Regulation

Winds of Regulatory Change: Cryptocurrency Industry Prepares for Compliance in 2024

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In 2023, the cryptocurrency industry experienced a milestone, with major jurisdictions such as the EU and the UK tightening their regulatory frameworks. Duncan Ash, head of strategy at blockchain security firm Coincover, discussed the key trends expected to shape the cryptocurrency regulatory landscape in 2024 and how they will influence the industry’s long-term evolution.

“Cryptocurrency regulation” itself is somewhat of an oxymoron. Although built on the principle of peer-to-peer transfer, the market has gradually moved away from its purist origins as regulators seek greater oversight. Different jurisdictions are moving at different paces of reform. The EU is leading the charge, approving its historic cryptocurrency markets (Not) regulation last summer.

The UK has taken a more gradual approach and is preparing to publish a new regulatory regime this year following the consultation period, which ended in February 2024. Progress in the US has been much slower, where the SEC has largely governed through coercive action and is at loggerheads with the CFTC .

While it remains to be seen exactly what the new regulation might look like and how it will be enforced, it is inevitable that the future of cryptocurrencies will lie within much more regulated and supervised parameters. As industry players look to navigate this transition in 2024, here are three key trends set to play a central role in shaping the regulatory landscape:

Traditional and decentralized finance are becoming increasingly intertwined. The approval of the Bitcoin ETF in the United States recently highlighted this. As the gap closes, we can expect an increase in hiring from crypto firms seeking experience in financial regulation to ensure they are at the forefront of compliance.

For example, last July Circle, the USDC issuer, appointed former CFTC Chairman Heath Tarbet as Chief Legal Officer to oversee its regulatory affairs. As regulators continue to increase market pressure, cryptocurrency companies are likely to prioritize hiring individuals from the traditional finance (TradFi) and regulatory sectors to avoid fines and penalties resulting from non-compliance with new requirements.

The aggressive stance taken by regulators towards the cryptocurrency market highlights the substantial risks involved. For example, between October 2022 and September 2023 alone, the SEC issued an estimated $5 billion in fines against crypto firms for a variety of offenses. This includes violations of anti-money laundering regulations and offering of unregistered securities.

To address these challenges, crypto companies will increasingly seek expertise in TradFi and legal fields to secure compliance
with the evolution of regulatory needs.

New technology requires new regulation

Arguing over whether to define cryptocurrencies as “securities” or “commodities” is not sustainable and will not help make the cryptocurrency market safer in the long term. For regulation to be effective in promoting a sustainable future for cryptocurrencies, regulators will need to understand the complexities of the cryptocurrency market and seek rigorous feedback from market participants on any new proposals.

Although cryptocurrencies are all part of the same group, they behave differently. This means that regulating the entire ecosystem under a single framework will only create friction between regulators and market participants.

For example, Stablecoins and cryptocurrencies perform different functions within the crypto ecosystem and, therefore, require different regulatory regimes. Despite being the most popular cryptocurrencies by market capitalization, Bitcoin and Ethereum have some key differences. The latter provides a decentralized platform for creating and deploying smart contracts and DeFi apps (dApps).

Each cryptocurrency does not require its own regulation. Rather, any new regulation should be tailored to the unique characteristics of the cryptocurrency market and should consider various use cases.

Election uncertainty slows the pace of regulatory reform

2024 will be the biggest election year in history, with countries representing more than 60% of global economic output holding elections. With elections comes uncertainty, and in times of uncertainty, the pace of any regulatory or legislative reform slows.

Let’s take the United Kingdom for example. Prime Minister Sunak has historically positioned the country as “open for business” and has been a vocal supporter of cryptography and blockchain. His government has been behind major stablecoin provisions such as those in the Financial Services and Markets Act, but with polls suggesting a change in Downing Street, regulators may prefer to delay the publication of any new framework until after the next general election .

The United States is in a similar situation. In July, the House Financial Services Committee passed a landmark bill that aims to develop a regulatory framework for cryptocurrencies. However, its progress through Congress will likely be slowed as growing attention shifts to the presidential election.

And then?

Regulation will be a positive force in the cryptocurrency market, providing greater trust, transparency and consumer protection. However, it will not be a panacea. Implementing new rules and frameworks is a long process that will not happen in a “big bang” moment. Even if this transition continues in 2024, we should not expect radical reforms.

