Is Crypto Regulated Across the Globe?
Entering 'is crypto regulated' as a search term on Google returns 15.9 million results in 0.50 seconds. Entering the same phrase, is crypto regulated, into Yahoo brought forth thousands of search results.
The millions of results indicate that skeptics of the emerging industry are interested in what regulatory bodies worldwide have done and continue to do to ensure the safety of investor money.
While some regulatory agencies have made efforts, the lows and highs of the crypto finance sector have made it difficult for regulators to design a comprehensive global regulatory framework for this booming industry.
In the beginning, crypto projects such as Namecoin (NMC), Peercoin (PPC), Novacoin (NVC), Terracoin (TRC), Devcoin (DVC), and WorldCoin (WDC) were low-cap digital assets (had less than $2 billion as market capitalization) with less useful underlying infrastructure. Innovative technologies back current projects.
This is why projects such as Solana (SOL), Cardano (ADA), Ripple (XRP), Ethereum (ETH), TRON (TRX), Polkadot (DOT), Cosmos (ATOM), Algorand (ALGO), and Flow (FLOW) have market caps that range in the billions of dollars.
As of the end of November 2022, the market capitalization of Bitcoin (BTC) alone was bigger than that of Samsung, Bank of America, Coca-Cola, PepsiCo, Oracle, Alibaba, Shell, Toyota, McDonald, Nike, and Morgan Stanley.
During the peak of the markets in November 2021, BTC's market cap was higher than Walmart and Visa and competed with Alphabet (Google), Microsoft, and Apple in terms of market value.
The boom in crypto, which saw BTC and Ethereum rise to all-time highs (ATH) of $68,789.63 and $4,891.70, benefitted a particular group in the decentralized finance (DeFi) sector. That group was cryptocurrency exchanges.
Binance, FTX, Mandala Exchange, Upbit, MEXC, Coinbase, Bitrue, OKX, Gate.io, Crypto.com, Huobi, and CoinTiger saw record revenue generation due to the fear of mission out (FOMO) taking over the market in 2021. FOMO saw billions of dollars poured into the crypto industry, bringing at least 1,000% gains for several unsophisticated traders and investors (those that lack crypto knowledge and do not conduct fundamental or technical analysis before making decisions).
Blockchain technology and cryptocurrency were on a high throughout 2021, and another area, called DeFi, started attracting a new audience. The new audience was hard-working individuals fed up with the infinitesimal interest rates offered by traditional finance (TradFi).
While the real interest rate in the US was 2.3% in 2020, according to the World Bank, the interest rate fell below zero in 2021. This could not be compared to the minimum annual percentage yield (APY) of 5% offered by DeFi lending platforms and certain exchanges through staking services. The boom in crypto lending led to the creation of several now-insolvent firms, such as Voyager and Celsius.
Millions of people have lost more than a trillion dollars since November 2021, with the current crypto market capitalization below $1 trillion a year later. Much blame has been placed on cryptocurrency exchanges and crypto lending firms. While these firms bear the lion's share of the responsibility, many potential traders ask 'is crypto regulated' in their jurisdiction so that they will not fall victim to investment losses due to the rapid collapse of crypto companies.
Is crypto regulated by SEC in the United States?
Cryptocurrencies are found on a blockchain and can be stored in crypto wallets. They are primarily traded on a cryptocurrency exchange, of which there are two types: centralized exchanges (CEXs) and decentralized exchanges (DEXs).
The best way to differentiate them is compliance with rules and regulations. While CEXs comply with rules such as Know Your Customer (KYC), which helps prevent money laundering and combat terrorism financing, DEXs thrive on anonymity. They do not require users to submit any documents for review.
Despite this, CEXs record more volume than DEXs. A great example can be attributed to Binance. It is the largest CEX by volume, seeing more liquidity in the first two days of October (around $66 billion) than Uniswap, the largest DEX by volume, which recorded around $42 billion throughout the month. Such statistics by CEXs have made them the go-to platforms for several traders.
The collapse of FTX in November, and the reduction of staff by others such as Crypto.com, Coinbase, BlockFi, Bybit, and Gemini in previous months, have led to calls for crypto regulation.
Many industry experts have asked why the top regulator in the US, the Securities and Exchange Commission (SEC), maintains focus on the "cryptocurrency securities" relationship, with an eye on its case with Ripple, instead of drawing up a comprehensive regulatory framework that will answer the question is crypto regulated in America.
In the US, Coinbase is the biggest exchange by trading volume and is a centralized exchange. The exchange has the necessary licenses for operations in more than 40 US states.
