Although cryptocurrencies have a wider acceptance as an asset class, they have struggled to lose their reputation for inhabiting a digital “wild west,” a place where laws and regulations are rarely enforced.
However, there are signs that the lawless days of cryptocurrencies are coming to an end. And as a result, companies that market cryptocurrency assets, as well as digital service providers, are struggling to keep new regulatory requirements from taking over.
According to financial authorities, cryptocurrency markets have grown rapidly since the onset of the coronavirus pandemic and the value of the industry has regularly exceeded $ 2 trillion.
Last month, Fabio Panetta, a member of the executive board of the European Central Bank, told a US audience that the cryptocurrency market is now larger than the subprime mortgage market ($ 1.3 trillion) when it caused the global financial crisis in 2008 .
He said an estimated 16 percent of Americans and 10 percent of Europeans were somehow exposed to cryptocurrencies or related assets, and warned of the potential dangers of a market crash.
Today, the ECB is one of many regulators around the world looking for ways to control this previously unsupervised space, where the lack of rules has been both a key attraction and a source of concern.
This has led to a growing number of cryptographic companies seeking help to meet growing regulatory demands, says Rachel Woolley of Fenergo, a Dublin-based compliance software company.
“Many virtual asset services companies have been complying with their compliance obligations because they have not done so as effectively as they could,” says Woolley, Fenergo’s global director of financial crime.
“This idea that you can deliberately violate obligations has to go. The reality is that regulation [in crypto] it will be hardened and there will be fines, “he added.
Fines and bans are already being imposed.
As a basic requirement, regulators want trading platforms and service providers to carry out anti-money laundering controls, a rule that continues to overwhelm many.
In April, the U.S. Bureau of Currency Controllers issued a cessation and withdrawal order against Anchorage Digital Bank, which claimed to be the first federally authorized digital asset bank capable of acting as custodians and offering encryption to its customers. But last month, the licensing agency withdrew the authorization, alleging a lack of controls on the surveillance of suspicious activities, including anti-money laundering controls.
The ban is in line with Fenergo’s research findings that show an increase in regulators’ focus on cryptocurrency-related companies.
In August last year, BitMex trading venue was forced to pay $ 100 million to the U.S. Commodity and Futures Trading Association in fines for failing anti-money laundering controls.
Many crypto companies argue that most players in the industry are interested in following the rules, but that the lack of clarity on what is required is hampering this effort.
UK regulators have been criticized for slow progress both in registering companies that want to offer digital asset services and in establishing a framework for crypto.
Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, said last month that the regulator is waiting for more powers to oversee cryptocurrency companies beyond basic anti-money laundering requirements.
He also said the FCA has considered only 33 companies eligible to operate so far. “Many were rejected because they had an inadequate disposition to avoid harm or even identify them in the first place,” he said. “We need to draw clear lines… As we constantly warn, if you invest in crypto, you must be prepared to lose all your money.”
Legal disputes over digital assets can also present new challenges. Sergey Romanovsky, the CEO and founder of Nebeus, a Barcelona-based company that lends cash against crypto, has discovered this by the hard way.
His business almost collapsed under the strain of a lawsuit alleging that the company did not adequately protect a client’s money. The case ended with a ruling in favor of Nebeus, but Romanovsky was severely affected by a court decision to temporarily freeze the company’s assets due to a technical misunderstanding.
He argued in a UK court for keeping the $ 1.5 million in question in so-called “cold storage” on a USB memory-like device that keeps digital assets safe by keeping them offline. The court initially found this unacceptable, which led to the freezing order.
“In retrospect, there were simple steps that Nebeus should have taken: that is, to keep suspicious fraudulent cryptographic assets in a format that the court would better understand,” Romanovsky says.
Woolley of Fenergo warns that companies may also fall prey to unexpected regulatory changes. She says the case against Anchorage is a cause for concern because it makes regulators look like they are changing.
“I’m worried about regulators licensing Anchorage in January last year, and less than 18 months later, they’re doing it again; the question is why did they get a license without those systems in place in the first place?” Woolley asks. Those checks should be there from day one. “
But in addition to protecting themselves from the dangers of money laundering, regulators are now focusing on consumer protection in cryptographic transactions. In addition to the UK FCA, a group of European financial supervisors agreed in late March that many cryptocurrencies are highly risky and speculative, and are subject to “aggressive promotion”.
Many in the crypto industry expect new regulations to vary from country to country, allowing companies to move to jurisdictions where the rules are more favorable to them.
Ian Mason, head of UK financial services regulation at the Gowling WLG law firm, says this potential for regulatory arbitrage is a concern due to the global nature of crypto.
“There is a need for regulation to be more unified, for there to be high and consistent standards in the crypto markets,” says Mason.
The digital asset market reaches new fragile highs
The rapid rise in the total value of all cryptocurrencies demonstrates a growing appetite among consumers to keep them as an alternative to traditional currencies and other stores of value, it reports. Michael Kavanagh.
But recent major changes in asset market capitalization have once again demonstrated the dangers of assuming that cryptography is a one-way bet.
Since 2017, the market has been marked by large peaks and falls in total value, which reflects a huge volatility in the trading value of rival bitcoins and currencies.
Market value slumped above $ 3 trillion last November before falling to about $ 1.6 trillion in February and has yet to regain ground.