Who Will Wag Its Finger at Crypto Business?

    26 May 2022
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    The prospect of creating a single global regulator for the cryptocurrency market is currently being discussed at various levels. We tried to collect all the available information and surmise: How real is such a possibility, what a structure like that could do, and how the regulatory process could work.

    The “stablecoin crisis” that began with the collapse of TerraUSD continues. On May 16, we learned that the algorithmic stablecoin DEI of the Deus Finance DAO project lost its peg to the US dollar. At the moment, its price is down to $0.51. Following the decline, the DEUS token used to mint the stablecoin fell by 40% to $177.

    In the meantime, discussions have been flaring up regarding the reliability of other stablecoins: some have brought up Tether’s dubious reserves, others contemplated a possible attack scenario on USDD, and so on and so forth… Long story short, regulation is, predictably, back on the agenda. And it extends beyond just stablecoins to the entire cryptocurrency industry, since there is no shortage of both the willing and the able. As we have seen, yesterday crypto fans, having lost their investments – even in a risky DeFi project or on the BTC price drop – can instantly get an appetite for regulating the supposedly freest market in the world.

    It makes all the more notable the recent statement on the topic by Ashley Alder, the chair of the International Organization of Securities Commissions (IOSCO) and CEO of the Hong Kong Securities and Futures Commission. She stated that the boom of digital currencies such as bitcoin was one of the three main current focus areas for the authorities of the world’s leading countries, along with COVID and climate change.

    “If you look at the risks we are facing, you will see how many there are, and there is a wall of anxiety about cryptocurrencies in conversations at the institutional level,” Alder said. She predicted that a global cryptocurrency regulatory body is likely to emerge next year. It will be created jointly by the largest state regulators to better coordinate the rules for crypto circulation. She also cited cybersecurity, operational resilience and a lack of transparency in the crypto world as key risk areas where controllers lag behind.

    The IOSCO chair is not the only one looking to take on global crypto business regulation. For several years now, experts from the International Monetary Fund (IMF) have recognized that crypto assets will radically change the global monetary and financial system. With that in mind, the IMF has already developed a strategy to continue its mandate into the digital age. As follows from their internal documents, the institution plans to work closely with the Financial Stability Board and other members of the international regulatory community to develop an effective approach to handling crypto assets.

    However, knowing how such structures operate, we can confidently assume that it will take a while to form a “global crypto regulator”. A very long while indeed. And then the new international body will likely itself become mired in bureaucracy. That is, if it gets created in the first place – after all, there is quite the competition to claim this role between IOSCO, FATF, Financial Stability Board, IFC, and maybe more.

    The fundamental question is: what cryptocurrency market issues will fall under the responsibility of this international controller? To answer, one needs to read the reports of such national financial authorities as the US SEC, the Financial Stability Board or the European Bank.

    They all have familiar concerns about the risks posed to the financial system by crypto assets. Namely: operational and financial integrity threats presented by crypto exchanges and wallets, investor protection, and issues of insufficient reserves and false disclosures related to some stablecoins. In developing countries, there is also a phenomenon of crypto assets replacing the national money and allowing citizens to bypass currency controls.

    In the mind of regulators, the only way to counter those risks is through adopting comprehensive international standards that cover the dangers to the financial system created by crypto assets, operations with them and associated ecosystems, but at the same time provide favorable conditions for “useful” crypto products and related applications.

    Under this framework, crypto asset service providers that perform essential functions will have to obtain proper licenses and permits. They will apply, among other things, to holding, transferring, and settling reserves and assets, and operate similarly to the existing rules for financial service providers.

    The requirements must be tailored to the main use cases for cryptocoins and stablecoins. For example, conditions for investment services and products would be identical to those for securities brokers and dealers overseen by a securities regulator. The requirements for payment services and products would then follow those for bank deposits managed by a central bank or a payment supervisory agency.

    But since we are not yet at the worldwide crypto regulation stage, individual countries themselves are trying to limit the circulation of stable cryptocoins. On May 16, it became known that the UK Treasury would include the regulation of stablecoins as a payment mechanism in the Financial Services and Markets Bill. The Telegraph quoted a Treasury spokesman, who pointed out that the decision to supplement the document was announced in a speech by Queen Elizabeth II on May 10, 2022: “A bill will be introduced to further strengthen the powers to combat illicit funding, reduce financial crime and promote business growth.”

    The Exchequer is not expected to also include algorithmic stablecoins in the final document, as they do not guarantee stability. “The government has made it clear that some stablecoins are not suitable for payment purposes as they share characteristics with unbacked crypto assets. We will continue to monitor the broader crypto asset market and stand ready to take further regulatory action if required,” the UK regulator said in a statement.

    As you can see, the UK is already preparing to sort stablecoins into “clean” (backed by fiat and stock assets) and “dirty” (algorithmic or crypto-backed). Apparently, the international cryptocurrency regulator will adopt a similar approach when it arrives. Expect the clean/dirty cryptocurrency divide, crypto exchanges, DeFi protocols, and everything else we tried to get away from when building a crypto world for ourselves.

    I’m afraid if this global regulator emerges and takes power, Satoshi Nakamoto will have to rise again and come up with something new that can free us and our money from external control.

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