Despite this, Coinbase is not insured by FDIC, the Federal Deposit Insurance Corporation. The FDIC is an independent governing body created by US Congress in 1933 to maintain public confidence and stability in the country's financial system.
If the exchange with the most customers in the country is not insured due to "cryptocurrency" not being subject to the protections of the FDIC or Securities Investor Protection Corporation (SIPC), many people may lose hope in the crypto industry due to a lack of regulation.
Blame continues to be placed on the SEC, but the Commodity Futures Trading Commission (CFTC) has also been drawn into the 'is crypto regulated' trend.
In 2015, the CFTC said it classifies virtual currencies like BTC as commodities under the Commodity Exchange Act (CEA). In September 2022, SEC Chair Gary Gensler affirmed his stance on classifying cryptocurrencies as securities.
This is the reason why current CFTC Commissioner Summer K. Mersinger told crypto news portal Coindesk on 28 November that crypto regulation is not a "one-agency solution". She admitted that the CFTC would need to work with the SEC in regulating the emerging sector. While she did not give a clear view about how the two agencies could regulate the industry, she assured stakeholders that the agencies would need to liaison with global regulators before regulations could be implemented.
Despite the delays in crypto regulation due to unclear CFTC crypto and SEC cryptocurrency rules, Chief Executive Officer (CEO) of Stifel Ron Kruszewski has called on the SEC to extend the customer protection rule to the crypto sector.
The Customer Protection Rule (Rule 15c3-3) was adopted in 1972 by the SEC in response to a congressional directive to create rules around the acceptance, custody, and use of customer securities. The rule requires broker-dealers to protect the securities that customers leave in their custody. It also ensures that, at any time, brokerage clients can withdraw assets, and a brokerage has to work to uphold it.
With such a rule in place, customers of bankrupt exchanges like FTX, and lending firms such as Voyager and Celsius, would have been protected from huge losses suffered from the halting of deposits and withdrawals.
Is crypto regulated by the Europe Union?
In Europe, Germany leads the rest of the countries as the world's most friendly crypto nation.
Unfortunately, the Financial Conduct Authority's (FCA) stiff stance on the highly-volatile industry has made the United Kingdom (UK) less of a crypto-friendly country.
In March 2022, the FCA warned residents of illegal crypto ATMs operating in the country. In trying to limit UK residents’ exposure to virtual currencies, the agency warned ATM owners to shut their operations or face strong action by law enforcement. The FCA followed this by clamping down on the marketing of high-risk investments to consumers in August 2022.
While a cryptocurrency exchange such as Binance has had a hard time dealing with the FCA, Chanpeng Zhao’s innovation has received the regulatory nod in France, Italy, Cyprus, and Kazakhstan. This shows that CEXs with the right whitepapers, assets, and Proof of Reserves (PoR) can weather the storm and be accepted by other European countries with different due diligent processes.
With that said, the Markets in Crypto-Assets (MiCA), first proposed by the European Commission (EU) in August 2020 and scheduled to take full effect in 2024, will establish agreed rules for all crypto assets at the EU level. This will bring some legal certainty for crypto assets not provided by existing legislation within the EU.
Is crypto regulated in the Asian Pacific region?
In Asia, China has banned cryptocurrency use in all of its forms and has instead created and popularized the use of the country's national digital currency called the digital Yuan (e-CNY).
In trying to limit the use of cryptocurrency as a transactional currency and investment asset, authorities in India have imposed a 30% tax on capital gains accrued from crypto transactions in July 2022.
Unlike China, crypto is legal in Japan. One of the best ways Japan’s Financial Services Agency (FSA) regulates crypto is by introducing a travel rule for crypto to track illegal transfers. The Travel Rule, scheduled to take effect in May 2023, will help reduce money laundering using cryptocurrencies.
Aside from the FSA, the MAS (Monetary Authority of Singapore) is one of Asia's top players and has a rigorous process regarding issuing virtual asset service provider (VASP) licenses. Despite receiving more than 170 applications for licenses, MAS has granted one to less than 10% of applicants, with many crypto companies still waiting for a positive outcome.
Aside from China, India, Japan, and Singapore, it is not uncommon to come across the question, 'is crypto regulated?' in Australia. As of January 2022, there is no legislation to tackle cryptocurrency as a discrete area of law in Australia. That said, cryptocurrencies can be captured within the existing rules of Australia.
Cryptocurrency is not the only area in the crypto stratosphere without legislation in the country; blockchain and other distributed ledger technology (DLT) do not have a regulatory framework in Australia.
