The regulation of cryptocurrencies has become, in recent months, a priority issue for most of the world’s governments, currently focused on trying to put control over a technology that came to light in 2008 with the appearance of the Bitcoin white paper.
The fact is obvious, especially if we take into account the number of comments that are read daily in the media, mainly in the course of this 2022.
Bitcoin needs to be regulated urgently! seems to be the new watchword of the governments.
The collapse of Terra (LUNA) and the stablecoin UST, which occurred last May, was the straw that broke the camel’s back. The slogan has become unanimous in recent weeks: the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Group of 7, and the bankers of the Davos Forum, among others, now insist on the need to create a legal framework for bitcoin.
But it was not always like this. In the early years of bitcoin there was no such great interest from the authorities for regulation. The world of cryptocurrencies moved in parallel (almost marginally) to that of finance, a situation that has been changing and that has led to a greater monitoring of the ecosystem.
The high interest of the public and the positioning gained by bitcoin in recent years, with an important role in the global economic and geopolitical game, is one of the reasons that the authorities have stopped considering the sector as a secondary industry.
This situation was already warned by Jacob Farber, general counsel of the R3 consortium, who has acted as a lawyer and consultant in cryptocurrency regulation since 2012.
Farber envisioned regulation of the ecosystem becoming increasingly stringent, in proportion to advancing levels of adoption.
As CriptoNoticias reported, the expert made this statement considering the significant growth of institutional investments in cryptocurrencies that began to be experienced between 2020 and 2021.
On this, the Bank for International Settlements (BIS) prepared a report last May. There he spoke about the increase in the adoption of bitcoin and the repercussions -in the traditional financial environment- of the acceptance of assets issued under the promise of decentralized money management and without intermediation.
And it is precisely the popularity achieved by this promise, among natural and legal persons around the world, that has set off the alarms of most international financial organizations, supervisory bodies, central banks and governments.
In particular, BIS analysts point to a discourse that most regulators have been repeating for several years, seeing cryptocurrencies as a danger to finances and a focus for committing crimes. An argument underlying a recognized fear of losing control of the global financial system:
Bank for International Settlements.The goals of regulating cryptocurrencies are largely similar to those of other financial assets and services and can be classified into three categories: combating the use of funds for illicit activities; protect consumers and investors against fraud and other abuses; and ensure the integrity of markets and payment systems and overall financial stability.
Five levels in bitcoin regulation:
At the beginning of 2019, the South African Reserve Bank published a document in which it set out its position on the regulation of cryptocurrencies. He exposed the main approaches used by regulators, which move between two opposing regulatory positions: regulate or let go.
Thus, he determined that the main lines of action of governments oscillate between those that seek to control cryptocurrencies (adopting or prohibiting), and those that advise “allowing things to happen without intervening.”
This fact has become an uneven regulatory world map, but in constant movement.
Some countries have become global advocates, such as El Salvador and the Central African Republic, which decided to declare bitcoin legal tender. Others actively ban cryptocurrencies, as happened in China and Turkey. A third batch of countries opts for intermediate nuances.
Jan Lansky, from the University of Finance and Administration in Prague, Czech Republic, conducted a study in 2018 in which he presents a scoring system that allows classifying government positions on the regulation of crypto assets.
Lansky’s ranking lists the approaches on a scale from 0 to 5, with 0 indicating ignoring and 5 indicating technology prohibition or integration. The different levels are shown in the following table:
In 2018, when the previous classification was released, it was estimated that some 150 countries were at level 0, with very few governments taking care to talk about bitcoin. By 2022, the countries at that level were reduced to 61.
On that date, some 36 countries were located between levels 1 to 4, with their central banks issuing warnings and giving some guidance. Now there are more than 100. In 2018 only 11 nations were grouped at level 5, a figure that has already reached 19.
The figures above show the changes in the regulatory dynamics around cryptocurrencies from about three years ago to today. They reflect how the topic went from being of little interest (level 0) to turning around levels 4 and 5 of regulation (maximum interest), as explained at the beginning of this writing.
Jansky himself raised it when presenting his classification. He predicted that the trend would see countries move from Tier 0 to Tier 5, depending on the pace of adoption.
That is exactly what we are experiencing in 2022, with a significant increase in countries speaking out for or against cryptocurrencies.
An investigation by the Thomson Reuters Institute accounts for the change in regulatory trends. It presents the year 2021 as a turning point in which cryptocurrencies ceased to be on the sidelines of the world economy.
The Reuters Institute reiterates the fact that the global regulatory framework is constantly and rapidly evolving, with jurisdictions imposing outright bans, and others proclaiming themselves staunch advocates.
The dilemmas of bitcoin regulation
While governments and regulatory bodies in countries are proposing stricter regulation for the cryptocurrency industry, the process is not without its problems.
