By Stephane Leloup, Head of Compliance, Europe, at Banxa
“Regulation will hamper innovation,” declares the pointy end of the cryptoverse. “Businesses will self-regulate,” they add in an outraged chorus. The jaded, cynical souls who have been in the blockchain industry for years have heard the refrain before. As this grumbling continues—in some circles, at least—the industry needs to take a step back and ponder upon the positive impact from regulations. The time is nigh indeed, seeing how the EU’s Markets in Crypto-Assets (MiCA) regulations are shaping up to come into effect in the near future, forcing the cryptoverse to live up to higher standards for customer protection (and that’s no easy task!).
After the 2018 ICO boom in all of its fraud-rich glory, the phrase “Wild West” was thrown around hundreds of articles about cryptocurrencies. It’s a catchy metaphor crypto opponents leverage to play up the lawlessness angle, painting a picture of bandits waiting behind every corner and not a single sheriff in sight. Fans interpret the phrase differently, dreaming of a new frontier where modern pioneers can build the infrastructure of the future.
But the market has changed quite a bit since 2018. As more and more institutional money floods into the crypto ecosystem, the big players are getting their skin and cash in the game. And money has a tendency to change people’s minds.
For a crypto sector that has grown into an entire industry, regulation and compliance have evolved from boogeyman to key selling point. The reason for that is quite simple: The first question a crypto company hears when approaching a prospective partner among major financial institutions is about its AML. The first hurdle the relationship hits is always in the institution’s Risk and Compliance department.
So now, suddenly, every crypto startup claims (and I am not commenting on whether it’s true or not) to be regulation-ready, AML compliant, and a good citizen seeking to play by the book. They better be, given the amount of scrutiny they are or will be in for from both the regulators and prospective partners, even before the first meetings—even their Twitter feeds and Facebook posts may be studied under a microscope. The best thing they can do is make sure they can quickly present solid evidence proving their business processes and practices are indeed thorough and legitimate.
In terms of regulatory frameworks, we have multiple national regimes and registration processes to navigate, but now we understand we are better off preparing for the sheriff's arrival rather than building barricades on the road he’s on.
The common good for crypto
For users, smart and fleshed-out rules would mean more confidence and security. Look at the stablecoins industry, for example, with a tidal market cap of about $130 billion, and their whole value proposition lies in the stability of their exchange rate for a given asset. So why shouldn’t there be a transparency standard for the underlying mechanisms of this stability? Wouldn’t they give traders and investors using stablecoins more peace of mind?
It appears that protection of customers (or investors, as some would say) becomes the focus for regulators. Market abuse prevention will be hopefully addressed by MiCA, but in the meantime, we anticipate that until it is fully adopted, the uncertainties on market manipulation in the crypto space will continue to be a big showstopper for some investors, even though others will benefit from it.
As for our larger ecosystem, where even basic transparency and accountability rules would go a long way. Would formal standards have made it more difficult for scammers to steal people’s money in 2017? I am not talking about a silver bullet here, scammers gonna scam, that’s sort of their thing, but would it have been harder for them? Yes, it would. The same goes for rules on multi-signature designs that would have prevented some of the rug pulls—scams where the lead developer runs off with the money in the project’s stash, enabled by having only one person in control of the smart contracts powering the project.
Now, for the money part. Venture capital companies are regulated, and making crypto tech regulated too could make them even more willing to invest in the field. It would also bring in more cash from other interested institutions, and guess what? More money means more innovation, with more developers working on more projects competing for a piece of the pie. And this competition will be waged along more lines than before.
Regulation fosters innovation
Regulation will only foster innovation, because it adds another dimension to the competition between rival projects, protocols, blockchains, and other industry players. With a formal rulebook to follow, they will no longer just need to deliver a cool product, but one that lives up to the standards and can be audited in line with those. After all, there are dozens of heavily-regulated industries, from vehicles to pharma and chemistry, but there is little evidence to make the case that regulation killed off innovation in any of those.
In a scenario where the prevalent approach is currently incapable of accommodating a specific rule—like DEXs being asked to collect and report transaction data the same way CEXs do—”currently” is the key word. When there’s a strong incentive to solve a problem, people will go ahead and solve it, which will boost their product in the market. At the same time, those who don’t move fast enough will gravitate toward marginalization, giving them an incentive to step up their efforts too.
Both private and institutional players want the certainty that comes with regulations and household names, just look at the proportion of Americans looking to trade crypto through banks, well-known and well-regulated entities. Their increasing involvement would only accelerate mainstream adoption of crypto. On the other end, more regulation would also make banks more willing to offer crypto companies access to the same financial tools as other companies.
With more and more players joining the cryptoverse, a full ban on crypto is off the charts in most of the world. Regulators seem to have accepted the fact that virtual assets are here to stay, and therefore, supervisory bodies have shifted their efforts from a pure ban to the development of a regulatory framework. Of course, China’s recent crypto ban may point to the contrary, but who can predict what stance China will take in six months or a year? Regulation will only incentivize more transparency, accountability, and innovation in the ecosystem. Even though regulations are always playing catch-up in any field with enough room for innovation, the skeptics saying they will slow things down too much will be proven wrong.
About the Author
Stephane Leloup is the Head of Compliance for Europe at Banxa, an internationally-compliant fiat-crypto gateway. A seasoned expert on crypto and fintech regulations, Stephane also worked as the Head of Compliance for the Luxembourg Stock exchange and Chief Compliance Officer for Bitstamp.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.