Crypto regulation had become a priority for many world governments, currently trying to control a technology born in 2008 when Nakamoto published the Bitcoin white paper.
In Short
For analysts, the bitcoin regulation process had its tipping point in 2021.
More and more countries are pronouncing themselves in favor of bitcoin regulation.
Regulate Bitcoin now!
It seems to be the new slogan of governments. The UST and LUNA fiasco was the breaking point. The G7 group, the Bank for International Settlements (BIS), the IMF, and bankers attending the Davos Forum, insist on the need for a bitcoin legal framework.
But this was not always the case. At first, no government was focusing on bitcoin. It was just a smart experiment. The Crypto world moved in parallel to the world of finance, a situation that has been changing and led to greater scrutiny.
In recent years, public interest and bitcoin surge, with a role in the global economy, is why the authorities have stopped considering the sector as a secondary industry. Jacob Farber, general counsel of the R3 consortium, warned about the situation. Farber envisioned that crypto regulation would become increasingly strict according to adoption levels. The expert made his statements considering the significant growth of institutional investments in cryptocurrencies between 2020 and 2021.
A report produced by The Bank for International Settlements (BIS) exposed the bitcoin adoption and its consequences - in the traditional financial environment - of the acceptance of assets issued under the promise of decentralized and unmediated money management.
And it is precisely the popularity of this promise among people worldwide that has set off the alarm bells of most international financial organizations, supervisory bodies, central banks, and governments.
In particular, BIS analysts point to a discourse that most regulators have been repeating for several years, seeing cryptocurrencies as a danger to finance and a focus for the commission of crimes. An argument that underlies a recognized fear of losing control of the global financial system:
The objectives of regulating cryptocurrencies are mainly similar to those of other financial assets and services and fall into three categories: - Fighting funding for illicit activities. - Secure the infrastructure of markets and payment systems. - Fraud protection for consumers and investors.
Bitcoin regulation levels
In early 2019, the South African Reserve Bank published a paper in which it set out its position on the regulation of cryptocurrencies. It set out the main approaches used by regulators, which move between two opposing regulatory stances: regulate or let pass.
Some countries took the lead, such as El Salvador and the Central African Republic, making Bitcoin legal tender in their countries. Others actively ban cryptocurrencies, as happened in China and Turkey. The third batch of countries opts for intermediate nuances.
Jan Lansky of the University of Finance and Administration in Prague, Czech Republic, presented a scoring system to rank government stances on crypto-asset regulation in 2018. Lansky's classification lists countries on a scale ranging from 0 to 5, with level 0 implying ignore and five indicating prohibitions or integration of the technology.
In 2018, when the previous ranking was released, about 150 countries were at level 0, with very few governments engaged in talking about bitcoin. By 2022, the countries in that tier reduced to 61. Some 36 countries were between levels 1 to 4, with their central banks issuing warnings and giving some guidance. Now there are more than 100. In 2018 there was only 11 level 5 nations, currently 19.
The study shows the changes in the regulatory dynamics around crypto in the last three years. The issue was of little interest (level 0) to levels 4 and 5 (maximum interest). Lansky himself made this point when presenting his classification. He forecasted the trend would lead to countries moving upwards in the scale, depending on the adoption level. That's what we see in 2022: a bipolar approach to crypto.
Research from the Thomson Reuters Institute accounts for the shift in regulatory trends. It presents 2021 as an inflection point at which cryptocurrencies ceased to be on the sidelines of the global economy.
" In 2021, digital assets moved from the economy's margins and began to enter the mainstream, leading to more widespread public adoption. Platforms for cryptocurrency trading are growing exponentially, and the sector is covered by mass media, becoming a focus of the everyday conversation." Thomson Reuters Institute
Bitcoin's regulatory difficulties
Hanna Halaburda, a New York University professor and economist, recently reflected on this topic. According to the professor, excessive regulation can kill innovation, but regulators must achieve a balance that promotes efficient markets and consumer safety.
Halaburda explained that, for regulators, the difficulty lies in the fact that developers created the blockchain for Bitcoin. A cryptocurrency, which, he points out, has among its main features "privacy." Bitcoin is a pseudo-anonymous coin but not anonymous, as most authorities say.
For many governments, privacy goes against their interests. Halaburda sees this trait as a weakness for cross-border usage.
" It would be attractive to the providers of those services to say, 'We are compliant, we have the seal of approval from the regulators,' which is a kind of quality signal (...) It allows them to say, 'We are well designed, and we have no malicious intentions, and our code will not benefit us. ". Hanna Halaburda
The economist favors Decentralized Finance regulation in the case of flash lenders because attackers "can borrow several governance tokens, and completely change the trajectory of the protocol, and we have no rules against that."
Supervisory bodies lack trained staff
Applying regulations adds to the problem of the lack of qualified workers and the infrastructure necessary for supervisors to manage such a work burden. The U.S. Securities and Exchange Commission (SEC) chairman, Gary Gensler, admitted that they need more human resources to regulate the cryptocurrency industry. There aren't enough people for the work burden.
The country's Congress is considering a budget request from the SEC, expecting to receive USD 240 million for 2023. "I wish we had more to devote to this" and "we're outspent" were Gensler's words to justify the expense.
The intention is to hire 20 more specialists in the area, to increase the size of its cyber unit to 80, with new investigators and lawyers on the task force. The plan is to be better prepared to establish regulatory guidelines for the sector.
The interest in increasing the staffing of the cyber unit also appears to be driven by Biden's executive order issued last March by U.S. President Joe Biden drafting the federal approach to bitcoin regulation.
Create new laws or use existing ones?
Other dilemmas also arise in the regulatory process. It is essential to consider what lawmakers should do to accommodate bitcoin in their legal framework.
Do they create new laws or use existing ones? The disruptive nature of cryptocurrencies, with different characteristics from other traditional assets, makes it difficult to choose between the two options. In this context, most countries are opting to create new legislation. El Salvador and the Central African Republic are the first to enact bitcoin as legal tender.
The situation is not so clear in other countries that are also debating between creating new laws or modifying existing ones. In the United States, Biden's Executive Order will outline the action taken.
The president ordered the country's federal agencies to assess the risks and opportunities posed by cryptocurrencies. The order sets a 180-day deadline for government agencies to submit their reports on the role cryptocurrencies will play today. There they will decide to create new laws or use the pre-existing ones. The European Union is already working on a new rule for its part.
Cuba began regulating the issuance of licenses to companies wishing to carry out bitcoin exchange activities last April. Corporations must apply for a permit from the Central Bank of Cuba. Panama, Brazil, and Paraguay favor preparing, debating, and approving new laws for their part.
The debate and controversy continue in many territories. It will intensify in the coming months, especially given the significant regulation moves by the world's major economies, mainly the United States, the European Union, and the United Kingdom.