Cryptos on the rise – a complex regulatory future emerges

Thomson Reuters Regulatory Intelligence has published a special report “Cryptos on the rise: a complex regulatory future emerges”.

In many countries, cryptos appear to be at a legal and regulatory tipping point. Concerns about financial stability and vulnerable customers, together with the apparently persistent misperceptions about financial crime, are driving policymakers to consider significant action. Policymakers must, however, balance these considerations with the benefits which could be derived from the more widespread adoption of cryptos.

Other countries, meanwhile, are welcoming cryptos with seemingly few regulatory concerns. Cryptos’ borderless nature makes this even more challenging, as is evidenced by the near-overnight relocation of miners and crypto firms out of China. Most countries are reluctant to stifle innovation, but it would be politically unacceptable to deliberately risk either wholesale financial stability or widespread retail customer detriment.

There is an urgent need for a coherent approach to the regulation and oversight of cryptos; otherwise, there is a danger that they will fail to achieve their potential, and the world will lose the considerable benefits they could bring.

My main message today is simple: the soul of money belongs neither to a Big Tech nor to an anonymous ledger. The soul of money is trust. So, the question becomes: which institution is best-placed to generate trust? I will argue that central banks have been and continue to be the institutions best-placed to provide trust in the digital age. This is also the best way to ensure an efficient and inclusive financial system to the benefit of all.

Agustín Carstens, general manager of the Bank for International Settlements, January 2022

Policymakers are all-too aware of the need for a coherent approach to cryptos. “Global crypto regulation should be comprehensive, consistent and coordinated,” according to the IMF.

Specifically, the international regulatory framework should provide a level playing field along the activity and risk spectrum. The IMF believes this should have the following elements:

  • Crypto-asset service providers that deliver critical functions should be licensed or authorized. This would include storage, transfer, settlement and custody of reserves and assets, among others, as with existing rules for financial service providers.
  • Requirements should be tailored to the main use cases of crypto-assets and stablecoins.
  • Authorities should provide clear requirements on regulated financial institutions concerning their exposure to and engagement with crypto.

Firms and their risk and compliance officers must engage with policymakers and regulators to ensure the best possible supervisory approach. Fast-moving digital transformation and adoption, even in limited terms, of innovative new technology, products and solutions will require skill sets to keep pace.

This report is a follow-up to Regulatory Intelligence’s “Cryptos on Rise” special report published in 2021. That report highlighted the need for policymakers, regulators and firms all to play their part in ensuring that cryptos are as “safe” as possible, not only in terms of investment risk but also with regards to regulatory certainty and cyber resilience.

The 2022 special report expands beyond cryptocurrencies such as bitcoin. Considering the need to develop a regulatory framework, it investigates other crypto-related instruments, such as central bank digital currencies (CBDCs), non-fungible tokens (NFTs) and stablecoins, and highlights policy work in key countries. It examines some of the misconceptions which persist about cryptos, as well as the ramifications for financial stability and the future of money. It also considers changing structural models for financial institutions emerging from the crypto world, as represented by decentralized autonomous organizations (DAOs).

As with the 2021 report there is a compendium which analyses the tax, legal and regulatory status of cryptos in various jurisdictions.

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Susannah Hammond is a senior regulatory intelligence expert and joined our regulatory intelligence team from GE Capital Bank where she was head of compliance. Susannah has over 25 years’ wide-ranging experience in international and UK financial services.

A qualified chartered accountant, Susannah’s compliance career includes SG Warburg, Caspian Securities and PricewaterhouseCoopers. She was head of international regulatory risk for the Halifax Group and became head of retail regulatory risk for HBOS plc upon Halifax’s merger with Bank of Scotland.

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