Regulators from Europe to Asia stepped up their efforts in 2023 to establish official regulations pertaining to digital currencies, but the United States pursued some of the most severe legal measures against significant participants in the market.
In a year that saw prominent lawsuits against five cryptocurrency companies by the Securities and Exchange Commission, the cryptocurrency industry heavyweight Binance being ordered to pay more than $4 billion to U.S. authorities, and the guilty plea of its former CEO, regulators abroad have been equally busy enacting new laws and advocating for more to curb the bad actors in the space.
Here is the current status of cryptocurrency regulation and enforcement worldwide in 2023, along with an outlook for 2024.
U.S. ranks first in the world for enforcement
As authorities sought to combat unethical behavior in the sector after Sam Bankman-Fried’s crypto empire collapsed, including his FTX exchange and sister company Alameda Research, the United States has shown itself to be among the most active enforcers of penalties and legal action against cryptocurrency companies this year.
Renato Mariotti, a former prosecutor in the Securities and Commodities Fraud Section of the U.S. Justice Department, clarified that enforcement was required in certain circumstances, such as FTX. However, the U.S. “regulation by enforcement” strategy has resulted in dubious enforcement proceedings against market participants who are more concerned with compliance.
The United States is the only nation that has actively taken action against major cryptocurrency companies and projects, despite the fact that many other regions have approved legislation with potentially harsh penalties. To date, the United States has spearheaded the enforcement campaign against cryptocurrency companies and has been the most punitive regulator in terms of fines and penalties.
Other countries have established a thorough regulatory structure. Mariotti told, they don’t. As a result, issues that need to be resolved by legislation or regulation are instead sued.
In fact, the SEC, the Commodity Futures Trading Commission, the Department of Justice, and Treasury’s Financial Crimes Enforcement Network (FinCen) have collaborated to police the industry in the absence of strict regulations from Capitol Hill, resembling a patchwork approach to regulation-by-enforcement.
Regarding the regulation of digital assets and cryptocurrencies, the SEC, CFTC, and Congress have been among the most aggressive enforcement bodies in the world, according to Richard Levin, a partner at Nelson Mullins Riley & Scarborough, who has defended clients before these organizations.
With 30 years of experience in the fintech space, Levin noted that these authorities have given the industry direction on how digital assets and cryptocurrencies must be marketed and sold, traded, and held by custodians. Still, Levin added, a large portion of their work has entailed directing the business through enforcement proceedings.
Over $2 billion in intentional financial losses to investors worldwide have been the subject of cryptocurrency fraud charges prosecuted by Justice’s Market Integrity and Major Frauds Unit since 2019.
It is reported that roughly half of all cases in 2023 involved activity connected to digital asset commodities in its annual report that summarized enforcement proceedings. SEC noted that 2023 was a significant year in terms of the enforcement of laws pertaining to “crypto-related misconduct, including fraud schemes, unregistered crypto assets and platforms, and illegal celebrity touting.” The SEC has filed more than 200 lawsuits pertaining to cyber enforcement and cryptocurrency assets since 2014.
In two lawsuits filed in the first half of the year, the SEC accused Binance and Coinbase of engaging in unlawful securities dealing, setting up the most rigorous cases of the year.
The SEC primarily claims that at least 13 cryptocurrency assets that are offered to Coinbase users, such as Protocol Labs’ filecoin, Cardano’s ada, and Solana’s sol, ought to be regarded as securities and be subject to stringent disclosure and transparency laws.
In Binance’s instance, the SEC took additional action. The business and its co-founder and CEO, Changpeng Zhao, were charged with violating securities laws in addition to combining client assets with company funds.
In terms of criminal enforcement, the Southern District of New York U.S. Attorney Damian Williams has been spearheading some of the Justice Department’s most prominent crypto prosecutions, including as the month-long trial of the disgraced FTX founder, Bankman-Fried. After several hours of deliberation, a jury in November convicted the former CEO of FTX guilty of all seven criminal allegations against him.
