2023 was a milestone year for crypto, with major jurisdictions such as the EU and UK moving ahead in tightening regulatory frameworks. ‘Crypto regulation’ itself is somewhat of an oxymoron. Although built on the principle of peer-to-peer transfer, the market has gradually moved away from its purist origins as regulators seek greater oversight.
Different jurisdictions are moving at different paces of reform. The EU is leading the charge, passing its landmark Markets in Crypto Assets (MiCA) regulation last summer. The UK has taken a more phased approach and is set to publish a new regulatory regime this year following its consultation period, which ended in February 2024. Progress in the US has been much slower, where the SEC has largely governed through enforcement action and remains locked in horns with the CFTC.
While it remains to be seen exactly what new regulation may look like and how it will be enforced, it’s inevitable that the future of crypto lies within far more regulated and supervised parameters.
As industry players seek to navigate this transition in 2024, here are three key trends set to play a central role in shaping the regulatory landscape:
Crypto firms will seek regulatory expertise
Traditional and decentralised finance is becoming more intertwined, recently highlighted by the Bitcoin ETF approval in the US. As the gap narrows, we can expect increased hiring in crypto firms seeking financial regulation experience to ensure they’re ahead of the compliance.
USDC issuer, Circle, for example, bought in Heath Tarbet, former CFTC Chairman, as Chief Legal Officer last July to take the reins on regulatory affairs.
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As regulators continue to ramp up market pressure, crypto firms are likely to prioritise hiring individuals from traditional finance (TradFi) and regulatory sectors to avoid fines and penalties resulting from non-compliance with new requirements. The aggressive stance taken by regulators against the crypto market underscores the substantial risks involved. For instance, the SEC issued an estimated $5 billion in penalties against crypto firms for a range of offenses between October 2022 and September 2023 alone – including breaches of AML regulations and offering unregistered securities.
To navigate these challenges, crypto companies will increasingly seek expertise in TradFi and legal fields to ensure compliance with evolving regulatory demands.
New technology requires new regulation
Grappling over the definition of cryptocurrencies as ‘securities’ or ‘commodities’ isn’t sustainable and won’t help make the crypto market safer in the long run.
For regulation to be effective in promoting a sustainable future for crypto, regulators themselves will need to understand the complexities of the crypto market and seek rigorous feedback from market participants on any new proposals.
While cryptocurrencies are all part of the same group, they behave differently. This means that regulating the entire ecosystem under a single umbrella framework will only create further friction between regulators and market participants down the road.
Stablecoins and cryptocurrencies, for example, perform different functions within the crypto ecosystem and therefore require different regulatory regimes. Bitcoin and Ethereum, despite being the most popular cryptocurrencies by market cap, have some fundamental differences, with the latter also providing a decentralised platform for creating and implementing smart contracts and DeFi apps (dApps).
It’s not to say that every cryptocurrency requires its own regulation. Rather, any new regulations should be tailored to the unique attributes of the crypto market and consider crypto’s various purposes and use cases.
Electoral uncertainty to slow pace of regulatory reform
2024 will be the biggest year in election history, with countries making up over 60% of the world’s economic output set to hold elections.
With elections comes uncertainty, and in times of uncertainty, the pace of any regulatory or legislative reform slows down.
Take the UK, for example. Prime Minister Sunak has historically positioned the country as “open to business” and has been a vocal crypto and blockchain advocate. His government has been behind major stablecoin provisions such as those in the Financial Services and Markets Act, but with polls suggesting a change at Downing Street, regulators may prefer to delay the publication of any new framework until after the next general election.
The US finds itself in a similar situation. The House Financial Services Committee passed a landmark bill aiming to develop a regulatory framework for crypto in July, but its progress through Congress will likely be slowed as mounting focus is diverted towards the presidential election.
What next?
Regulation will be a force for good in the crypto market, providing greater trust, transparency, and consumer protection. However, it won’t be a panacea.
The implementation of new rules and frameworks is a long process that won’t happen in one ‘big bang’ moment. While 2024 will see this transition continue, we should not expect sweeping reform.
Duncan Ash is Head of Strategy at blockchain protection firm Coincover
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