Ten years in, and crypto is still largely unregulated and uncontrolled in many parts of the world. But over the past couple of years, a growing number of countries have introduced cryptocurrency regulations, with varying degrees of permissiveness and restrictiveness.
These countries include Switzerland, Japan, Lithuania, Malta, and Mexico, which in previous years have passed laws requiring such things as crypto exchanges to be licensed in accordance with KYC (know your customer) and AML (anti-money laundering) guidelines.
However, such initial steps are only the beginning, because in 2020 more governments are set to propose or implement crypto regulation. The EU and G7 are looking into how to regulate stablecoins, while the likes of China and Japan will have laws coming into effect next year that should ultimately help foster the adoption of digital currencies.
Regulation = Restriction
“More and stricter regulation is a racing certainty,” says Gary McFarlane, a cryptocurrency analyst at UK investment platform interactive investor.
“Governments will remain divided between and within countries as to where to place the line regarding the balance between fostering innovation and killing it, with Libra likely pushing major OECD (The Organisation for Economic Co-operation and Development) countries towards stricter enforcement,” he tells Cryptonews.com.
“But, given we live in a global economy, there will be jurisdictions looking to carve out a competitive advantage through more crypto-friendly offerings.”
Nations such as China, Turkey, Hong Kong and Thailand are planning their own central bank digital currencies (CBDCs). At the same time, there has been a regulatory pushback in the United States and the European Union against Facebook‘s planned Libra stablecoin.
Together, these two developments imply stricter and more restrictive regulation, since governments and central banks operating their own digital currencies will want to make it difficult for potential rivals (e.g. Facebook) to outcompete them.
For instance, congresswoman Sylvia Garcia introduced a bill in November that would see all stablecoins being classified as securities, requiring them to be registered with the U.S. Securities and Exchange Commission (SEC). Meanwhile, the G7 group of nations outlined the need for stablecoin regulation in a report published in October, implying that guidelines or laws may be produced next year that would limit how cryptocurrencies such as Libra operate.
Regulation = Cultivation
Fortunately, the flip side of increased government interest in crypto will be the introduction of more constructive and nurturing laws, at least in some nations.
“I am expecting an overall positive wave in terms of regulations all around the globe,” predicts Kunal Barchha, the CEO of India-based crypto-exchange CoinRecoil, despite he previously expected that the Indian government will ban cryptocurrencies.
“The first phase was of rejection, second was of criticism, and finally, governments all around the world have understood that they will lose a lot more if they keep the same attitude.”
Support for this positive outlook can be found in various countries. For one, the Chinese government passed a cryptography law in October that will come in effect from January 1 and which establishes government support for the “development of the cryptography business” in China.
Likewise, Japan passed a bill in May that will reinforce its existing cryptocurrency laws from April of next year. Most notably, the new law will place limits on margin trading in order to decrease investor risk, while also broadening the definition of virtual currencies to “crypto assets,” thereby further increasing protections for consumers.
Other nations have also focused on positive regulations that should encourage more people to get involved in crypto. Back in March 2019, the Swiss Parliament voted to submit new laws on cryptocurrencies for consultation, a process which this year is likely to result in crypto exchanges, currencies and platforms being incorporated within existing Swiss financial legislation.
“Regulation should be permissive of crypto, which will help bring certainty and credibility to the industry, resulting in more investment and more players entering the space,” predicts Iqbal V. Gandham, the managing director of eToro UK.
The Fifth Anti-Money Laundering Directive
One big regulatory development coming next year is the introduction of the 5th Anti-Money Laundering Directive. As Iqbal V. Gandham explains, this will require some significant changes for EU-based cryptocurrency transmitters.
“For firms buying and selling cryptoassets, the 5th Anti-Money Laundering Directive (5AMLD), being introduced on January 10th, will require them to register with [national financial regulators],” he tells Cryptonews.com. “It also states minimum requirements for AML processes, similar to what we see with traditional asset classes.”
Because the 5AMLD requires crypto-related firms to register with their national regulators and comply with a variety of AML guidelines, it’s likely that some firms may struggle to adjust to the new regulatory environment.
“Certain small and medium companies may have problems with compliance because of the associated cost,” Gandham says.
“There is a lack of knowledge of crypto compliance and governance, so finding, recruiting and hiring these people may be a challenge for smaller firms. Bigger companies by and large will likely have the necessary procedures and processes already in place needed for crypto from working with other asset classes.”
In other words, the arrival of tighter regulations may have the industry-wide effect of clearing away a proportion of smaller companies and leaving the larger firms to claim more of the cryptocurrency pie for themselves.
Regulation beyond 2020
And how will cryptocurrency regulation look by the end of the decade? Most experts believe that a permanent framework will have stabilised by the time the 2020s end.
“Technology is moving very quickly and will reach a stability point along the innovation curve – definitely before the end of the next decade,” suggests Iqbal Gandham. “It’s at this point that we’ll know pretty much what the crypto industry will look like as an investment asset and this includes how it’ll be regulated. I expect by the end of the next decade, crypto regulation will be talked about like any other asset class.”
Kunal Barchha agrees.
“I see 2020 as the start of a regulatory revolution for cryptocurrencies,” he says.
“Like any other new regulation, crypto law will also face criticism, opposition, and arguments from the community. A lot of representation will be made to the government to make amendments, but in the end things should settle down.”