In 2023, the cryptocurrency industry experienced a milestone, with major jurisdictions such as the EU and the UK tightening their regulatory frameworks. Duncan Ash, head of strategy at blockchain security firm Coincover, discussed the key trends expected to shape the cryptocurrency regulatory landscape in 2024 and how they will influence the industry’s long-term evolution.

“Cryptocurrency regulation” itself is somewhat of an oxymoron. Although built on the principle of peer-to-peer transfer, the market has gradually moved away from its purist origins as regulators seek greater oversight. Different jurisdictions are moving at different paces of reform. The EU is leading the charge, approving its historic cryptocurrency markets (Not) regulation last summer.

The UK has taken a more gradual approach and is preparing to publish a new regulatory regime this year following the consultation period, which ended in February 2024. Progress in the US has been much slower, where the SEC has largely governed through coercive action and is at loggerheads with the CFTC .

While it remains to be seen exactly what the new regulation might look like and how it will be enforced, it is inevitable that the future of cryptocurrencies will lie within much more regulated and supervised parameters. As industry players look to navigate this transition in 2024, here are three key trends set to play a central role in shaping the regulatory landscape:

Traditional and decentralized finance are becoming increasingly intertwined. The approval of the Bitcoin ETF in the United States recently highlighted this. As the gap closes, we can expect an increase in hiring from crypto firms seeking experience in financial regulation to ensure they are at the forefront of compliance.

For example, last July Circle, the USDC issuer, appointed former CFTC Chairman Heath Tarbet as Chief Legal Officer to oversee its regulatory affairs. As regulators continue to increase market pressure, cryptocurrency companies are likely to prioritize hiring individuals from the traditional finance (TradFi) and regulatory sectors to avoid fines and penalties resulting from non-compliance with new requirements.

The aggressive stance taken by regulators towards the cryptocurrency market highlights the substantial risks involved. For example, between October 2022 and September 2023 alone, the SEC issued an estimated $5 billion in fines against crypto firms for a variety of offenses. This includes violations of anti-money laundering regulations and offering of unregistered securities.

To address these challenges, crypto companies will increasingly seek expertise in TradFi and legal fields to secure compliance
with the evolution of regulatory needs.

New technology requires new regulation

Arguing over whether to define cryptocurrencies as “securities” or “commodities” is not sustainable and will not help make the cryptocurrency market safer in the long term. For regulation to be effective in promoting a sustainable future for cryptocurrencies, regulators will need to understand the complexities of the cryptocurrency market and seek rigorous feedback from market participants on any new proposals.

Although cryptocurrencies are all part of the same group, they behave differently. This means that regulating the entire ecosystem under a single framework will only create friction between regulators and market participants.

For example, Stablecoins and cryptocurrencies perform different functions within the crypto ecosystem and, therefore, require different regulatory regimes. Despite being the most popular cryptocurrencies by market capitalization, Bitcoin and Ethereum have some key differences. The latter provides a decentralized platform for creating and deploying smart contracts and DeFi apps (dApps).

Each cryptocurrency does not require its own regulation. Rather, any new regulation should be tailored to the unique characteristics of the cryptocurrency market and should consider various use cases.

Election uncertainty slows the pace of regulatory reform

2024 will be the biggest election year in history, with countries representing more than 60% of global economic output holding elections. With elections comes uncertainty, and in times of uncertainty, the pace of any regulatory or legislative reform slows.

Let’s take the United Kingdom for example. Prime Minister Sunak has historically positioned the country as “open for business” and has been a vocal supporter of cryptography and blockchain. His government has been behind major stablecoin provisions such as those in the Financial Services and Markets Act, but with polls suggesting a change in Downing Street, regulators may prefer to delay the publication of any new framework until after the next general election .

The United States is in a similar situation. In July, the House Financial Services Committee passed a landmark bill that aims to develop a regulatory framework for cryptocurrencies. However, its progress through Congress will likely be slowed as growing attention shifts to the presidential election.

And then?

Regulation will be a positive force in the cryptocurrency market, providing greater trust, transparency and consumer protection. However, it will not be a panacea. Implementing new rules and frameworks is a long process that will not happen in a “big bang” moment. Even if this transition continues in 2024, we should not expect radical reforms.

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