If you ask executives and investors in the blockchain and cryptocurrency industries to describe the current state of regulation, you’d hear things like “desperately needed” and “way overdue.”
Given one word, Caroline Malcolm, head of international public policy at blockchain data firm Chainalysis, chose “emerging,” although she did agree that “inconsistent” was also a good choice.
Both of these choices are a lot more understanding of the issues regulators and the elected officials above them are going through when it comes to creating a broad and consistent regulatory framework under which crypto can thrive.
That makes sense, given that Malcolm has spent eight years at the Organization for Economic Co-operation and Development (OECD), most recently as the founding head of its Global Blockchain Policy Centre.
“One of the things that makes crypto so interesting from a policy perspective is that it doesn’t necessarily fit really neatly into those categories that we’ve had in the past,” Malcolm told PYMNTS’ Karen Webster. “So, I can certainly understand from a policymaker’s or regulator’s perspective, why there’s not a rush to put hard boundaries around these things.”
Moving Fast, Moving Slow
For one thing, she said, crypto is a very fast-moving space. The initial coin offerings, or ICOs, that were a huge part of focus of regulators in the U.S. and elsewhere just five years ago are barely heard of today, while the non-fungible tokens (NFTs) that hold art, music and video content turned into a mainstream phenomenon were barely known even within the industry as little as 18 months ago.
“Things are evolving, and regulators are needing to learn and understand where things are going as well as trying set a framework that will last,” she said. “You know, we can’t be changing regulations every five minutes.”
That means legislators must develop a future-ready regulatory “framework that’s flexible enough to prepare for the issues that are coming on new developments in the ecosystem” while also giving industry and innovators the clarity they need to thrive, Malcolm added.
Related: Bank of England Calls for Tougher Crypto Rules
“This is where a principle-based approach can be really useful from both a regulator perspective and an industry perspective,” she said.
That doesn’t mean there won’t be some “very clear, bright lines” around issues like money laundering and tax reporting. But when an industry is as fast-moving as crypto despite being “really only at the beginning of its growth,” Malcolm said, a principle-based approach can be very useful.
Two other priorities that seem to be emerging are “consumer protection, particularly advertising and promotion, and secondly, around market integrity,” notably but not exclusively market manipulation, she added. As 2022 rolls on, Malcolm predicted that the environmental impact of crypto and the disclosure of those issues to investors will also be in focus.
Making It Work
Besides, in many cases, regulators and elected officials simply need time to figure out how the industry works so that they can come up with the best way to make the existing rules fit the industry’s contours.
“In most cases, it’s a matter not of providing new rules, new laws, but providing guidance about how those rules apply into this space,” she said.
In crypto’s case, the big exception to that seems to be regulating decentralized finance, or DeFi, which resides in a part of the market where enforcement is built around having some central person responsible for the workings of the platform.
In DeFi, which in theory has no person in any position of authority, that’s more challenging, Malcolm said. “What regulators are really focusing on in the DeFi space right now is understanding how different decentralized DeFi platforms actually are.”
See more: Bank for International Settlements Calls DeFi’s Decentralization an Illusion
Internationally Inconsistent
One thing that is not likely to happen, she said, is a broad global regulatory framework.
One reason crypto rules remain unfinished is that many countries are still figuring out what their approach to crypto should be.
“There’s no question that certain countries have decided that crypto is part of their economic future as part of their digitalization technology, innovation strategies,” Malcolm said. “Other countries have chosen to focus elsewhere.”
That’s why no one regulatory framework will fit every country, she said.
Other than anti-money laundering (AML) and taxes, where international consistency is important and growing, “The reality is that policy makers and regulators are still grappling with the very fast emerging and continuously changing nature of crypto.”
Beyond that, she said, different countries have different focuses and priorities — India, for instance, has banned crypto payments, while Japan and Switzerland have taken a largely self-regulatory approach to DeFi.
But, Malcolm added, the idea of a single set of international agreed-upon rules is “not realistic.”
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