Would crypto regulation mark the end of a libertarian fantasy?
by Ben Richmond
The Bank of England has announced that it will be sketching out plans to implement its proposed regulatory approach to the use of cryptocurrency. The crypto sector’s extraordinary growth over the course of the pandemic – which is currently valued at $1.7 trillion or 0.4% of global financial assets – has naturally positioned it within the regulator’s crosshairs.
It comes as no surprise that the Bank of England is assessing how to implement regulation around crypto assets, particularly as they become increasingly interconnected within the wider financial system. Realistically, it was never a question of if, but when.
But there’s a delicate balance to be considered, as regulation shouldn’t come at the expense of innovation – so what should regulators consider before implementing a new regulatory framework for crypto assets?
A short but important history
Borne from a demand for greater financial freedom, the nature of the crypto industry is at odds with traditional financial systems. The very characteristics that define crypto assets – that it is borderless and decentralised – has meant that to date, they’ve largely been uninterrupted by regulators.
That’s not to suggest that regulators haven’t kept a keen eye on the industry. In fact, the FCA opened more than 300 cases relating to unregistered crypto assets businesses from April to September 2021 alone. While this is a step in the right direction, the current regulatory framework is difficult to navigate, and UK regulators have limited capacity to act.
However, over the last year, we’ve entered a new phase and the burgeoning crypto ecosystem can no longer fall under the radar. As crypto assets enter the mainstream, they’re becoming “too big to fail”, hence the Bank of England’s urgency to introduce an effective framework.
Leading by example
It’s ironic, in some respects, that a currency that was originally designed to transcend borders and traditional financial frameworks will inevitably be brought into the same regulatory system that it sought to differentiate itself from. However, if left unregulated, criminal and fraudulent activity will only accelerate – with little protection for consumers. As it stands, the existing regulatory parameters fail to properly protect those that have invested in crypto.
With this in mind, we welcome the plans from regulators – but creating and implementing crypto regulations will not be straight-forward.
In order to be successful, the Bank of England must consider a cross-border, collaborative approach to establish a standardised set of policies for an industry that transcends both jurisdiction and traditional financial services frameworks. A collective global approach will be particularly beneficial given that the objectives are broadly the same across jurisdictions: to prevent illicit financing, promote innovation and protect the consumer. Without this, we will see siloed regulations that vary across jurisdictions – leaving room for loopholes and confusion.
Despite the consensus that regulatory bodies must work together internationally, this has failed to take flight. According to the World Economic Forum, there has been no internationally coordinated regulation of cryptocurrencies – and countries from China to El Salvador have already implemented different regulatory approaches. This makes it even more important for the Bank of England to lead the charge in creating a framework that is conducive to international collaboration.
A libertarian nightmare? Not necessarily
To enable a truly coordinated approach, countries must leverage best practices and learnings from each other, such as aligning on risk assessments and establishing common standards. Moreover, countries must collaborate in order to leverage technology in the right way to enable the regulatory framework to develop fit for purpose and inclusive solutions.
However, although it is imperative that we see a watertight framework implemented as soon as possible, this shouldn’t be viewed in a negative light by crypto enthusiasts. Regulation is not – and should not be – synonymous with a bottleneck. If implemented correctly, regulation can create a prosperous environment for the crypto industry, allowing growth and innovation whilst mitigating concerns both on a micro- and macro-economic basis.
On the other hand, without collaboration and standardisation, the regulatory landscape for crypto could become more complex and delay meaningful progress towards creating a coherent framework to protect consumers.
Ben Richmond, CEO and founder of CUBE