First, regulation can also become a double-edged sword, discouraging innovation.
A counterproductive consequence for a sector that, only with bitcoin, the main digital asset in the market, has a capitalization that currently reaches USD 573 billion.
Recently, New York University professor and economist Hanna Halaburda reflected on this aspect. The professor considers that excessive regulation can put an end to innovation, but regulators also have to strike a balance that guarantees the efficient functioning of markets and protection for consumers and investors.
“What we see is that we have new opportunities and new challenges, and both the opportunities and the challenges come from incentives, and dealing with incentives is what economists do,” Halaburda said in an interview with the Pymnts portal.
Halaburda explained that the difficulty for regulators is that the blockchain was originally created for Bitcoin. A cryptocurrency, which, as she points out, has “privacy” among its main characteristics.
Here it should be noted that Bitcoin really is a pseudo-anonymous cryptocurrency and not anonymous, as most authorities suggest. This is because all transactions can be tracked through the blockchain network, even though addresses cannot be associated with an identity.
It is a property that, for the regulators of many countries, goes against their interest in controlling users. For this reason, the economist sees in this characteristic an inconvenience for its use at a cross-border level.
Halaburda believes that there must be clear regulations, while the adoption of cryptocurrencies grows, because this also produces multi-million dollar fraud, hacks and cybercrime.
“Providers of those services would find it attractive to say, ‘We’re compliant, we have the regulators’ seal of approval,’ which is a kind of quality signal (…) it allows them to say, ‘We’re well designed and we don’t we have malicious intent and our code is not going to benefit us,” he said.
The economist was favorable to the regulation of DeFi, in the case of fast loans, because with those funds, the attackers “can borrow various governance tokens, vote in their favor and completely change the trajectory of the protocol and we do not have rules against it.”
Oversight agencies lack trained staff
Applying regulations to bitcoin and cryptocurrencies not only runs the risk of slowing down innovation, but also adds another problem. This is the absence of trained personnel and the necessary infrastructure for the supervisory entities to face a task of such magnitude.
A few days ago, the president of the United States Securities and Exchange Commission (SEC), Gary Gensler, admitted that they need more human resources to be able to try to regulate the cryptocurrency industry because the one they have is insufficient for the amount of work. that they must address.
The Congress of that country is studying a budget request from the SEC, which expects to receive USD 240 million for fiscal year 2023. “I wish we had more to dedicate to this” and “we are really overwhelmed” were the words of Gensler to justify the spent.
The intention is to hire 20 more specialists in the area, to increase the size of its cybernetic unit to 80 with new investigators and lawyers in the work group. The plan is to better prepare to establish regulatory guidelines for the sector.
The interest in increasing the workforce of the cyber unit also seems to be driven by the executive order issued last March by the president of the United States, Joe Biden, in which he outlines the government’s strategy for the regulation of bitcoin.
More dilemmas: create new laws or use existing ones?
Other dilemmas also arise in the regulatory process. It is important to consider what legislators need to do to accommodate bitcoin and other cryptocurrencies in their legal framework.
Are new laws created or are existing ones used? The disruptive nature of cryptocurrencies, with different characteristics from other traditional assets, makes it difficult to choose between the two options. In this context, most countries are choosing to create new legislation.
On the other hand, the Central African Republic makes the use and acceptance of bitcoin mandatory as a means of payment with a new law. In addition, it has announced the Sango project, an initiative with which they plan to attract investors from the bitcoin sector and cryptocurrencies.
To achieve this goal, they are going to create a Digital Bank of the Nation to facilitate the execution of operations with cryptocurrencies, they abolished the collection of income tax from investors in the industry in that country and they will even be able to acquire land with BTC.
The situation is not so clear in other countries that are also torn between creating new laws or modifying existing ones. In the United States, Biden’s Executive Order will outline the action to follow.
The president ordered the country’s federal agencies to evaluate the risks and opportunities that cryptocurrencies represent. The order sets a 180-day deadline for government agencies to submit their reports on the role cryptocurrencies will play today. There it will be decided whether to create new laws or use the pre-existing ones. For its part, the European Union is already working on a new law.
In Cuba, the issuing of licenses to companies that wish to carry out bitcoin exchange activities began to be regulated last April. According to the new norm, to carry out activities as providers of virtual asset services, natural or legal persons request a license from the Central Bank of Cuba, to which is added a new task: the supervision of the ecosystem.
For their part, Panama, Brazil and Paraguay opt for preparing, debating and approving new laws.
The debate and controversy is still open in many territories and is likely to intensify in the coming months. Above all, from the great movements to regulate the sector that are being carried out in the world’s large economies, mainly the US, the European Union and the United Kingdom.