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Crypto assets and democratized currencies have long eluded government regulation throughout the world, but that time may be coming to an end as both US and UK lawmakers have taken steps towards regulation and oversight.
Parliament in the UK recently voted in favor of recognizing all crypto assets as regulated financial instruments. This move portends far greater regulation and scrutiny for the digital asset industry as the sweeping statements and changes to regulation aim to treat any crypto assets, including stablecoins, like any other form of financial assets, bringing them primarily within the scope of the Financial Conduct Authority. However, Parliament also indicated that the Treasury may also work with other regulators, including the Bank of England and the Payment Systems Regulator.
This new approach, while somewhat expected, is set to shape the global future of the crypto asset industry. If the legislation is passed, all crypto assets will soon be required to be registered before they are offered in the UK, which will bring the companies dealing in these “securities” under the purview of the regulators. Any crypto assets not registered will now be under regulatory scrutiny and ripe for prosecution against the offering of any of these unregistered assets.
The action by Parliament follows the introduction of similar legislation in the US Congress with the Lummis-Gillibrand Responsible Financial Innovation Act. If passed, this legislation would classify crypto assets as commodities and place them under the primary jurisdiction of the Commodity Futures Trading Commission (CFTC).
However, the jurisdiction of the CFTC is not exclusive. Crypto assets which meet the definition of a “security” will also fall under the rules of the SEC. Recently, SEC Chairman Gary Gensler made headlines stating that he believes almost all crypto currencies in the US will be considered securities and subject to regulation under the SEC’s jurisdiction. Gensler’s Commission has filed numerous enforcement cases in 2022 alleging various crypto assets are “securities” indicating that he is unwilling to concede jurisdiction to the CFTC, despite the headwinds created by Lummis-Gillibrand.
What does this mean for the crypto asset industry?
The crypto assets industry can expect big changes to regulation in the coming year. With multiple agencies and authorities involved in US and UK regulation, crypto managers will see an overload of regulation in 2023. Looking into 2024, these regulations will naturally result in more enforcement actions against issues, dealers and managers.
No doubt, regulation in other jurisdictions will follow the lead taken by the US and the UK government. However, we can expect to see more managers and investors trend towards crypto assets as regulation becomes more commonplace and predictable. Although regulation can increase compliance costs, it can also drive investment when the unknown becomes known. These rules aim to significantly help provide protection for investors and prevent fraudulent activity in the crypto asset industry resulting in positive change to build a more robust trading environment.
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