Regulation
Navigating the New Era of Cryptocurrency Compliance and Maturation in 2024
Last week was a big week for the cryptocurrency industry. The SEC approved 11 bitcoin spot ETFs, allowing them to legally trade in the United States. January 10th; however, it was not without controversy as the day before the official announcement, a fake announcement was posted on the SEC’s X account, which was later attributed to a hack – a dramatic start indeed.
For better or worse, the regulators are here now, and crypto ETFs wrapped up by Wall Street have seen record first-day trading of over $4.6 billion. So what happens next? On the one hand, JPMorgan’s recently released forecast expects another $36 billion in crypto investments to flow into ETFs, while many more companies refuse access to invest in these products for their customers.
In 2022, the “crypto winter” arrived with an avalanche of fraud, over-reliance on bad debt, and bankruptcies. These painful events led to two things that are now being felt keenly in the crypto sector: the maturation of the industry and the negative reaction of regulators. First, projects are more circumspect. The sideways market for crypto legalities and compliance remains active. Gray hair is often no longer considered a bad thing, especially when it comes to institutional engagement.
Second, regulatory oversight has naturally increased as the sector has grown. Much has been made of the SEC’s announcement of 20 additional positions in the new Crypto Assets and Cyber Unit (formerly the Cyber Unit) in May 2022, shortly before the Terra/Luna collapse, but that was the commission’s response to the explosion in crypto markets. Today, in response to the active enforcement environment and global scrutiny of any activity or entity engaging in digital assets, projects are either looking to “offshore” in an attempt to immunize themselves from U.S. regulatory pressure or to double down on compliance and best practices on-site.
2023 has been a year of both challenges and stabilization in the crypto space. Traditional financial services (“tradfi”) entities have reduced their engagement in crypto and DeFi, exploratory partnerships have never materialized, legislators have applauded and lashed out at the industry, and more entities and individuals have sought out safe and reliable options in crypto. Now that the recent approval of the spot BTC ETF has led to more institutional and low-risk investors becoming at least marginally involved in crypto, what will be the impact of the 2024 U.S. regulatory environment, and how will it affect investment and engagement in crypto?
Regulators have indicated that they will continue to focus on anti-money laundering, DeFi, financial intermediaries, and conflicts of interest. To potentially avoid any sanctions, regulated entities in the crypto sector will need to have top-notch transparency and compliance, and unregulated entities in the crypto sector will need to either have a clear justification for not being regulated or have no ties to the United States – or, at the very least, no engagement or marketing to potential U.S. customers and affirmative steps to block such activity.
The year 2024 holds great promise for the growth of institutional and commercial engagement in cryptocurrencies, and regulatory scrutiny will force projects to carefully consider their risks, compliance, and legal infrastructure. Consider the following growth areas in the crypto and trade finance sector and their regulatory risks:
Cryptocurrency custody – a perennial investment area for foreign banks in response to customer demand, but one that is underserved in the United States, largely due to regulatory concerns. As technology advances, more promising security and safety solutions emerge – but these solutions must be approved by regulation and, ultimately, by legislation.
Tokenization – Research and development in this area, both in crypto and trading, has exploded in 2023. Regulators appear to have been more supportive of tokenization blockchain Or financial technology contrary to cryptoand banks are increasingly at the forefront of this. So this case will likely continue to attract scrutiny because of the big names involved, but it should also gain legitimacy because of the big names involved.
Fight against money laundering – This is an area of existential risk for cryptocurrencies (regulated or not), so parties should continue to focus on engaging with entities that have best practices in terms of rigorous know-your-customer processes and sanctions controls. Look for more sophisticated technological advancements, such as the use of zero-knowledge proofs and on-chain identity verification, to make it easier. Regulators will continue to demand accountability on this front, even from “decentralized” entities.
This year promises to be a busy year for U.S. regulators. The best thing that can happen is continued and ever-increasing engagement between industry, regulators, and legislators, all working to improve and consolidate the status quo.
What are the major regulatory hurdles for companies engaged in the cryptocurrency market in 2024?
The impact of regulatory changes on crypto businesses is significant but varies depending on the nature of the business. Key regulatory challenges this year will include complying with evolving global anti-money laundering standards and understanding the nuanced differences in cryptoasset classifications across regions. For example, a digital token may be considered a commodity in one jurisdiction but a security in another, requiring a diversified approach to compliance. Businesses must invest in robust compliance frameworks that are both flexible and responsive to these different regulations, including financial crime prevention, asset classification and market integrity. There are a range of approaches to implementing regulation in these areas.
How can businesses effectively navigate the various international crypto regulations?
Navigating global cryptocurrency regulations effectively requires a strategy that combines global compliance principles while adapting to local regulatory requirements. Crowdfunding institutions have operated in a global landscape with fragmented regulation for years. In contrast, cryptocurrency businesses must mature in a fraction of the time to continue operating in the borderless environment in which they operate. This involves continually monitoring regulatory trends in key markets, deploying a capable compliance team, and leveraging technology to streamline compliance processes. Success in this area often depends on a company’s ability to integrate these compliance strategies into its broader operational framework, allowing it to respond nimbly to regulatory changes while maintaining a strong understanding of the global regulatory landscape.
Morgan Stanley expresses concerns that central bank digital currencies (CBDCs) and bitcoin have the potential to reduce the dominance of the US dollar.
BlackRock CEO Interview with Larry Fink offers his thoughts on ETF approvals, Ether ETFs, and the path to tokenization.