Regulatory Harmonization to Drive Crypto Adoption
By Leon Foong, Head of APAC, Binance
The events in 2022 served to remind us of the importance of regulatory compliance when it comes to protecting users and maximizing user security and trust in the industry. As we move forward and usher in a new chapter of growth for the crypto industry, regulatory harmonization will play a fundamental role in driving adoption, protecting users, and facilitating innovation in the industry.
Regulatory harmonization seeks the convergence of regulatory frameworks, placing a greater emphasis on the global alignment of policies and laws and thus reducing opportunities for regulatory arbitrage. As it stands, the disparities in virtual asset regulations across different jurisdictions is shedding light on the importance of policy harmonization across countries. We’ve seen a disparity in the classification of virtual assets across different countries and this has led to different regulatory bodies taking on the role of prescribing policies for this new asset class that is not bound by traditional market and trading hours.
As the crypto industry continues to evolve at an unprecedented rate, the need for international standardization of crypto policies is becoming more critical. In times when central banks are struggling to pursue policy goals of managing growth while hitting inflation targets, having a resilient global liquidity is critical to curbing market volatility and virtual assets can play a defining role in the rebalancing of global liquidity across asset classes. As of today, the total market cap of crypto is only at USD 1.25 trillion, which is not even half of Apple Inc’s market cap of USD 2.6 trillion. If we had a way to measure the ratio of regulatory scrutiny to market cap, crypto would rank top amongst all asset classes and that is because of the impact that blockchain technology can have on how consumers and businesses interact and exchange money. Apart from identifying and bridging the gaps in regulation for greater transparency, global policy consensus also forms a strong foundational framework for Web3 innovation to prosper.
Reducing regulatory complexity and discrepancy to build trust and transparency
User protection and security continue to be of paramount importance when it comes to crypto regulation. In order to safeguard users from systemic risks and fraud, there should be a collective goal to reduce regulatory complexity and discrepancies across the crypto and blockchain industry. The absence of clear global definitions and constitutions for different classes of digital assets makes it challenging to enforce sanctions and policies across different governmental bodies.
To foster adoption and innovation, regulations should focus on three key components – 1) fiat to crypto 2) custody, and 3) crypto to crypto transactions. For the first piece, traditional financial market regulations and Financial Action Task Force (FATF) guidance is key to ensure transaction reporting obligation and AML/CFT requirements are met. For the second portion, with recent events of certain centralized exchanges collapsing, there is a need for key proof of reserve/solvency and transparency requirements to ensure that user funds are protected. Best practices around security, private key encryption, wallet segregation should also be shared to ensure that exchanges can have operational agility and efficiency while ensuring that user funds are safe. For crypto to crypto transactions, regulators first need to understand how price discovery and fulfillment work in the virtual asset space where both centralized (CEX) and decentralized (DEX) exchanges co-exist. There are differences in settlement and clearing processes across DEXs and CEXs, and smart contracts and liquidity pools can actually replace traditional exchange order books. On-chain vs off-chain and on-exchange vs off-exchange settlement are also issues that need to be considered.
These disparities create uncertainty and confusion within the industry, which translate to more opportunities for malicious actors to worsen the financial integrity. At the same time, it blurs the guidelines for Web3 organizations and renders it more difficult to establish preventive measures for anti-money laundering. The enforcement of cross-sectoral global standards will help to bridge existing gaps in local policies, which will facilitate the creation of a safer, more transparent and trustworthy global crypto ecosystem moving forward. Knowledge sharing and open dialogue between industry players and policy makers will be key to ensuring this happens.
Equalizing opportunities for Web3 growth
As the crypto industry is still in its nascent stage, this is an opportune time to strive towards harmonizing regulatory governance in anticipation of Web3’s growth. Evidently, Web3 is where the future is headed – with irrefutable economic potential and use-case opportunities following the further growth of the industry. To note, Web3 start-up companies in the Asia-Pacific region have raised an estimate of USD 16 billion in August 2022, even in the midst of “crypto winter”. While North America remains the largest Web3 market, Asia-Pacific takes the crown for the fastest growing region in the world. This only serves to reiterate the huge amount of untapped potential for Web3 growth within Asia-Pacific.
At present, the regulatory environment for digital assets in Asia-Pacific is widely different from other regions such as Europe and North America. Some countries have imposed bans on digital assets, and are looking to tighten restrictions surrounding crypto-related activities. Other countries such as Japan are expressing their commitment to develop the Web3 and digital asset economy. Governments and regulators who are setting the groundwork for Web3 investors and entrepreneurs to set base in the country will no doubt witness more significant growth in their Web3 ecosystem, as opposed to countries who are taking a more conservative approach. Through regulatory harmonization and the establishment of consistent market regulations, the playing field is leveled by preventing policies from gatekeeping or impeding on growth.
The key to achieving regulatory harmonization
Following the dawn of the Web3 revolution, we are witnessing more countries step up their regulatory efforts to govern the growth of the industry. This is evident in the way discussions surrounding crypto and blockchain are taking a stand in international forums such as the G-20 Summit. In fact, India is leading the development of a global consensus for policy approach towards digital assets through its G-20 presidency this year. Through these discussions, we can expect to see greater global alignment in regulatory policies, which serves to prime the pathway for more innovation and adoption in the industry.
Be that as it may, regulatory harmonization goes a step beyond coordinating regulatory developments. It also involves an ironclad commitment by key industry players to align and follow through with regulatory policies. Regulators and stakeholders need to make an active effort to quantify what proportionate and systemic regulation looks like and setting the right thresholds. Innovation will always be disruptive but that is never a reason not to embrace it.
On that front, global blockchain trade associations play a critical role in bridging the structural gaps and enhancing communication within the blockchain and crypto space. It provides an important platform for global dialogues and open discussions between regulators and virtual asset service providers to take place. Such opportunities allow for the building of a consensus pool of knowledge and the sharing of best practices for the industry. Through the participation of industry players in the Web3 space, global blockchain trade associations can enable a more inclusive and committed ecosystem. Ultimately, this also builds more trust between Web3 organizations and regulators, which can only open more doors of opportunity for crypto adoption across the markets.
