Regulation
Best Practices for Crypto Asset Regulation in 2024
There are several compelling reasons to consolidate data in one location. Storing data in a single area makes it easier to access, organize and update information. Keeping data in a single area simplifies the process of retrieving, organizing, and updating information. Information derived from fully integrated databases is more likely to be complete and uniform. People who manage these centralized servers can more easily spot signs of data integrity issues and security threats. Additionally, data aggregation allows applications to operate both cost-effectively and efficiently.
However, the centralization of data in the cryptocurrency landscape also has negative consequences. This includes concentration of power, loss of privacy, reduced accountability and limited competition. This is evident as the Internet has become more centralized over the past quarter century. This shift began when a few companies developed user-friendly platforms. These platforms and websites have made the Internet significantly more accessible. Currently, most online activity is stored in databases controlled by Google, Meta, Amazon, Microsoft and other entities.
Blockchain, the backbone of cryptocurrencies
Blockchain technology uncovers the disadvantages of centralized data storage in crypto exchanges. It offers an alternative channel for structuring digital information. Blockchain technology allows data to be shared across multiple computers within a network. Due to the nature of blockchain, individual computers can verify the authenticity of information received from other “nodes” in a blockchain network. Every time data is shared on a blockchain, the transaction is automatically recorded in a distributed ledger (DL). The DL cannot be changed.
Therefore, taking a global perspective, this article discusses crypto regulation and will move towards the best practices in crypto asset regulation in 2024.
Steering the regulatory landscape for crypto securities
The Securities and Exchange Commission’s (SEC) increased scrutiny of the crypto sector has cast a long shadow. Investors must now balance innovation and compliance, ensuring that their investments in crypto assets do not violate securities laws. This increased scrutiny has sent shockwaves through crypto exchanges and the broader crypto market, creating a need for increased awareness and understanding.
As we navigate this new landscape, let’s first look at the basic principles that determine whether a crypto asset is “good” or “bad” for the SEC.
Understanding the Howey Test and Digital Assets
The Howey Test, stemming from a 1946 Supreme Court decision, serves as a guide for the Securities and Exchange Commission (SEC) to determine which cryptocurrency assets are subject to its regulatory authority. This test, characterized by four key criteria, requires an investment in a joint venture where the primary expectation of return rests on the work of others. Although its relevance in the digital assets arena is widely debated, the Howey Test constitutes a fundamental principle in the regulation of cryptocurrencies, with varying interpretations and enforcement approaches in different courts. For those in the cryptocurrency industry, it is crucial to understand these subtleties.
SEC Position on ICOs and Tokens
The SEC closely monitors initial coin offerings (ICOs) and digital tokens, aiming to protect investors and eliminate deceptive activity. This attention serves as a wake-up call for the cryptocurrency industry to meet cryptocurrency regulatory standards, as the SEC Chairman and the organization as a whole view ICOs as fertile ground for contrarian behavior to ethics without strict regulations for crypto securities.
Therefore, the future of digital asset securities lies in transparency and adherence to rules that protect investors’ interests.
The SEC’s recent actions in the cryptocurrency space underscore its commitment to strengthening defenses against fraud, market manipulation, and unclear reporting. The growth of the SEC’s division focused on digital assets and cyber threats, as well as its emphasis on unregistered securities, mark a period of heightened vigilance.
Notable cases, like the 2023 lawsuit against Ripple Labs, show that determining whether a digital currency is a security or not is a legal challenge and a risk that investors should be aware of.
Global Principles for Crypto Regulation
IOSCO has proposed 18 global guidelines for the regulation of cryptocurrencies and digital assets. The organization believes that global alignment on certain crypto rules is “not only desirable but necessary” because the markets are “cross-border” and create “significant risk of harm” for investors.
According to the World Economic Forum, a comprehensive approach is needed to “maximize the benefits of the underlying technology” and “manage the risks.”
