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| photo: PayBito |
For several years, the compliance industry has been warned that a large amount of new regulations for cryptocurrency will significantly change the industry.
However, these regulations have not yet been implemented. The only known regulatory effort, Europe's MiCA legislation, has been delayed again to allow more time for translation.
Instead of new regulations that address the true issues facing the cryptocurrency industry, what we are seeing is the proposal of unnecessary legislation that is motivated by political gain. This suggests that regulators lack a deep understanding of Web3 technology and may not be adequately protecting consumers.
In order to effectively regulate the cryptocurrency industry, we need to re-evaluate our current approach, identify the real problems, and develop new solutions.
Superfluous statutes
For example, the Digital Asset Anti-Money Laundering Act, introduced by Senators Elizabeth Warren and Roger Marshall in December, would not effectively protect consumers. The legislation was presented during a Senate Banking Committee hearing entitled "Crypto Crash: Why the FTX bubble Burst and the Harm to Consumers."
However, it would not have prevented the issues that occurred at FTX. Anti-money laundering (AML) regulations have already been widely applied to cryptocurrency companies, including FTX, well before its founding.
We can see the effectiveness and implementation of these regulations through the settlement between Coinbase and the New York Department of Financial Services (NYDFS). This is just one example of many regulatory actions taken against cryptocurrency firms for anti-money laundering and sanctions violations.
It is surprising that Senator Elizabeth Warren, known for her consumer protection efforts as the architect of the Consumer Financial Protection Bureau, is involved in this bill and misrepresents its impact.
Some in the cryptocurrency community view this as a direct attack on the industry. It is more likely that this legislation is the result of uninformed and politically motivated attempts to address a problem without fully understanding it. Proposing more anti-money laundering legislation is a simple and politically safe move.
Overlooking the real issues
It is important to note that there are significant gaps in the global regulations for digital assets. Many countries lack comprehensive financial regulations for cryptocurrency companies in areas such as consumer protection, protecting customers' funds, capital and liquidity requirements, managing risk, and disclosure requirements. The need to address these regulatory gaps is widely recognized and pressing. The issue seems to be a lack of willingness by some lawmakers to educate themselves, which is surprising given recent events at FTX.
This situation is similar to a doctor who is unable to diagnose a patient's illness, but still prescribes antibiotics to appear as though they are treating the patient. Not only is it harmful to the patient, who may stop seeking further testing in the mistaken belief that they are cured, but it also contributes to the problem of antibiotic resistance worldwide.
Similarly, prioritizing redundant legislation gives consumers a false sense of protection and undermines trust in global financial systems.
The way forward
If global lawmakers are feeling overwhelmed by the amount of knowledge needed to effectively regulate cryptocurrency, they should take a systematic approach and model their regulations on successful financial regulations that already exist.
Instead of trying to classify different types of market participants and creating regulations for each, the law should focus on describing and regulating the specific activities in which they are engaged. The first step should be to create a comprehensive classification of relevant products and services.
To create appropriate rules for each product and service, politicians will need to educate themselves on the details of blockchain technology and the different services available to consumers, which is a positive outcome in itself. For instance, effective prudential regulation for cryptocurrency would need to make distinctions between custodial and non-custodial services.
But in order to truly protect consumers and promote innovation in the digital asset space, a more thorough and thoughtful approach to regulation is necessary. This includes creating a comprehensive taxonomy of products and services, and then carefully designing regulations tailored to each specific activity, taking into account the unique characteristics of blockchain technology.
This approach will require effort and education from legislators, but is ultimately crucial for protecting consumers and fostering growth in the industry.
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