In my predictions piece in January, I forecast that we would start to see increasing calls for crypto regulation but that it would be impossible to predict when regulation will arrive.
Well, six months later and it’s safe to say that in many ways that forecast has certainly come true.
But it hasn’t all been plain sailing. There have also been instances of potential regulatory setbacks. Like the UK parliament’s cross-party Treasury committee suggesting that UK authorities should regulate cryptocurrency trading as a form of gambling.
With so many changes, I thought it would be useful to do a quick catch up on where crypto regulations stand today, what’s still to come and why regulation – while it flies in the face of the original crypto dream – is vital to the future of crypto.
While “cryptocurrency is in the midst of a regulatory onslaught in the US” EU crypto regulations have finally been approved by the EU Parliament. The package of rules that make up the Markets in Crypto Act (MiCA) “will impose a number of requirements on crypto platforms, token issuers and traders around transparency, disclosure, authorization, and supervision of transactions” and will become law in 2024. In short, it puts liability on providers if they lose investors’ crypto assets, reducing the risk for consumers.
To help reduce anonymity around crypto transfers, a separate Transfer of Funds regulation was also passed at the same time. If a transfer between exchanges and individually owned self-hosted wallets tops €1000 it must be reported. The “travel rule” that is already used in traditional finance has been updated to include crypto assets to combat money laundering by screening, recording, and communicating information about the sender and recipient.
The EU parliament is not the only body to have been busy with crypto regulations.
The International Organization of Securities Commissions (IOSCO), the umbrella organization for global market regulators, has published an 18-point plan that provides recommendations to authorities around how they can help improve global standards for regulation of crypto assets.
In the official communication about the new initiative Chairperson of IOSCO, Jean-Paul Servais said, “the time has come to put an end to regulatory uncertainty that characterizes crypto activities. Today’s consultation paper…will mark a turning point in addressing the very clear and proximate risks to investor protection and market integrity risks”.
It’s important to note that IOSCO doesn’t have the power to compel regulators to adopt the rules but IOSCO secretary general Martin Moloney believes “it will not be sustainable for our [130] members to be in sustained non-compliance with our recommendations and I’m confident that is not going to happen”.
Both MiCA and the consultation from ISOCO show just how seriously financial authorities and governments are taking the increasingly strong presence of crypto globally. Of course, situations like the collapse of FTX last year have played their role in accelerating the need for crypto regulation. In fact, the feedback period on the IOSCO consultation is only open until 31 July 2023 and they hope to finalise policy measure by the end of the year.
France has also been busy. Already considered a crypto-friendly nation, the French National Assembly “has voted in favor of legislating stricter licensing rules for new cryptocurrency firms in order to harmonize local laws with proposed European Union (EU) standards”.
There is one notable piece of the European crypto regulation puzzle missing, however, and that’s the UK.
Our friends at IOSCO recently urged the UK to look at crypto regulation in the same way as traditional assets like stocks and bonds.
This was in direct response to calls from MPs that crypto trading should be treated as a form of gambling – that it is “addictive” and investors could stand to lose “life-changing amounts of cash”. Former chair of the Financial Conduct Authority (FCA) said, “speculative crypto is gambling pure and simple”.
These views don’t quite match up with Rishi Sunak’s ambition to make Britain “a global hub for cryptoasset technology”.
The gambling comments were met with a scathing response from Crypto UK board adviser Ian Taylor – “equating cryptocurrency with gambling is both unhelpful and untrue” and that “professional investment managers see bitcoin and other crypto assets as a new alternative investment class”.
And then you have Andrew Griffith, economic secretary to the UK Treasury recently telling CNBC that “Britain could introduce specific laws aimed at regulating the cryptocurrency industry in the next 12 months”. While the formal plans to regulate the UK cryptocurrency industry are now being reviewed after the consultation period ended on 30 April, there is already the Financial Services and Markets Bill which is currently going through Parliament and aims to bring asset-backed stablecoins into the regulatory fold.
But regulation takes time, and it could still be years before measures are approved.
In the meantime, Binance is doing everything it can to change the FCA’s belief that it cannot be regulated in the UK. But as Carol Alexander, professor of finance at the University of Sussex said, “it is a massive ask for one country to take on the regulation of Binance. Even though the government plans to make the UK a global cryptoasset technology hub, the resources currently available fall very far short of what is needed”.
So, while the appetite is there for UK crypto regulations it’s still some way behind its neighbors in Europe.
Between January 2021 and June 2022, 46,000 people lost over $1 billion in crypto to different scams, according to the Federal Trade Commission (FTC).
The reason crypto scams are so attractive to thieves is thanks in large part to the lack of regulation. There are no legal protections or government assurances when cryptocurrency is stolen (all crypto transfers are irreversible) and there is no centralized authority tracking and flagging suspicious crypto transactions.
If you type “crypto scams” into Google, you are given multiple results all along the same lines of “the most popular crypto scams to watch out for in 2023”.
These include scams like fake job listings in the crypto space which require a payment in crypto to get started or impersonations of government, law enforcement, banks, technology companies etc. that require a payment in crypto to unfreeze your assets or finalise a delivery. And there’s blackmail, phishing and even romance.
One type of scam that we have seen a lot of recently has been in the meme coin space. A meme coin is a popular currency that has been influenced by a meme or internet joke. Dogecoin is well-known example and has gained a massive following over the years. They often have very high or unlimited supply, so numbers just keep rising as more people buy. And it’s possible for pretty much anyone to make meme coins.
Unfortunately, people generally invest in meme coins without doing research and are instead heavily influenced by Twitter accounts with large followers, many of which position themselves as ‘undercover developers’ of the meme coin projects.
The problem with these projects is that the developer writes the contract for the tokens meaning they have complete control over the code in that contract. They will write the code to allow only buying activity, preventing investors selling any tokens they buy from them. This is what is called a honeypot. The creators can then pull all the liquidity from the token and walk away with the money.
Riding on the popularity of Netflix’s Squid Game, a Squid Game-based coin was made and reached a peak of more than $2,000 per coin at which point, the creators sold their units, took everyone’s money and disappeared.
More recently, there has been a lot of discussion on Twitter about one developer that has been associated with creating over 114 scam meme coin projects in just 45 days.
There is software that can detect buy only code but it’s not always accurate. There are also ways to look deeper into the contract and wallet distribution of any token but the average buyer in this space doesn’t have the knowledge or understanding of how to do this.
The meme coin scam is easy to do, hard to spot and is constantly evolving, making it increasingly dangerous.
Crypto scam revenue dropped 46% last year thanks to the ongoing bear market, but scams still remain the largest form of cryptocurrency-based crime.
Providing protection and support in the form of crypto regulation is the only way to ensure those wanting to invest in crypto can do it safely. The UK’s Financial Services Compensation Scheme recently published the results of a report which found that more than half of consumers expressed “fear of being scammed”.
The biggest concern for IOSCO’s Moloney is waiting for perfection – “just push ahead, do it to this standard as quickly as you can…It’s not helpful for anyone to hold back at this point”.
Something is better than nothing when it comes to crypto regulation.
Our resident Web3 expert, James helps customers that are busy changing the world by disrupting traditional frameworks to realize a decentralized future.
Watch out, he practices Brazilian Jiu Jitsu.
