Countries across the globe are working towards the regulation and implementation of digital assets. The European Union recently passed legislation to legalize cryptocurrency while countries such as South Korea and Hong Kong are further strengthening the laws to eliminate the issues related to money laundering and terror financing.
Multilateral organizations such as the World Bank (WB), the International Monetary Fund (IMF) and the World Economic Forum (WEF) are also working to establish a foolproof system. These organizations regularly conducted surveys and published research to increase awareness and eliminate loop hopes in the system.
It is important to note that significant progress has been made over the past few years, especially the numerous consultations and frameworks from international organizations (the FSB BIS, OECD, IOSCO and others) and national regulators (the EU, Singapore, Japan, the UAE, India, South Africa, the US and many more), as well as various industry efforts, several pertinent questions remain under discussion including definition, classification, regulation and coordination among various stakeholders.
Recently, the WEF published a white paper titled “Pathways to the regulation of crypto-assets: a global approach”. The paper highlighted the need for a global approach and also pointed out the issues involved in establishing a global approach. Importantly, the paper underlines the types of regulatory approaches such as principle-based regulation, agile regulations etc.
The paper underscores that coordinating regulatory frameworks across jurisdictions is a complex task for almost any sector. Crypto assets, given the unique features of the underlying technology as well as the boundless opportunities that it presents are often contended that global coordination is not just
desirable but necessary.
Further, there exists a broad spectrum of views, especially due to multiple stakeholders at varying levels of maturity, and the need for a global approach is warranted due to the borderless nature of technology and the potential of interconnectedness within the crypto-asset ecosystem and with the traditional financial system.
While highlighting the issues the paper mentions that there is a lack of harmonized taxonomies or classification leads to different jurisdictions defining and categorizing crypto assets in various buckets, creating ambiguity in understanding the risks posed as well as a lack of clarity for market participants. There is regulatory arbitrage in which different jurisdictions evolve their respective regulatory frameworks, this hampers effective oversight and development of the ecosystem. Also, there is fragmented monitoring, supervision and enforcement.
Discussing regulatory approaches, the paper appreciates the proactive steps taken by countries, various international standard-setting bodies and organizations. The paper discusses some
jurisdiction examples about a wide spectrum of regulatory approaches such as principle-based,
risk-based, agile regulation, self and co-regulation and finally, regulation by enforcement.
The paper bifurcates recommendations for international organizations, regional/national
regulatory authorities and industries. International standard-setting bodies, regional authorities and national governments must cooperate and collaborate with industry stakeholders to address technological, legal, regulatory and supervisory challenges.
A global approach is needed to maximize the advantages from the underlying technology and to manage the risks arising from regulatory arbitrage and the interconnectedness within the crypto-asset
ecosystem, as well as the potential of spillover into the traditional financial systems.
