Tech
Can Cryptocurrency Regulation Revive Its Reputation?
They called him the “Crypto King,” but after a month-long trial, a New York jury took less than five hours of deliberations to find Sam Bankman-Fried guilty of charges including fraud and money laundering.
The 31-year-old cryptocurrency billionaire now faces decades in prison after his arrest last year after his exchange, FTX, went bust. He had pleaded not guilty to all seven charges.
Bankman-Fried’s extraordinary fall from grace coincided with a rocky 2022 for the cryptocurrency industry. The stablecoin Terra, touted as one of the most reliable digital currencies, lost 96% of its value in a single day.
Bitcoin, perhaps the best-known of all cryptocurrencies, lost more than 60% of its value last year. It was the second worst year in the history of the digital currency (it was down 73% in 2018).
But the biggest negative news for cryptocurrencies has been FTX, which has been promoted by A-listers such as supermodel Gisele Bundchen, comedian Larry David and NFL star Tom Brady, putting an “acceptable” face on what is still considered by many to be a risky investment.
‘Wild West’
Michael Lewis, author of books such as Moneyball and The Big Short, both of which were later adapted into Oscar-nominated films, recently wrote a book about Bankman-Fried. Speaking on The News Agents podcast, he said that “Cryptoland is the Wild West” and suggested that other exchanges are structured like FTX, but are out of reach of U.S. prosecutors.
The challenges of 2022 have led to increased calls to introduce regulations – or even specific regulators – for cryptocurrency and digital assets, but how will this and can it work?
“Unfortunately, cryptocurrency scandals and a lack of regulatory clarity have made cryptocurrencies almost a dirty word in the financial services world,” explains Sasha Skoryk, head of banking at Clear Junction.
“The term ‘crypto’ is used so loosely that we don’t really understand all the components of digital assets and blockchain technology.
“What’s holding back this mass adoption of digital ledger technology is that some of these cryptocurrencies are so volatile and can change in price very quickly. That makes them risky and not something that can be easily adopted by businesses, for example. But there are so many elements of cryptocurrencies that have the potential to transform the way we make payments.”
Effective regulation can “provide the critical confidence that both institutions and individual investors need to confidently enter or re-enter a market,” adds Spectrum Search founder and CTO Peter Wood.
“The crypto space is nascent and therefore highly susceptible to volatility, misinformation and fraudulent activity. The introduction of a dedicated regulator can effectively act as a stabilizing force by setting clear standards, enforcing compliance and ensuring consumer protection.
“Such oversight not only adds credibility, but also streamlines processes, making it easier for new entrants to adopt and innovate. On the other hand, the challenge is to find the right balance.”
However, he cautions that there is a fine balance to be struck.
“Overly restrictive regulations can stifle innovation and drive away potential investors and technology leaders, which is counterproductive to restoring the cryptocurrency world’s reputation.”
VARA
For the UAE, cryptocurrency and digital assets are seen as a huge opportunity. In fact, at the recent GITEX conference in Dubai, a local government official told TechInformed that the goal is to make the emirate the “Switzerland of cryptocurrencies” by acting as a neutral and welcoming home for digital asset companies.
To achieve this, Dubai became the first region to launch its own independent regulator for virtual assets: after several years of development, the Virtual Assets Regulatory Authority (VARA) went live in March 2022.
VARA’s mission includes the aim of making Dubai a “regional and international hub for virtual assets and related services”, but also to “promote shared responsibility in developing efficient and tailored regulations to protect customers and curb illegal practices in coordination with the relevant bodies”.
TechInformed asks VARA Vice President Deepa Raja Carbon to explain why Dubai chose to create a regulator specifically for the virtual assets sector.
VARA Vice President Deepa Raja Carbon
He explains: “When we were created, cryptocurrencies were not viewed in the same way that they have been in the last six months. It was an industry that every jurisdiction globally wanted to promote and nurture to help grow.
“Part of the Dubai 2033 plan, laid out last year, was to target new economy sectors, and everything from blockchain and the metaverse to artificial intelligence and virtual assets fell under that mandate.”
The 2033 plan was drawn up by Ruler Sheikh Mohammed bin Rashid Al Maktoum to steer Dubai’s economy towards new areas and opportunities, including transforming the city into one of the world’s leading smart cities.
According to these plans, the new economy sectors account for approximately $100 billion of that goal.
