Regulating Crypto
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Bibliographic details
- Authors: ADITYA NARAIN, MARINA MORETTI
- Published: September 1, 2022
Overview
- Crypto assets have existed for "more than a decade" but only in the "past few years" have efforts to regulate them risen to the top of the policy agenda.
- Crypto assets have shifted from niche products to mainstream roles as speculative investments, hedges against weak currencies, and potential payment instruments.
- Failures of crypto issuers, exchanges, and hedge funds, and a "recent slide in crypto valuations," have increased impetus to regulate.
Challenges to regulation
- Rapid evolution of the crypto world strains regulators' ability to "acquire the talent and learn the skills" needed to keep pace amid stretched resources and many other priorities.
- Data limitations: monitoring crypto markets is difficult because "data are patchy" and thousands of actors may not be subject to typical disclosure or reporting requirements.
- Terminology and scope: the term "crypto asset" covers a "wide spectrum of digital products" with diverse uses that can attract attention from multiple domestic regulators (banks, commodities, securities, payments) with different frameworks and objectives.
- Actor coverage gaps: a range of crypto actors—miners, validators, protocol developers—are "not easily covered by traditional financial regulation."
- Governance and accountability: entities in crypto may be hard to identify or may play casual/voluntary roles, complicating transfer of governance, prudence, and fiduciary responsibilities.
- Concentration of roles: centralized entities such as crypto exchanges can concentrate conflicting roles that regulation must address.
- Environmental and public policy trade-offs: national authorities may need to assess "the enormous energy intensity of 'mining' certain types of crypto assets."
- Technology-related risks: the electronic lifecycle of crypto assets amplifies cyber and operational risks, evidenced by several high-profile losses from hacking or accidental loss of control, access, or records.
- Financial system overlap: crypto now emulates functions such as providing leverage and liquidity, lending, and storing value, prompting calls to apply the "same activity, same risk, same rule" principle and raising questions about integration with central bank facilities and safety nets.
Contrasting national approaches
- National approaches vary widely:
- Some countries have "prohibited the issuance or holding of crypto assets by residents or the ability to transact in them or use them for certain purposes, such as payments."
- Other countries have been "much more welcoming" and actively sought to attract crypto companies.
- Fragmentation risk: the resulting global fragmentation "neither assures a level playing field nor guards against a race to the bottom" as crypto actors migrate to jurisdictions with the least regulatory rigor.
International regulatory activity
- Anti–money laundering focus: the Financial Action Task Force provided a global framework for virtual asset service providers.
- Market infrastructure and exchange guidance: the International Organization of Securities Commissions (IOSCO) issued regulatory guidance on crypto exchanges.
- Stablecoin catalyst: the announcement of Libra (a "global stablecoin") intensified global regulatory efforts.
- Financial Stability Board actions:
- Began monitoring crypto asset markets.
- Released a set of principles to guide regulatory treatment of global stablecoins.
- Is developing guidance for the broader range of crypto assets, including unbacked crypto assets.
- Other standard-setters:
- Committee on Payments and Market Infrastructures and IOSCO are working on applying principles for financial market infrastructures to systemically important stablecoin arrangements.
- Basel Committee on Banking Supervision is working on the prudential treatment of banks’ exposures to crypto assets.
IMF position and policy recommendations
- The IMF calls for a global regulatory response that is:
- Coordinated: to fill regulatory gaps arising from inherently cross-sector and cross-border issuance and to ensure a level playing field.
- Consistent: to align with mainstream regulatory approaches across the activity and risk spectrum.
- Comprehensive: to cover "all actors and all aspects of the crypto ecosystem."
- Expected benefits of a global regulatory framework:
- Bring order to the markets.
- Help instill consumer confidence.
- Lay out limits of what is permissible.
- Provide "a safe space for useful innovation to continue."
Key facts and references from the piece
- Publication: F&D Magazine, "Regulating Crypto"
- Authors: ADITYA NARAIN, MARINA MORETTI
- Date: September 2022
Source: Regulating Crypto, F&D Magazine, ADITYA NARAIN and MARINA MORETTI, September 2022.