For years now, the compliance community has been constantly warned that a new regulatory deluge is coming for all things crypto. Still waiting for light rain.
A potential well-known (albeit imperfect) legislative initiative on the horizon – Europe’s flagship crypto legislation, MiCA – is a Second timeAllow more time for translation.
Steven Eisenhauer is the Chief Risk and Compliance Officer ramp. This article is part of CoinDesk Policy week.
Instead, we see unnecessary legislation being proposed to solve a problem that is misdiagnosed for political expediency. Overall this reflects poorly on the depth of knowledge our regulators have in Web3 technology and how capable they really are of protecting consumers.
Sometimes new technologies require new approaches to regulations. Let’s consider what’s wrong with the current approach, try to identify the real problems, and propose solutions to create a new way forward.
For example, in December last year Sen. The so-called Digital Asset Anti-Money Laundering Act was introduced by Elizabeth Warren (D–MA) and Roger Marshall (R–KS).
The proposed legislation was presented to the Senate Banking Committee under the title “Crypto Crash: Why the FTX Bubble Burst and the Harm for Consumers.” It does little to protect consumers and would have done nothing to prevent what happened with FTX – the almost single focus of crypto-related regulation to date, with a strong anti-money laundering (AML) rule broadly applicable to crypto. Companies before Sam Bankman-Fried founded FTX.
As evidence of performance and utility, we have only to consider solution Between Coinbase and the New York Department of Financial Services (NYDFS), this is just the latest example in a long list of regulatory actions taken against crypto companies related to anti-money laundering and sanctions failures.
See also: Coinbase to pay $50M fine to New York regulator to settle background check charges
Warren’s involvement in the bill and the gross misunderstanding of its impact is surprising, given his strong consumer protection beliefs (Warren is alternately maligned and admired, depending on one’s political affiliation, for his key role in creating the Consumer Financial Protection Bureau.)
For many in crypto, this is nothing more than a direct hit to the entire space.
What we see in politics is very common. And introducing anti-money laundering legislation is easier and politically safer.
Ignoring the real issues
To be clear, there are gaps in the global regulatory framework for digital assets.
Most countries do not have strong financial regulations applicable to crypto companies in terms of consumer protection, safeguarding of clients’ funds, capital and liquidity requirements, concentration risk management and disclosure requirements.
The need to address these regulatory gaps is widely acknowledged and very urgent. The problem seems to be that some legislatures are unwilling to educate themselves – a surprising statement in the wake of FTX!
See also: After FTX: How Congress Prepares to Regulate Crypto
All this is like a doctor who can’t diagnose a patient’s disease but prescribes antibiotics in order to cure the patient. Not only is this dangerous for the patient, who may forgo further tests in the false hope that they will be cured, but it also contributes to global antibiotic resistance.
Prioritizing unnecessary legislation is similarly insidious, as it gives false protections to consumers and further erodes confidence in global financial systems.
The way forward
If global lawmakers feel overwhelmed by the knowledge base needed to effectively regulate crypto, they should take a systematic approach and rely on precedents from successful financial regulation.
I recommend looking at the EU Payment Services Directive and its amendments For inspiration.
Instead of trying to determine the different types of market participants to which the resulting regulation is applicable, the law should describe and develop regulations for each activity in which they engage.
The first step in the process is to create a complete taxonomy of applicable products and services.
See also: The World’s Best Crypto Policies: How They’re Doing It in 37 Countries
To determine the appropriate rules for each defined product and service, politicians should educate themselves on the nuances of blockchain technology and the various services available to consumers – a net positive from the start.
For example, any effective prudential regulation of crypto must distinguish between security and non-security services.
Security requirements should apply to services that involve holding consumer assets, but for self-secured assets it would be hilariously ineffective and inappropriate. Disclosure and transparency requirements apply broadly, but must ensure that consumers are informed and specific information is provided.
All of this no doubt requires a little effort by legislators to educate themselves. Of course, trying to pass another anti-money laundering bill is much easier.
The views and opinions expressed herein are those of the author and those of Nasdaq, Inc.