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Crypto Regulations: Do We Need Them?

03 Mar, 2023

The global crypto regulatory landscape is iffy, to say the least. It ranges from regions that believe a complete ban is the best solution to those who have adopted crypto as legal tender, like the Central African Republic.  Then there is the standard argument for crypto regulations: it will mitigate money laundering and terrorism financing (AML/CFT), hopefully preventing bad actors while protecting crypto users from financial institutions who play by their own rules. 

Crypto’s main differences from fiat play a part in the need for regulation, for example, the ease at which users can conduct cross-border transactions. Cross-border transactions allow crypto users to send and receive assets globally, regardless of location. Because of this facility, cybercriminals use this to their advantage to conduct activities, i.e. money laundering. However, this can be mitigated with recommendations like the Financial Action Task Force’s (FATF) Travel Rule

Furthermore, due to crypto’s law development not keeping up with innovations, many decentralised financial (DeFi) institutions get away with not meeting AML/CFT and Know Your Customer (KYC) requirements as regulations do not govern them, nor are they licensed in regions where regulations are not set. With regulations like the EU’s Transfer of Funds Regulation (TFR), VASPs must apply AML/CFT and KYC checks, further hindering these activities. 

Having been around for over a decade, cryptocurrencies have secured their place in the market. We have seen crypto grow from a niche to a currency that features in global finance and day-to-day living. The financial industry and governments can no longer ignore its presence and must decide how to act: should it be regulated or banned completely?

Why Bans Are Not the Answer 

A handful of countries argue that due to crypto’s volatility and the fact that it can be used for nefarious purposes, it makes better sense to ban crypto.  

China is an excellent example of why bans are not the answer. Following China’s ban in 2021, more than USD 5 billion has been laundered through cryptocurrency, and mining has increased significantly. The problem with this increase is that users are not protected from cyber attacks, and paths are opened for bad actors to operate carefree as there are no protections to stop them. 

On top of this, bans don’t seem to offer any of the positives envisioned. For starters, they are seen as a violation of individual rights in many countries like the USA, all technological advancements we have seen would be lost if bans were implemented globally, and the amount of manpower involved to successfully enforce these bans would be costly to governments. 

READ:  Addressing the Risks in Crypto

What Are the Benefits of Crypto Regulations? 

The benefits of crypto regulations are multiple.

Establishing a set of rules provides a layer of protection for regulators, entities and consumers alike. A single set of rules aids regulators in the overview of virtual asset service providers (VASPs). It provides VASPs with clear guidelines of what they can or can’t do, what is legal and illegal, and a security blanket for consumers who know exactly what their rights are as customers. With regulations, the ongoing “debate” that the ecosystem is a highway for illicit transactions can be shut down as crypto would be regulated similarly to fiat, as seen in the Travel Rule’s instruction for exchanging originator and beneficiary data when transacting. Although this does not mean illicit activities cannot happen with regulations, they are hindered.

Focusing specifically on the FATF’s Travel Rule and the EU’s TFR, these guidelines further aid VASPs in AML/CFT standards mitigating risks that facilitate the movement of illicit funds. More so, these requirements need VASPs to conduct KYC and Know Your VASP (KYV) processes before onboarding either, to further sieve out any bad actors. 

Regulations also help the stability of crypto as it provides greater trust in the market, which attracts more investors and customers, ultimately aiding the broader adoption of the ecosystem. This stability also opens the market to investment strategies, as seen in traditional banking. 

In Summary

A worldwide regulatory framework will stabilise markets, foster consumer confidence, outline the parameters of what is legal, and create a secure environment for continued useful innovation.

Curious to know more about the regulatory scene and how it impacts you? Reach out to us today.

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