Crypto Regulation Advances Though Jurisdictional Disparity Remains Key Issue

Crypto Regulation Advances Though Jurisdictional Disparity Remains Key Issue

by January 16, 2024

Notable developments occurred throughout 2023 to advance digital asset regulation, including the release of global regulatory frameworks, crypto-assets policies, and prudential standards. But despite advancements in creating a well-functioning, secure and sustainable ecosystem for cryptocurrencies and digital assets, there is still much work to be done, especially when it comes to jurisdictional equivalence, a new report by the global consultancy PwC says.

The report, titled “Navigating the Global Crypto Landscape with PwC: 2024 Outlook” and released in December 2023, provides an overview of the global regulatory landscape, exploring how regulatory frameworks are developing across the world and the impact of new regulations on crypto and traditional financial services firms.

According to the report, regulators were actively working on advancing cryptocurrency and digital asset regulations in 2023, with many countries recognizing the need to establish clear regulatory frameworks to address issues such as consumer protection, financial stability and anti-money laundering concerns associated with the growing market.

Key regulatory developments in 2023 included the release of a regulatory framework for crypto-asset activities and crypto-asset roadmap in July 2023 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. The framework comprises two interconnected sets of recommendations: one addressing the regulation, supervision and oversight of crypto-asset activities, and the other focusing on revised recommendations for global stablecoin arrangements.

The FSB is now working closely with other standard-setters to ensure coordination, mutual support, and complementarity in the monitoring and regulation of crypto-asset activities and markets. The organization plans to review the implementation status of the recommendations at the jurisdictional level by the end of 2025 and says it will continue its work on assessing the policy implications for decentralized finance (DeFi).

The International Organization of Securities Commissions (IOSCO) also published several recommendations in 2023, addressing DeFi risks in September and sharing its views on how to regulate crypto and digital assets markets in November.

But most noteworthily, 2023 saw the entry into force of the European Union (EU)’s Markets in Crypto-Assets Regulation (MiCAR). The groundbreaking regulation, which came into force in June 2023, offers a harmonized regulatory framework for crypto-assets in the bloc, replacing the patchwork of individual member states’ national framework on the regulation of the new asset class.

MiCAR is the world’s the first cross-jurisdictional regulatory and supervisory framework for crypto-assets, and covers nearly all business activities related to crypto-assets taking place in the EU. Non-EU crypto-asset firms carrying out activities for EU customers must also comply with MiCAR’s requirements.

Timeline for MiCAR implementation, Source: Navigating the Global Crypto Landscape with PwC: 2024 Outlook, PwC, Dec 2023

Timeline for MiCAR implementation, Source: Navigating the Global Crypto Landscape with PwC: 2024 Outlook, PwC, Dec 2023

For digital asset firms, choosing the right jurisdiction for incorporation and operational base is a critical matter that must be considered thoroughly, the PwC report says. Several factors must be taken into account, including the jurisdiction’s regulatory maturity, cost of operations, available talent pool and the global reputation of the jurisdiction.

Crypto native firms should favor jurisdictions with a mature regulatory regime which offers certainty, legitimacy and protection for service providers and consumers, while fostering a conducive and competitive environment for innovation and growth, it advises.

Operators should also consider the operational costs associated with doing business from a certain jurisdiction, taking into account the cost of obtaining and maintaining a license or registration, tax obligations and reporting requirements.

The size of the local talent pool is also critical. Locations such as Switzerland, Singapore, Hong Kong and Malta, in particular, have well-established talent pools with deep subject matter expertise in digital assets and blockchain technology. These locations have emerged into leading crypto hubs thanks to supportive regulatory frameworks and investment in blockchain education and research, the report notes.

Finally, jurisdictional reputation is another important factor to consider. It typically signals whether or not a country has a stable and transparent regulatory framework, which is essential for the growth and development of the digital asset industry. Investors and businesses tend to choose jurisdictions with a positive reputation which provide them with a sense of security and assurance that their rights and interests will be protected, the report notes.

To conclude, it says that while progress has been made over the years to provide regulatory clarity, some challenges remain that digital asset firms must cope with, including jurisdictional disparity.

For digital asset firms, navigating through contradictory regulatory obligations across countries with varying levels of regulatory maturity poses challenges and can lead to operational complexity. While Europe and the Middle East have made significant progress in providing comprehensive guidance, other locations such as the US have complex and fragmented regulatory systems with overlapping and conflicting mandates between federal and state agencies, the report notes.

It advises that as the crypto regulatory landscape continues to evolve, digital asset firms looking to operate in numerous territories must design internal standards complying with the strictest and most reputable regulatory jurisdictions.

Cryptocurrencies have gained widespread adoption and legitimacy over the past decade. Just this week, the US Securities and Exchange Commission (SEC) approved the first bitcoin exchange-traded funds (ETFs) in the country, marking a watershed moment for the crypto industry and improved accessibility of bitcoin for institutional investors.

The eleven spot bitcoin ETFs, which began trading on January 11, saw US$4.6 billion worth of shares trade hands by the end of their first day of trading, Reuters reported.

Bitcoin is currently trading at US$45,000, up 7% from the start of 2024 and 164% from a year prior, data from Coinmarketcap show.


Featured image credit: edited from freepik