However, due to the different stages of market maturity, the emergence of regional hubs and the varying capacities of regulatory bodies, it is wise to examine the role of international organizations, national/regional regulators and stakeholders. industry to ensure responsible management. evolution of regulations.
EU rules on digital currencies
Let’s explore ‘Best practices for regulating crypto assets in Europe. In May 2023, the European Union became the first to implement comprehensive global rules for digital currencies, called Cryptocurrency and Asset Markets Regulation (MiCA).
The European Securities and Markets Authority is currently seeking public comments on various aspects of these regulations.
Any entity that issues or trades digital currencies must be licensed and, from January 2026, all service providers will be required to record the details of the sender and receiver of any transaction, regardless of the value of the transaction. Additionally, any digital wallet storing more than 1,000 euros must verify ownership of the wallet before processing any transaction.
The fall of FTX highlighted the “critical need to establish regulations that will protect Europeans who have invested in these digital assets and prevent the crypto sector from being exploited for illegal activities such as money laundering. ‘money and support for terrorism’, according to Elisabeth Svantesson, Finance. Minister of Sweden, who currently heads the EU.
Asian Digital Currency Laws
Asia is one of the world’s largest users of cryptocurrencies, but regulations vary widely between countries. When it comes to “Best Practices in Crypto Asset Regulation”, Japan is one of the most accepting countries for the use of crypto as it recognizes it as a form of money and as an asset legal. Crypto and yen transactions are managed by the Financial Services Agency in Japan, and Japanese citizens can own or invest in digital currencies. However, the country recently tightened rules on sharing customer data between crypto exchanges in an effort to combat money laundering.
South Korea is moving forward in regulating cryptocurrencies and other virtual assets, following the adoption of the “Virtual Asset User Protection Law” in 2023. The law strengthens user protection adding recordkeeping and transparency requirements. Financial authorities are expected to issue guidelines for listing virtual assets by April 2024 or May 2024, News reported.
Digital currency rules in Brazil
‘Best practices for regulating crypto assets in Brazil have been in place since June 2023, when the central bank became the overseer of crypto assets. Under the Cryptoassets Act, companies providing services related to virtual assets are subject to rules and regulations designed to prevent fraud and money laundering related to cryptocurrencies.
Brazil’s central bank governor said he intends to impose stricter regulations on cryptocurrencies. This comes after Brazilian cryptocurrency imports increased by almost 45% between January and August 2023, reaching a total of $7.4 billion. According to the governor, demand for Brazilian cryptocurrencies has shifted to stablecoins as people increasingly use them as a means of payment rather than as an investment.
China is one of the strictest countries in the world when it comes to cryptocurrency regulation, banning cryptocurrency trading, trading and mining. In 2020, the Supreme Court lifted the ban on cryptocurrencies.
In India, the “Cryptocurrency and Regulation of Official Digital Currency Bill” was expected to be passed by Parliament in 2020, but faced delays. The bill aims to enable the Reserve Bank of India to create an official digital currency.
Regulating cryptocurrencies and stablecoins in Britain
The UK government is in the process of establishing regulations for the cryptocurrency sector. In particular, it imposed a rule according to which any entity providing a digital currency must be approved by the Financial Conduct Authority (FCA).
“The government believes that companies that interact directly with consumers in the UNITED KINGDOM must be approved, regardless of their geographical location,” specifies the financial department.
Additionally, the Financial Conduct Authority and the Bank of England have suggested rules for stablecoins. Stablecoins are created to maintain a more consistent value compared to traditional cryptocurrencies by tying their value to another asset. For more details on the distinctions between cryptocurrencies and stablecoins, please refer to our detailed explanation.
Conclusion
In conclusion, best practices for regulation of crypto assets are developed by governments around the world. The World Economic Forum (WEF) has launched its 18 recommendations on global regulation for the management of cryptocurrencies and digital assets. This report forecasts the main regulatory developments that have occurred in recent years. The WEF is also working on a Digital Asset Regulation (DAR) initiative, which examines the results of various national approaches to regulating digital assets.