“One of the obvious things that this formulation doesn’t address is any regulation of virtual assets,” adds Raja Carbon. “So if you stopped thinking about virtual assets as a vertical and started thinking about them as a horizontal, almost a cross-section, none of the other ones would be able to be attractive or grow with it. For that scalability, we needed to build a foundation, and that’s VARA.”
In February this year, VARA issued the highly anticipated Virtual Assets and Related Activities Regulations 2023, which sets out the regulatory framework governing virtual assets and all related activities in the emirate, with numerous updates announced since then. Its mandate concerns only the Emirate of Dubai.
Now, more than 800 companies operate in Dubai in the space covered by VARA without licenses, although Raja Carbon has set a target that by the end of the year all these entities will have the correct registration or are in the process of doing so. of registration, to obtain a VARA license to operate.
“So by the end of the first quarter of next year, they will either formally apply for our license, or they will close completely,” he adds.
To address the broader market and those companies that may be connected to virtual activities but not directly in that space, VARA has launched the Dubai Legacy Program, which is expected to impact around 850 companies. This will allow them to go through a transition period to align their activities with VARA regulations through a temporary license.
VARA only covers the Emirate of Dubai: the rest of the UAE has its own crypto rules under the Emirates Securities and Commodities Authority (ESCA), while payments are still regulated by the Central Bank of the UAE.
So how does VARA balance Dubai’s goal of becoming a leader in this sector, with the need to protect itself from bad actors through regulation?
“We’ve set ourselves up to be a very agile regulator,” explains Raja Carbon. “I don’t just mean agile in terms of responding to the market, but also in terms of regulations that need to change, knowing that this is not a static industry. It’s dynamic, it’s going to change, and regulators are only as good as they are aware of what the market can do.
“Our regulations will constantly evolve, but we need to protect those who need protection the most, and that means not being completely vague so that a person isn’t sure where they’re going to land.”
Dubai: We built this city on blocks and chains
Around the world
At the moment, there are few signs that other countries are willing to follow Dubai’s lead with a dedicated regulator, but many are moving.
Spectrum Search’s Wood points to Switzerland and Singapore as two nations that stand out for embracing a “proactive, but balanced approach” to cryptocurrency.
He explains: “The Monetary Authority of Singapore provides clear guidelines and promotes innovation while ensuring investor protection. The Swiss “Crypto Valley” in Zug has become a global hub thanks to its forward-thinking regulatory framework that is both business- and investor-friendly.
“It is the synergy between clear rules, accessibility to regulators, and an overall progressive mindset that makes these countries stand out in the cryptocurrency legislative landscape.”
TI analyzes the latest regulatory moves in the largest markets
WE: The nation announced a new framework in 2022 that opened the door to further regulation. The new directive gave power to existing market regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The SEC has already moved toward regulating the industry with its widely publicized lawsuit against Ripple, alleging it raised more than $1.3 billion by selling its native token, XRP, in unregistered securities transactions. More recently, the SEC has targeted exchanges and companies like Coinbase (COIN) and Binance (BNB) for their crypto products. SEC Chairman Gary Gensler has spoken openly about cryptocurrency and called it “a Wild West.”
China: China classifies cryptocurrencies as property for inheritance purposes.
The People’s Bank of China (PBOC) has banned cryptocurrency exchanges from operating in the country, saying they facilitate unauthorized government financing.
Additionally, China imposed a ban on Bitcoin mining in May 2021, forcing many of those involved in this activity to shut down operations entirely or relocate to jurisdictions with a more favorable regulatory environment.
And in September 2021, cryptocurrencies were banned entirely.
However, the country has been working on the development of the digital yuan (e-CNY). In August 2022, it officially began launching the next round of its central bank digital currency (CBDC) pilot test program.
European Union: Cryptocurrencies are legal in most of the European Union (EU), although governance of exchanges depends on individual member states.
The EU’s Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) recently came into force, tightening KYC/CFT obligations and standard reporting requirements.
In September 2020, the European Commission proposed the Markets in Crypto-Assets Regulation (MiCA), a framework that increases consumer protection, establishes clear conduct in the cryptocurrency sector and introduces new licensing requirements. It was provisionally agreed in 2022.
In April 2023, Parliament passed measures allowing legislation requiring certain crypto service providers to apply for an operating license. This legislation is intended to provide regulators with the tools they need to monitor cryptocurrencies used for money laundering and terrorist financing.