Regulation Roundup
2023 The Year of Cryptocurrency Regulation
You might ask why I would choose to open the year with a newsletter on regulation. The reason is because there is nothing more critical to the adoption, development and price action of cryptocurrency. There are a myriad of efforts both international and domestic to regulate cryptocurrency projects as well as access to trade digital assets.
International
The Reserve Bank of India, who currently holds the G20’s rotating presidency, says that it will wield its power to foster a global regulatory framework for cryptocurrency. More specifically they stated the following:
Under India’s G20 presidency, one of the priorities is to develop a framework for global regulation, including the possibility of prohibition, of unbacked crypto assets, stablecoins and DeFi.
Others in the Asia-Pacific appear to feel differently. As soon as March, Hong Kong in efforts to reestablish themselves as a financial hub plans to legalize crypto trading for retail investors and offer access to crypto ETFs. This is a departure from mainland China’s ban on the practice. Japan will move in a similar fashion by removing its ban on US dollar backed stablecoins. The Japanese yen has struggled over the past year compared to the US dollar; this will offer citizens an opportunity for asset protection.
The European Union is also taking what appears as a favorable approach to crypto regulation. The final version of their Markets in Crypto Assets (MiCA) legislation should be released next month. MiCA is broadly focused on the regulation of stablecoins and sets limits on daily transactions for those digital assets. The legislation divides digital assets into three categories with differing regulatory requirements for each. The category that most cryptocurrencies fall under is Utility Tokens, which requires the submission of a white paper and registration with regulators. According to Belgian regulators Bitcoin and Ethereum are exempt from MiCA regulations as they are sufficiently decentralized.
South America has also issued favorable crypto regulation in the past three weeks. While not going as far as making crypto assets legal tender, Brazil declared that cryptocurrency can be used for payment of goods and services. The law signed by President Bolsonaro also establishes licensing for virtual asset service providers and penalties for entities or individuals who commit fraud. The province of San Luis in Argentina has announced that it will be issuing its own stablecoin pegged to the US dollar. According to Chainalysis, over 30% of Argentinians use stablecoins for everyday purchases. Year over year inflation in Argentina was as high as 92% for the month of November, up from 88% for the month of October. Holding funds in US based stablecoins provides them with the ability to reduce the devaluation of their spending power.
Domestic
There are currently five bills that have been introduced in Congress to address cryptocurrency regulation.
Digital Asset Money Laundering Act
Digital Commodities Consumer Protection Act
Responsible Financial Innovation Act
Stablecoin Transparency Act
Virtual Currency Tax Fairness Act
The focus of these bills is to provide: guidelines to eliminate the ability to obfuscate the source and destination of digital assets; enforcement/oversight authority for cryptocurrency projects, exchanges and trading platforms; guidelines for the issuance and financial backing of stablecoins; and tax exemption of cryptocurrency used for retail payment of goods and services. These bills are all in their initial stages, but some have language that is quite unfavorable towards cryptocurrency developers, businesses, service providers and investors.
Closing Thoughts
With all of the fraud that the cryptocurrency industry experienced in 2022, it is very evident that regulation is required in order to provide some protections for investors. Regulation is also necessary before institutional investors will adopt cryptocurrency at scale. That funding will spur further development by existing and new projects. These new developments will then spur greater retail adoption. Unreasonable regulation will simply push projects and their development to more favorable jurisdictions. Furthermore, retail investors may suffer and be forced to use offshore or peer-to-peer platforms if crypto trading is restricted to only accredited investors.
With the US Congress in gridlock over electing a Speaker of the House the probability of them passing significant crypto regulation is unlikely to take place until there is more public interest some time closer to Sam Bankman-Fried’s criminal trial which is scheduled to begin October 2nd. With that said, any Congressional regulations will not go into effect until 2024. Also MiCA, though passed will not be implemented until 2024. This leaves the SEC as the largest regulator likely to take significant action this year. Gary Gensler, SEC chairman, has stated that his agency doesn’t need any additional authorities to regulate cryptocurrency as nothing in the crypto markets is incompatible with existing securities laws. If the SEC is successful in their current case against Ripple Labs, they will have the legal precedent to crackdown on any cryptocurrency token they deem to be a security. If they fail to win the legal battle against Ripple Labs, I believe they will pivot and focus on regulation of cryptocurrency exchanges and marketplaces.
SEC regulation can cause a large selloff of a particular asset and an overall slowdown of crypto trading which makes markets more volatile. In addition, investors may be left with illiquid assets if the SEC deems their holdings a security; as crypto exchanges will be forced to delist them or risk being accused of offering unregistered securities to their clients. This is one reason why we are entering the season of Bitcoin dominance. The fact that Bitcoin is viewed by nearly all, if not all, regulatory bodies as a commodity instead of security makes it a safe digital asset to hold during this period of regulatory uncertainty.
If you currently hold digital assets you may want to look at how regulation, positive or negative, will change the value and liquidity of your holdings. (Not financial advice, just educational content.)
Stay crypto curious!