providers in June 2019. These include rules on Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT) regulations.  The International Monetary Fund is also examining the regulations in this space of its’ member countries. 

Unless a unified regulatory approach/standard is adopted and accepted by all major western powers, those in this space will face unnecessary delays in taking the vital most important step towards a virtual currency financial future. The stability created by a unified standard is precisely what market participants require and is critical for the smooth functioning of the global financial system.

Bridging the gap between traditional regulations and the new crypto/digital currency world of services is critical for a smooth functioning of these two worlds. This must happen not only on a national level, but also in the geo-political and international monetary policy arena. 

The largest part of the resolving this dichotomy rests with regulators who either 1) don’t understand the topic and its significance to the world financial system, 2) are too busy with other issues or 3) can’t square the circle.  A balance is needed where the innovators respect and, in many cases, have a say in the laws being applied to them.  On the other hand, the lead financial regulators must define a path of clarity globally. Unless that happens, we will see a shift of financial power, moving to where the innovative blockchain/crypto businesses can operate more easily but not because the laws are better for the common good. Those countries who are early adapters of crypto currently, however, will not - in my view - end up as the definers of global regulation.  It’s a stop-gap. 

If history is a guide, critical U.S. regulations in the financial sector with global impact have generally been accepted in the G-7 where common goals are relevant – aka with regards to AML/KYC etc.  While this has not been the case in data privacy or accounting standards yet, there is precedent that once the financial powers recognize a danger that they can address better jointly, this will happen through normal procedures. 

Initiating a common set of global rules and regulations in the crypto space that reflect the demands of the modern economy - that in western democracies in many ways traditionally reflect the will of the people - is the best way to manage what can potentially become a minefield for a new era of finance.