The crypto community and government authorities continue looking for ways to build a relationship. The UAE is starting to license crypto businesses, and in the US, major crypto exchanges and brokers are cooperating to comply with FATF requirements.
Unfortunately, this is a topic we have to bring up over and over again. Regulators continue to pressure the crypto industry, and governments of different countries are increasingly saying that cryptocurrencies create economic hazards. In the US, the tensions have so far been kept in check by large crypto exchanges consistently complying with government agencies, participating in Senate hearings, and trying to work through all misunderstandings.
But while the issues with national regulators are being settled, opponents of cryptocurrencies are aiming at a higher level. On February 16, an international body called Financial Stability Board reported on the risks posed by cryptocurrencies. According to them, regulators have insufficient access to cryptocurrency transaction data, which contributes to money laundering, terrorism financing, and cybercrime done through crypto.
A separate topic of concern was the dangers associated with stablecoins and their reserves. The Board experts believe that the fall of major stable currencies could create chaos in the financial markets.
Fortunately, individual state regulators are beginning to understand blockchain and cryptocurrencies better, thus becoming more and more permissive. This happened in the United Arab Emirates (UAE), where they are going to issue the first national licenses to virtual asset service providers (VASPs) before the end of the first quarter of 2022. The procedure will be handled by the UAE Securities and Commodities Authority (SCA), which recently made final amendments to the legislation allowing for the creation of VASPs.
The process is now underway, with some special economic zones in the UAE already issuing VASP permits. So far, 22 companies in the Dubai Multi Commodities Centre, six companies in the Abu Dhabi Global Market, and at least one in Dubai Silicon Oasis have received such licenses.
All these measures are meant to help the UAE compete with such global financial hubs as Singapore and Hong Kong, which are also creating a fully regulated cryptocurrency trading environment. The Emirati government states that they will apply a hybrid approach to cryptosphere management: the SCA and the Central Bank will handle regulation, while local financial centers will be able to establish their own licensing procedures.
You may recall that at the end of last year, the UAE authorities assessed the dangers associated with digital assets. Based on the results, the government experts have concluded that, despite the high risk of VASP involvement in illegal schemes, it is better to regulate the crypto industry than to ban it, as reasonable restrictions will reduce potential threats to financial security.
Going back to the US, a group of crypto market participants has decided to present the authorities their own regulation, “from below” rather than “from above”. 18 US cryptocurrency companies, including Bittrex, Coinbase, Kraken, Paxos, Gemini, Robinhood, and other cryptocurrency exchanges and brokers, have teamed up to create a new transparency system called TRUST. They want to jointly conduct their operations in accordance with the requirements of the international regulator FATF.
The Financial Action Task Force (FATF) has a so-called Travel Rule designed to track the origins of money to combat money laundering. Members of the TRUST association want to implement technologies that will make their work compatible with the Travel Rule. It implies tracking the sources of money (including cryptocurrencies) and reporting suspicious transactions to regulators. At the same time, they promise to maintain the safety and privacy of users.
It’s hard to tell how realistic these promises are. So far, it has been said that TRUST will not use a centralized data storage, and transaction information will be transmitted between market participants via an encrypted channel. Developed by Exiger, this technology specializes in compliance and risk management in the cryptocurrency environment.
TRUST has already stated that it is ready to accept new members and plans to expand to other jurisdictions outside the United States. However, not all major crypto companies are willing to join TRUST. For example, Binance and FTX exchanges are building their own relationships with the FATF. Similarly, Tether stablecoin developers announced direct coordination with the FATF and its Travel Rule in October of last year.
However, the US Treasury Department is not calming down yet, quite the contrary. “The absence of legislation describing the rules for dealing with stablecoins harms innovation and increases risks,” US Under Secretary of the Treasury Nellie Liang has recently said.
According to the official, the need for stablecoin legislation is “urgent”. “Regulators do not currently have the authority to address all the risks associated with stablecoins, so Congress must intervene to close regulatory gaps,” Liang claimed.
Hence, the US Congress must act quickly to pass legislation that creates restrictions to the fast-growing market for this type of asset. And although the applicable legislative initiatives already exist, it is far from certain that the Republicans will be able to find enough points of agreement with the Democrats for the bill to be passed in the near future.