After the collapse of several cryptocurrency companies in 2022, the topic of crypto regulation and legislation has become more critical than ever before. What laws and regulatory frameworks already exist? How do they differ from banking regulation? And why does the crypto industry need to be regulated to begin with? Find out everything you’ve ever wanted to know about the state of crypto regulation in this Bitpanda Academy lesson.
Regulation vs. legislation
Although the words “regulation” and “legislation” are often used interchangeably in everyday conversation, semantically speaking they actually describe two separate parts of the same process.
Legislation is the collective term for the process of preparing and setting laws. Lawmakers propose and create rules that are meant to manage the behaviour of people, institutions or industries. Legislation is legally binding, meaning that the issuers of a law can impose punishments in case the rules are not followed.
Regulations are more specific. The biggest difference between legislation and regulation is that regulation is more concise and imposed with a specific topic or industry in mind. Furthermore, authorities different from the government can impose regulations only when a piece of legislation authorises such authority to do so.
Crypto regulation vs. bank regulation
As we now know, regulation is the setting of specific rules to govern the conduct of groups or institutions, which means that banking regulation is designed to check the behaviour of banks. Specifically, banking regulation is meant to increase transparency towards customers and clients, reduce risk, prevent fraud or nefarious activities, and increase social responsibility. The European Banking Authority alone counts 28 regulatory topics to its scope, including accounting and auditing, credit risk, investment firms, payment services and electronic money, just to name a few.
Licencing is the process by which companies can start banks. The licence allows them to operate as a bank and to provide financial services. Getting a licence from the governmental regulator means that the regulator will have oversight over the bank’s activities and makes sure that the bank remains compliant with the rules. This is called supervision.
Since banks and fiat currencies have existed far longer than cryptocurrencies and digital asset exchanges, much more regulation is already in place. Still, the amount and strictness of regulation vary between countries.
Cryptocurrencies and digital assets have existed for years now, but until recently the sector has gone largely unregulated. Initially, this might have been because cryptocurrencies were designed to be a decentralised asset, meaning they are not tied to any official institution or government and are therefore free from their control. Even today, creators of cryptocurrencies might feel that regulation is at odds with their intent.
But concern over the regulation of cryptocurrencies and digital assets has only been growing. 2022 was an especially difficult year for crypto. The market reflected the loss of consumer trust, and more than one crypto company went under due to fraudulent activities and mismanagement of funds. While some players in the crypto industry might not like the increased regulation, others see it as recognition and think it will spur on competition between traditional financial institutions and their crypto-native counterparts, as banks are starting to dip their toes into the digital asset space.
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What crypto regulation currently exists?
Crypto regulation in Europe
Markets in Crypto-Assets Regulation (MiCA)
The European Union is nearing the last stages of finalising the Markets in Crypto-Assets Regulation, also known as MiCA. MiCA is an EU-wide, cross-jurisdictional regulatory framework for digital assets expected to be passed by the European parliament in 2023 and to go into effect in 2024.
Virtual Asset Service Provider (VASP)
Currently, most European countries advise crypto companies to register as a virtual asset service provider (VASP) with the local regulator. Registering as a VASP with a country’s regulator means that a crypto company has a validly and locally recognised Anti-Money Laundering (AML) framework which is registered with the local authorities. This registration also allows crypto companies to directly market their services in that country.
To obtain a VASP registration, crypto companies must undergo a rigorous inspection by the local regulator demonstrating the company’s entire business model and compliance with AML and KYC requirements, as well as proving that all of their internal systems and processes are transparent and compliant.
In Europe, VASP registrations are not transferable between countries, meaning that in order to be fully recognised as a crypto business, a company has to repeat the review and inspection process anew in each jurisdiction that provides such a registration. The time between applying and receiving a registration can take a few years, underlining that being a fully regulated crypto company takes a lot of effort, determination, and patience
Crypto regulation in the United Kingdom
On February 1, 2023, the UK government announced their “robust” plans to regulate crypto assets. Currently, the UK is far behind other European countries in the development of a regulatory framework. According to the announcement, the proposal will “place responsibility on crypto trading venues for defining the detailed content requirements for admission and disclosure documents – ensuring crypto exchanges have fair and robust standards.” They want to ensure innovation while elevating digital assets to the same level of regulation as other assets with the same risk profile.
Crypto regulation in the U.S.
Regulatory efforts in the United States have been similarly slow and an official national regulatory framework is still just in the development phase. But as the crypto market continues to grow, so does the risk. In March 2022, President Biden issued an executive order to start addressing the risks associated with the crypto industry. This proposed regulatory framework is meant to address “consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”
In the meantime, there are several other regulatory bodies, both on the national and state level, that have been using their existing frameworks in an effort to regulate digital assets. The Financial Crimes Enforcement Network (FinCEN) views the trading of digital assets as money transmission and therefore subjects companies that deal in digital assets to licence with the FinCEN and its money laundering compliance frameworks.
The Securities and Exchange Commission (SEC) considers most crypto assets to be securities, and thus also places the crypto industry under its jurisdiction. The stated mission of the SEC is to protect investors, and to “promote a market environment that is worthy of the public’s trust.” At the end of 2022, after fraudulent behaviour at the heart of the popular crypto exchange FTX was exposed, the SEC announced guidelines that crypto companies will have to explicitly disclose the risks of crypto trading to their customers. The SEC was the authority that charged Samuel Bankman-Fried, FTX’s disgraced founder, with defrauding investors.
Crypto regulation in the rest of the world
In the rest of the world, crypto and digital asset regulation finds itself in various states of progress. Some countries like China have banned cryptocurrencies outright, whereas others, like India, appear content to let things go unregulated for a while longer as there is no framework orlegislation even being proposed.
The future of crypto regulation
The next step in crypto regulation is the introduction of wide-reaching regulatory frameworks like MiCA in the EU and the frameworks currently being developed in the United States and the United Kingdom. Furthermore, there has to be a culture of knowledge-sharing between jurisdictions - the Financial Stability Board has already published a proposal for standardised digital asset regulation guidelines.
Bitpanda remains pro-regulation. We are confident that governmental oversight is good for the industry and will help it to grow faster and stronger over time, while earning and retaining the trust of the customer base.
To learn more about how Bitpanda is regulated, see our article on licences and registrations.
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