A week of contrasting progress in the digital asset regulatory space. On Thursday, the EU approved the Markets in Crypto Assets Regulation. Broadly, the objectives of the EU in enacting the regulation were: to provide protection against fraud for consumers; to remove regulatory barriers for dealing with crypto-assets; to provide companies with new sources of financing; and to open up the development of new business models via crypto payment methods as well as new investment opportunities. The provisions applying to stablecoin will apply from July 2024 and other provisions related to service providers and the travel rule from January 2025. So, the EU is working to increase the attractiveness of the European market, strengthening consumer protection when dealing with crypto-assets and providing regulatory clarity.
Meanwhile on Wednesday, the US continued to grapple with a draft piece of legislation, at best described as a “jumping off point” (Patrick McHenry), at worst must be disregarded and “we’re starting from scratch” (Maxine Waters). FTX acted as an accelerant, but progress remains glacial. Clearly, Congress must take the lead in moving forward with more haste, but they must be more prescriptive in what they are trying to achieve and perhaps focus on getting a few of the basics right.
Provide legal certainty. The web of state and federal laws and regulations is tangled and lacks clear demarcation of authority, responsibility and accountability. This leaves room for interpretation and discretion by different agencies and has led to what many consider to be a hostile and uncertain business environment. Uncertainty creates risk. Investors and risk managers often choose to reduce or avoid unacceptable levels of risk and may well go elsewhere until the uncertainty is resolved.
Protect the consumer and prevent financial crime. The industry needs to bring trust back to the system. This should not be difficult as most basic requirements should be familiar from the TradFi space and many are not in fact crypto specific. In current form, the Bill needs work to address or tighten up areas related to lessons learned from recent events: effective governance, risk management and compliance systems; financial and accounting controls including capital planning, reserves management, liquidity management and disclosures; counterparty risk management and due diligence; clarity of risk disclosures to consumers; address co-mingling v safeguarding of customer funds and digital assets; create legal certainty of ownership in bankruptcy events; bolster anti-fraud measures to prevent unauthorized movements of funds and digital assets etc. In the meantime, market participants should not wait for Congress but move forward on these areas proactively.
Welcome new technologies, payment systems and business opportunities. This should really be a no brainer! The US is supposed to be at the forefront.
Chief Compliance and Risk Officer