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The Future of Crypto-assets Regulation

If crypto-assets are here for the long term, how can regulators best govern their connections with the conventional financial system?
Christopher Bloechle
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In 2010, a computer programmer traded 10,000 Bitcoins for two Papa John pizzas in the first crypto transaction of its kind. 11 years later, those 10,000 Bitcoins are now valued at $613 million meaning the two humble Papa John pizzas are technically worth more than Leonard di Vinci’s Salvador Mundi. However, crypto-assets do not comprise of just crypto-currencies like Bitcoin and Ethereum, for example. They also include instruments like stable coins (i.e., crypto-currencies tied to fiat currencies); central bank issued digital currencies [CBDCs] and security tokens, whose value is correlated to an underlying asset such as an equity security or a piece of real estate. With growing investor interest in all assets crypto, it was inevitable regulators globally would start scrutinizing these new instruments.

As is to be expected, different regulators are taking completely different approaches towards supervising crypto-assets. In light of their volatility and speculative nature, crypto-currencies are being earmarked for the harshest regulations. In markets like India and China, specific cryptocurrencies are banned. The EU – as part of its proposed Markets in Crypto-Assets (MiCA) regulation – is clamping down on unregulated crypto-assets (i.e., crypto-currencies) by introducing greater investor safeguards and imposing added rules (e.g., capital requirements) on crypto-asset servicers. Global regulators, including the Basel Committee on Banking Supervision (BCBS) have recommended cryptocurrencies are subject to tougher capital requirements given their volatility and other risks (i.e., cyber-security concerns; fraud risk, etc.). However, some regulators including the US Securities and Exchange Commission are divided on whether or not to tighten up the rules for cryptocurrencies.

With growing scrutiny over the carbon footprint of crypto-currencies, it is entirely possible the asset class could potentially be restricted (or banned) under future environment, social, governance rules. Tokenized securities are a different story, largely because they are seen as being lower risk than crypto-currencies as they are underpinned by tangible assets. “A crypto-asset that provides equivalent economic functions and poses the same risks compared with a ‘traditional asset’ should be subject to the same capital, liquidity and other requirements as the traditional asset,” according to the BCBS consultation. Similarly, Stable Coins – would also be subject to similar rules because they are fully reserved, something banks will need to monitor. The EU has confirmed that regulated crypto-assets (e.g., security tokens) will also need to comply with existing regulations such as the Markets in Financial Instruments Directive (MiFID). However, CBDCs appear to be outside of the scope of most regulators, mainly because their development is being driven by Central Banks as opposed to private institutions.

As with all things regulatory, the approach towards crypto-asset supervision is not standardized. However, it is clear that cryptocurrencies, owing to their higher risk profile, face the most significant oversight and scrutiny. Asset managers actively trading or thinking about trading crypto assets will need to keep on top of the rules if they are to navigate this nascent market properly.

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