Governments’ Quest for Crypto Oversight: Regulation Updates in 2021 and What to Expect in 2022

Whatever your feelings toward cryptocurrencies might be, their acceptance is growing rapidly, with global crypto-asset capitalization exceeding $2 trillion amid increased institutional demand and new uses of technology.

According to Chainalysis’ data, global adoption has increased by more than 2,300% since 2019 and over 881% in 2020. Source: Chainalysis Global Cryptocurrency Adoption Index measured between July 2020 and June 2021.

On November 23, 2021, the daily number of newly created BTC addresses reached 709,160 – the highest figure this year.

Source: IntoTheBlock

As crypto acceptance grows, financial institutions and governments are recognizing it’s not a fringe phenomenon. Previously skeptic institutional investors have rethought their opinions after seeing some of the incredible returns crypto offers.

Crypto regulations fragmented globally

Currently, there is no centralized authority that regulates the digital asset class worldwide, and governments or regulators stick to their own policies. As crypto products come in a variety of forms, it’s hard for regulators to establish a unified framework. The taxation and income laws also vary across countries, which makes regulation more challenging.

While some government officials turn the screw on the industry, others are warming up to cryptocurrencies. El Salvador, for example, became the world’s first country to recognize Bitcoin as legal tender earlier this year.** **

Meanwhile, China clamped down hard on Bitcoin trading and mining, declaring it illegal. In contrast, Singapore has clear licensing regimes for crypto firms, making them as legitimate as traditional financial companies. In some countries like India it is still a matter of debate how to regulate digital tokens, with policies changing all the time.

In Brazil, a bill regulating Bitcoin and cryptocurrency was approved on December 7, 2021. After being debated and approved by senators, it will be ready to be signed into law.

To operate in Canada, cryptocurrency exchanges still must be registered with Canadian Securities Administrators (Canada’s version of the SEC) and follow its regulatory guidelines as confirmed in a March 2021 notice by the CSA.

The United Kingdom has stepped up efforts to develop and implement crypto-specific policies following Brexit. Although the UK government declared all digital assets would be considered ‘property’ in 2020, no laws or guidelines exist yet for digital assets. In November 2021, the deputy governor of the Bank of England warned that crypto assets pose a risk to the British financial system unless they are urgently regulated.

In the European Union, cryptocurrencies are legal and governments can choose to oversee crypto exchanges. The EU recently enacted new anti-money laundering directives (AMLD5 and AMLD6) that tighten requirements for KYC/CFT and standard reporting for service providers.

However, all eyes are on the United States’ regulators, who have been closely monitoring the virtual currency industry for several years, grappling with how to regulate the more than $2 trillion market.

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Sanctions Compliance Guidance for the Virtual Currency Industry to assist those in the virtual currency industry comply with OFAC sanctions. It also updated its Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments and commented on the digital asset space in its 2021 Sanctions Review. Each document echoes the need to enhance institutional capability and knowledge in the rapidly evolving space of digital assets and services.

Various US federal agencies are working together to establish robust regulatory policies for cryptocurrencies, especially stablecoins, including the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Federal Trade Commission (FTC). At the same time, the IRS and the Department of Justice have continued to aggressively prosecute crypto cases.

Meanwhile, several US crypto firms presented their technologies to Congress on December 8, 2021, to argue that they have great potential for the future and to call for a clear and adapted regulatory environment for the sector.

Participants discussed various topics, including customer protection, regulatory oversight, crypto competition from other countries, environmental sustainability, the pros and cons of stablecoins, US dollar dominance, ransomware, security, transaction tracking, as well as the illicit use of cryptocurrency. Another round of hearings will target participants who will be less supportive of cryptos. Regulators are expected to consider this hearing when deciding the regulatory framework.

According to Jerome Powell, the Fed is evaluating whether it should establish its CBDC and will release a whitepaper on digital currencies soon. However, he did make it clear that the US is not planning to ban cryptocurrencies like China.

With all this in mind, here’s an overview of how things might evolve in the near future.

Crypto Regulation to Be Coordinated at a Global Level

In my view, a very likely scenario for the future of crypto regulation is the one outlined by the International Monetary Fund (IMF).

IMF officials said they are planning to develop a global regulatory framework for crypto assets in collaboration with the Financial Stability Board and other international regulators.

The regulatory framework would apply to providers of crypto firms who offer critical services like asset transferring and storage, similar to those governing financial services institutions.

Stablecoins and crypto assets would have different requirements based on their major use cases. Crypto investment products and services, for example, would be regulated by the same regulator as securities brokers and dealers.

As with bank deposits, crypto payment services and products would have to meet the same standards as bank deposits, and would be supervised by the central bank or the payments authority.

To engage in crypto, institutions would have to comply with strict requirements, including limitations on their exposure to digital assets. While waiting for that to happen, every country has an array of regulatory and compliance frameworks, some carefully developed and some implemented hurriedly. However, there’s no denying that the growing prominence of cryptocurrencies will have an impact on decision-making in governments and regulators going forward.

About the author

Pauline Shangett is the Chief Business Development Officer at ChangeNOW. She has extensive experience in music marketing and promotion, a career she pursued before entering into the crypto space in 2018, where she’s stayed ever since. Pauline’s favorite things include decentralization, crypto mass adoption, marketing, videogames, and tattoos.