Cryptocurrencies are facing an ‘existential moment’ – and time is running out to align on standards
- International crypto regulation is suffering from coordination problems. FTX’s collapse signalled greater urgency is needed to harmonise standards
- The deepening ‘cryptocurrency winter’ has wiped out more than US$2 trillion from digital currency markets globally over the past 12 months
“This is an existential moment,” summit chair Mark Pesce told the conference in his opening remarks.
“The industry that emerges, post-FTX, will not look very much like that which existed pre-FTX. That simply won’t be allowed – both for political reasons, and for financial ones … we’re in for a very rough ride.”
The absence of clear laws has permitted opaque, overleveraged platforms like FTX to morph into pillars of the supposedly-decentralised industry. Now, as their shoddy foundations begin to crumble, they pose a systemic risk to the entire ecosystem.
Adoption of international standards among nations has not only been slow, but highly fragmented.
The intergovernmental Financial Action Task Force’s (FATF) “travel rule” is a case in point. Designed to counter money laundering and terrorist financing in traditional banking, the rule mandates the collection of personal details from the sender and receiver of transactions.
FATF extended the regulation to cover virtual asset service providers in 2019. Yet, as of June this year, the watchdog found only about one-quarter of 53 countries to be fully compliant in enforcing the order on virtual asset platforms.
This situation is of “extreme concern”, FATF officials told delegates at the V20 conference, urging national governments and the industry to do more to uphold standards.
Yet service providers are in a bind. For them, compliance is less a technical challenge and more a question of which rules to follow. Many governments have not implemented FATF guidelines, and even among those that have, divergences remain.
This then gives rise to the “sunrise problem” – if cryptocurrency providers should interact with other providers in different jurisdictions operating under different standards.
There is also a mismatch in terminology between countries, even on foundational concepts, such as distinguishing virtual assets from digital assets.
“We need to have clarification and legal alignment on definitions,” said Loretta Joseph, who has advised several countries on regulating virtual assets as deputy chair of the ADC Global Advisory Group. “With a global standard terminology, we’d have a much better idea of how to proceed.”
Clarifying these terms must be a priority, especially now that other international standards setters, like the Financial Stability Board (FSB), are entering the fray.
FSB officials told the V20 that the FTX crisis has so far not threatened stability in the broader financial system, but cryptocurrency’s growing role means that similar events in the near future could cause a systemic risk.
The FSB put out a consultative document last month, outlining nine recommendations based on the principle “same activity, same risk same regulation”, signalling its intention to apply the same standards used in traditional finance to cryptocurrency. It is currently canvassing feedback and aims to finalise these standards at next year’s G20 summit in New Delhi and begin reviewing implementation worldwide in 2025.
Meanwhile, the International Organisation of Securities Commissions, the global body for securities regulators, also formed a task force for cryptocurrency markets this year, with policy recommendations due at the end of 2023. Its mandate covers protecting investors from loss of assets in events such as the FTX collapse, which has now affected an estimated one million creditors.
Yet if these organisations encounter the same hurdles as FATF, it could be years before guidelines on stability and investor protections are broadly adopted. It’s doubtful the ecosystem will survive that long without proper safeguards.
Time is running out to fix this coordination problem. The longer it is left unresolved, the larger the regulatory gulfs between jurisdictions may become, which will not only hamper the development of the asset class, but leave loopholes for criminals to exploit.
If more drastic action is not taken to change course, the cryptocurrency ecosystem risks becoming a permanent pariah of the financial system and the domain of bad actors, rather than a vehicle for financial inclusion and an engine for economic growth. International regulators, national governments and industry players must work harder to converge the rules for cryptocurrency and salvage this technological revolution while they still can.
Liam Gibson is a freelance journalist and opinion columnist who regularly writes on geopolitics and technology for leading Asian publications.