The year 2023 saw a sharp increase in attention to the regulation of digital assets. Many legal frameworks have been proposed for consideration across the world to strengthen the safety and integrity of this industry. The adoption of MiCA by the EU is undoubtedly the most notable case.
And yet, even though many countries have realized the importance of rules in creating a safe cryptocurrency market, we are still far from broader adoption of digital assets.
why is this the case? Let’s take a closer look.
The current state of European regulations: what impact does it have on crypto adoption?
Much of the regulation of cryptocurrencies is still in the development stage because this market is very dynamic. Many of its various sub-areas are not yet understood well enough by regulators to develop clear laws. Additionally, having clear rules means that different countries must have a uniform approach to managing crypto assets.
In the European Union, these issues are expected to be resolved through the introduction of the MiCA (Markets in Crypto Assets) framework, which will come into force in 2024. Its implementation will help strengthen the integration of crypto with traditional finance because MICA will maintain transparency and global rules. in various areas of the crypto industry. This will include marketing, portfolio management, user verification, token issuance, stablecoins, etc.
The introduction of a unified authorization system across all EU countries through MiCA means that crypto projects will no longer need multiple licenses for different jurisdictions in this region. Meanwhile, TradFi players can see if a crypto company has passed a regulatory check with the only authority everyone recognizes. This means that dealing with CASPs will involve less risk, leading to greater crypto adoption.
Challenges continue to hinder adoption despite regulatory progress
As promising as MiCA is, strengthening regulation also has its nuances. While the framework aims to address issues like money laundering and user protection, it also seeks to integrate everything crypto-related into a centralized format. This type of regulation will mainly have a beneficial effect on large market players. For decentralized services and small-scale players, this can become a problem.
Let’s look at decentralized exchanges (DEX) for example. As things currently stand, no particular KYC/AML procedure needs to be followed. But in the future, with this approach of regulators, all decentralized services that interact with EU citizens will be subject to new requirements. Such a transition will be very abrupt and probably painful for these actors.
Another important issue is the implementation of the travel rule for crypto assets. This means that when carrying out transactions, a payment service must identify its customers and the recipients. In the TradFi sector, this system aims to combat illicit financial activities.
To implement the same measures in the crypto industry, European regulatory bodies must first develop the necessary mechanisms and software. Clear guidance on how crypto companies should fit into such a system will also need to be published. However, for now, this all remains theoretical. There is no blanket solution as to how this would work in practice.
Regulatory and operational frameworks: a symbiotic approach is necessary
In the crypto industry, there are often divergent views regarding the role of regulation. Some argue that an excessive focus on rules can stifle innovation and hinder the growth of this sector, advocating instead for more practical developments. On the other hand, proponents of regulation believe that better rules are essential for market stability and establishing overall trust in cryptocurrencies.
Personally, I think both directions are necessary. Having a comprehensive set of regulations would also give rise to practical applications. Mainly because different countries would be able to develop technological solutions in a compatible manner. And to create such an environment, policymakers must work in tandem with the crypto companies that are directly creating this environment.
This can be done in several ways. Public consultations on the implementation of new rules are standard practice among UK regulators. Another solution is to partner with exchanges and other PSAPs. Create hubs and working groups and invite experts from leading crypto companies to work together.
Take Hong Kong as an example: earlier this year, the local regulator encouraged commercial banks to provide services to licensed crypto companies and meet their business needs. This type of attitude is currently pushing Hong Kong to become one of the largest crypto hubs. It’s not exactly easy to operate in this jurisdiction, but the willingness of regulators to engage with crypto still makes it very attractive to many parties. Perhaps this is something other countries could strive to follow.
The horizon still remains distant because other considerations must be taken into account
As countries around the world work to regulate cryptocurrencies, achieving widespread adoption remains a distant goal for several valid reasons. The crypto industry is large and complex, making it difficult to establish rules that apply to all participants. Most jurisdictions end up prioritizing regulation within their own borders. This way, they can tailor their practices to their unique situation and needs.
It is important to strike a balance between creating consistent rules and introducing operational frameworks that enable businesses to operate better within them. This is the only way to approach an ecosystem by encouraging innovation while maintaining the necessary safeguards. Once such an ecosystem is in place, crypto adoption will become much smoother.