However, cryptocurrency businesses have started to retaliate; some have even threatened to leave the United States completely if this pattern of enforced police persists.
Brian Armstrong, the CEO of Coinbase, criticized the SEC’s moves against the exchange and hinted that the business would have to relocate its headquarters abroad. Although Armstrong eventually backtracked on his promise to relocate overseas, Coinbase and other significant cryptocurrency companies have started to increase their investments in their global operations.
Nevertheless, players in the cryptocurrency market are hoping that a wave of legal challenges to cryptocurrency businesses in 2023 will result in new legislation that will provide certainty.
Alyse Killeen, managing partner of Stillmark Capital, told that more people are participating in the bitcoin market because of the sense of legitimacy and security that clearer regulatory frameworks and the worldwide authorities’ stance have given.
With one of the rival measures on digital assets passing several House committees for the first time, the crypto sector experienced the most legislative progress on crypto regulations in the United States this year.
There is currently no legislation in the US that is explicitly geared toward the cryptocurrency industry, despite efforts by lawmakers to pass such legislation. It’s doubtful that much progress will be made in a year when there is a presidential election and a divided federal government, according to Levin of Nelson Mullins Riley & Scarborough.
He contends that recurring criticisms of U.S. regulators for failing to offer industry direction are baseless, especially in the absence of legislative regulations on cryptocurrencies. Levin claims that when it comes to the regulation of digital assets and cryptocurrencies, the SEC, CFTC, and FinCEN frequently offer informal recommendations.
In fact, the SEC went so far as to offer a framework for analyzing cryptocurrencies and digital assets. Additionally, according to Levin, the SEC developed a fictitious digital asset called Hosey Coin that offered guidance to the FinTech community on how not to introduce a digital asset.
Killeen of Stillmark Capital believes that in 2024, regulators won’t grow weary of cryptocurrency, despite its recent decline in popularity. Cryptocurrency values, including those of bitcoin and ether, have surged substantially in the same year that two of the industry’s top executives were sentenced to prison.
The price of Coinbase’s shares has increased by more than 400% since the year began. The prices of ether and bitcoin, however, have nearly doubled. That’s because investors believe the SEC’s approval of a bitcoin exchange-traded fund could happen soon.
Europe
With the intention of controlling the “Wild West” of the cryptocurrency business, the European Union appears prepared to implement its Markets in Crypto-Assets regulation fully beginning in the upcoming year.
The law was first presented in 2019 in reaction to Meta’s digital currency project Diem, which was once known as Libra. Its goal was to eradicate bad actors in the industry more generally and clean up fraud, money laundering, and other forms of illicit financing in the crypto realm.
Additionally, it aimed to address a perceived danger posed by “stablecoins,” which are blockchain-based currencies backed by private businesses that function as a stand-in for government money. In essence, stablecoins are digital currencies whose value is based on fiat currencies, such as the US dollar.
While tether and Circle’s USDC aren’t thought to be “systemic” assets that may upset the financial system, some EU central bankers believe that a private stablecoin from a major corporation like Meta, Visa, or Mastercard could be more dangerous and could even undermine sovereign currencies.
In order to combat threats, especially those pertaining to the potential undermining of the euro, a portion of the EU’s cryptocurrency framework prohibits issuers from minting stablecoins backed by currencies other than the euro, such as the U.S. dollar, once they reach a threshold of more than one million transactions per day.
With the Markets in Crypto-Assets Regulation (MiCA), the European Union is paving the way for a uniform regulatory framework for cryptocurrencies in the meantime.
MiCA was ratified this year by the EU’s three major political institutions, making the regulation a law. Although MiCA went into effect in June 2023, it won’t be fully implemented until December 2024.
Companies are already preparing to take advantage of the new rules, with Coinbase applying for a universal MiCA license in Ireland. If and when it is accepted, Coinbase will be able to “passport” its services into nations like as Germany, France, Italy, and the Netherlands.