Despite their impact on centralized finance, Australia does not regard cryptocurrency as money. This is in direct contrast to the notion held by some countries that digital currencies can be equated with fiat currencies. While China has taken the lead in the creation of central bank digital currencies (CBDCs), Australia does not have plans to issue a retail CBDC in the near future.
Is crypto regulated in Africa?
Crypto regulation in Africa is largely non-existent. Despite the majority of Africans using crypto as a hedge against inflation, most central banks and local regulatory bodies do not have cryptocurrency laws.
The only African country that has given the green light for the use of crypto so far is the Central African Republic (CAR).
The Central African country followed El Salvador to become the second country across the globe to legalize BTC as a legal tender. Much of this has been done to aid international trade due to African countries' consistently depreciating local currencies.
African countries have not gone unchecked concerning cryptocurrency regulations. The International Monetary Fund (IMF) announced in November 2022 that the growing crypto market within the region needs better regulation.
According to the IMF, the collapse of FTX and the tanking of the market should prompt central banks in African countries to set up cryptocurrency laws so that consumers can be protected from high volatility. The financial body said that the widespread acceptance and use of crypto could create macroeconomic instability within the region.
Crypto regulation needed more than ever
While many expect the crypto finance industry to remain highly decentralized so that citizens can control all aspects of their financial lives, unending cases of fraud and scams have shed new light on regulations. Some industry experts have shared their views about crypto regulation.
"The collapse of the FTX Derivatives Exchange has made the perfect case for regulators. Now they can claim that the emerging crypto ecosystem, despite its revolutionary propositions, needs urgent and comprehensive regulation. In reality, regulators worldwide have often maintained this stance, and crypto proponents are now forced to support the notion en mass.
“FTX deceived everyone, and despite the facade of good health that the company put up, many shady and unethical activities were going on in the background.
Reporting and accountability standards amongst C-Suite executives are among the key regulatory frameworks that will need to be designed for crypto firms. However, it's more important than ever for the crypto community to point out that, even if FTX dealt with crypto, they were not crypto. They never were, nor is any one centralized company that offers it to their customers. Cryptocurrency exchanges are, if anything, more akin to banks than to cryptocurrencies or even Decentralized Finance.
“If you were to ask me, ‘should the FTX collapse increase centralized institutions' regulation?’ then the answer would be an unequivocal yes. These institutions need regulation, not the sovereign tools and technologies enabling users to eventually surpass them altogether,” Brian Pasfield, CTO of Fringe Finance, told Moni Talks. Slava Demchuk, Co-founder of AMLBot, Founder of the AMLSafe app, and CEO of PureFi, also shed light on the current state of crypto regulation.
“The collapse of the FTX exchange will increase the necessity for cryptocurrency regulation. We strongly believe that this situation has become similar to the Subprime mortgage crisis in 2008. It would be the same tipping point for the crypto industry. Such a market condition will inevitably lead to stricter regulation for CEXs and VASPs in general.
“It will include tighter control over exchanges' liquidity, stronger executive responsibility, etc. Conventional crypto-enthusiasts would not suffer from more severe regulation because they are already operating under specifically defined market rules. Moreover, we always used to say, crypto regulation follows the classical financial market, so the collapse of the exchange is just a reason for it.”
Despite the numerous bankruptcies with the collapse of FTX as the headline of issues miring this emerging sector, blockchain technology and cryptocurrency is the new way of finance. Most traditional financial companies could adopt the blockchain technology infrastructure to scale transactions and rid themselves of the fragmented nature of the old systems.
Although crypto is not regulated globally, crypto regulation will see a significant spike in the number of cryptocurrency exchanges. This will result positively in the trading volume of centralized exchanges.
Many will complain about hidden risks due to the unpredictability of the market, but major developments in the industry prove otherwise. CoinMarketCap launched a new feature, called Proof-of-Reserve tracker, for crypto exchanges in November. PoR provides transparency of an exchange's cryptocurrency reserves via a verifiable auditing practice. With the new feature, users can access the total assets held by an exchange, its balance, and its public wallet address ownership.
Exchanges such as Bybit, Huobi, Crypto.com, OKX, Bitfinex, and Kucoin have released their PoRs to show their customers that their coins are in safe hands.
Crypto regulation is needed. The right time may have come for the SEC, CFTC, European Union, MAS, and the African Union to pull the plug on this highly volatile industry.
Author: Raphael Minter
Raphael Minter/ Albert Zuhnden (preferred pen name) is a crypto finance writer, data miner, and fundamental analyst. Raphael has written hundreds of articles about centralized and decentralized financial instruments such as precious metals, commodities, stocks, and cryptocurrencies. He broke into digital finance in 2016 and believes digital assets and blockchain technology is the future of finance.