The impression of the United States as a regulator of the cryptocurrency business “may be diminishing,” according to Braden Perry, a former federal enforcement attorney and current partner at the law firm Kennyhertz Perry. This is because other governments have stepped in with clearer regulations.
This impression is a result of the proactive steps made by US regulatory agencies such as the IRS, CFTC, and SEC, particularly in tackling fraud and security concerns in the cryptocurrency space. According to him, prominent judicial cases in the US further solidify the country’s reputation as a severe enforcer.
Perry pointed out that other areas, such as Singapore, Dubai, Hong Kong, and the European Union, are also creating strong regulatory frameworks. These locations have important and occasionally strict regulatory processes, even though they might not be as well-known in international media for enforcement activities.
However, individual European nations haven’t been sitting back while the EU as a whole has been rushing to enact new crypto regulations.
With the prospect of tax breaks on cryptocurrency revenues and an easier registration procedure for digital asset businesses, France has been luring traders and cryptocurrency enterprises to its borders.
According to a statement released by the regulator in August, the Financial Markets Authority, or AMF, in France, plans to modify the registration requirements for cryptocurrency enterprises with effect from January 1, 2024, in order to better match with MiCA.
Authorities in France have been wary of fraudulent conduct involving different cryptocurrency participants at the same time. 22 bogus websites, some of which promote cryptocurrency and derivatives tied to it, were added by French regulators in September to a list of unapproved foreign exchange providers.
In the meantime, as part of a larger initiative to foster openness and confidence in the cryptocurrency sector, Germany’s financial watchdog Bafin has stated that it wishes to quicken the licensing process for cryptocurrency custody services.
A rule allowing authorities to monitor stablecoins was enacted in June in the United Kingdom, which is not a part of the European Union. However, as of right now, crypto has no set regulations.
In response to a consultation on new cryptocurrency regulations, the U.K. Treasury Department stated earlier this year that it intends to include a variety of cryptocurrency-related operations, such as crypto lending and custody, within the country’s current financial services company legislation.
Asia
Stablecoin regulations were finalized earlier this year by the Monetary Authority of Singapore, one of the first jurisdictions in the world to do so. Singapore is known for having transparent fintech and cryptocurrency policies that do not rely primarily on enforcement measures.
The demise of Three Arrows Capital, or 3AC, and the contentious algorithmic stablecoin TerraUSD in 2022 had a lasting impression on Singapore. The corporate headquarters of 3AC and Terra, the firm that created Terra, were located in Singapore.
The new framework in Singapore mandates that stablecoin issuers back their coins with highly liquid, low-risk assets that must always equal or surpass the value of tokens in circulation, return the digital currency’s par value to holders within five business days of a redemption request, and notify users of the audit results of their reserves.
In the meanwhile, stablecoins are the subject of a public survey in Hong Kong, which plans to enact legislation the following year. Even while China has been actively opposing cryptocurrencies, with a ban on bitcoin mining and trading going into effect in 2021, the region has been growing more accepting of crypto assets.
Earlier this year, the Hong Kong Securities and Futures Commission, or SFC, established a registration system for companies that deal in digital assets. The system includes explicit rules for cryptocurrency exchanges and funds.
Only OSL Digital and Hash Blockchain have received licenses thus far.
The Middle East and Africa
Because of its absence of personal income tax, flexible visa regulations, and attractive incentives for overseas enterprises and workers, the United Arab Emirates has emerged as a favored site for the fintech sector more widely.
UAE’s most populous city, Dubai, established the Virtual Asset Regulatory Authority (VARA) in 2022 in an attempt to spearhead the virtual assets industry in the Middle East and Africa.
According to Perry, the UAE and Dubai have made it easier for companies involved in crypto trading by providing dedicated zones and regulations.
Dubai led the way when it introduced a blockchain strategy in 2016, highlighting that UAE officials were early adopters of cryptocurrencies. The UAE regulators have continued to lead the industry ever since. The UAE established further federal crypto legislation earlier this year to facilitate the oversight of the industry and the operation of economic-free zones by authorities such as VARA.
