Regulating cryptocurrency: should it be regulated? Who should do it? Is crypto banning a possibility?
The advantages of cryptocurrencies over traditional financial instruments like cash is a hotly debated topic. In fact, its decentralized nature is central to any discussion of its value proposition. Permissionless public blockchain networks, which underpin many of the largest cryptocurrencies by market capitalization, remove middlemen such as government, banks and other financial institutions from transactions, eliminating dependency and the need of confidence in the systems they operate. Decentralization is at the heart of the spirit of cryptography; some would even go so far as to say that crypto culture is rebellious and anti-establishment1.
It is therefore not surprising that the idea of regulating the cryptocurrency ecosystem can be controversial. However, from an investor perspective, there are benefits to regulating such a nascent and volatile market to detect fraudulent activity and ensure accountability. The crypto world is often referred to as the “Wild West”, named after the chairman of the United States Securities and Exchange Commission (SEC), Gary Gensler, due to its instability, lack of regulatory oversight, and many risks.2.
As the FTX collapse culminated in a dramatic 2022 for the crypto market, what lies ahead for the future of cryptocurrency? Should governments and institutions leave the sector as it is, seek to regulate it, or – if that is even possible – ban it altogether? This is a particularly relevant question today, given how quickly the market capitalization of cryptocurrencies is increasing. As of July 2023, the global crypto market capitalization stood at $1.18 trillion. It had already peaked almost three times that amount in 2021.
This issue was previously discussed at the Future of Finance Forum 2022, jointly organized by DBS and the Bretton Woods Committee, and held in Singapore in November 2022. The panelists discussed the potential risks of the growing crypto market and shared of ideas around global cooperation for regulation.
But first, let's take a look at the context of this question.
Is there a need to regulate cryptography?
The rise of cryptocurrency and underlying blockchain technology has inspired many new possibilities for the future of finance and payments. In particular, you can learn more about how it happens transform the bank here.
However, beyond that, the cryptocurrency ecosystem is rife with risks and challenges that have burned many investors. In November 2022, the crypto market suffered its biggest crash in years – wiping out over $2 trillion – due to the collapse of FTX. The crash led to a “bank run” response, with many investors and institutions seeking to make quick withdrawals – only to find their accounts and assets frozen. These events have led regulators to take a closer look at the digital asset market and its participants. Although cryptocurrencies are likely to remain speculative and volatile, appropriate regulation could help prevent manipulation and fraudulent activity, and provide some level of accountability and protection for investors.
But does that mean we should regulate crypto? If so, who should do it? And how?
Why is it so difficult to regulate cryptocurrencies?
One of the main challenges of crypto regulation is that it transcends political boundaries – another key characteristic of the digital asset. It is global and accessible anywhere in the world to anyone with an Internet connection.
The other issue that comes up regularly when discussing the feasibility of crypto regulation is the difficulty of defining crypto as an asset. Whether it is a currency, a security or a commodity, it will influence the policies developed to regulate it.
As its name suggests, cryptocurrency was originally designed to be a currency; that is, storing and transferring value in transactions. Yet today it also functions as an investment instrument, just like securities. Gary Gensler, Chairman of the United States Securities and Exchange Commission, believes that cryptocurrencies are securities to the extent that they pass the “Howey test” which lists the four criteria for an asset to be considered a security . However, he also noted that Bitcoin, the largest cryptocurrency by market capitalization, should be treated as a commodity rather than a security, further complicating how cryptocurrencies should be treated and regulated in the United States.
Finally, excessive market intervention could become a barrier to innovation and trigger an exodus of service providers to jurisdictions with less regulatory oversight. This could prove detrimental to the market as a whole, as service providers who do so would now be subject to less oversight while continuing to offer their services to investors in other markets, given the nature without borders of cryptocurrencies.
Who is responsible for regulating cryptocurrencies?
At the Future of Finance Forum 2022, Piyush Gupta, CEO of DBS and moderator of the regulator's panel, discussed the debate over regulating and perhaps even banning cryptocurrency exchanges.
He cited reasons such as anti-money laundering (AML), know your customer (KYC) and monetary policy issues. He asked the question of who can and has the regulatory power to do so.
In response, Shri T Rabi Sankar, Deputy Governor of the Reserve Bank of India, explained that the solution would come through some form of global cooperation. “In terms of banning, I agree that no country can do it alone, which is probably why the Minister of Finance has spoken very often about the fact that for something that exists in the In virtual space, regulation cannot be centralized, with a state or a country.
“This regulation must be global, not in terms of who implements the regulation, but in terms of understanding what the objectives of regulation are, what regulatory tools can be implemented and what is the nature products that are implemented. being regulated. This is extremely important,” Rabi said.
Continuing the conversation, Piyush asked William C Dudley, Chairman of the Board and Co-Chair of the Bretton Woods Committee's Digital Finance Working Group: Former President of the Federal Reserve Bank of New York, on the States' position -United on the issue. This was sparked by a question from the public: Given that most private crypto capital efforts are driven and carried out in the United States, is it really in America's interest that there no global cooperation to build consensus on crypto policies?
William disagreed with this, recognizing the pace at which the crypto market is growing and its current impact on the world.
“When the space wasn't very big, we weren't really worried about the risk to financial stability because, you know, if it collapsed a few people would get hurt, but it wouldn't be big enough nor broad enough to have huge consequences for the global economy. But as the situation grows, I think the risks to financial stability potentially become more acute,” he said.
He also discussed the Terra (Luna) crash that occurred in 2022, explaining that while most of the United States escaped unscathed, it hit South Korea significantly. “There was a lot of money in Korea that was invested in this algorithmic stablecoin, and people suffered tens of billions of dollars in losses,” he said.
For more information, watch the full discussion here:
The discussion also touched on the debate around “private” cryptocurrencies and central bank digital currencies (CBDCs), fiat currencies issued by the central bank on a blockchain-based ledger. Learn more here.
Cryptocurrency Regulations in Singapore
The Singapore government is experimenting with the use of blockchain and DeFi technology with initiatives such as Orchid Project, Project Guardian and the finished Ubin Projecteverything that DBS has supported and participated in.
In November 2022, DBS partnered with Open Government Products (OGP) to pilot the use of Purpose-Linked Money (PBM), which adopts smart contract technology for programmable digital payments. This month, DBS has partnered with SBI Digital Assets Holdings transact foreign exchange and government bonds against decentralized financial liquidity pools. DBS will also participate in new pilots this year to explore PBM-based rewards and the execution of a repurchase agreement with natively issued digital bonds.
Specifically regarding the regulation of cryptocurrencies, the Monetary Authority of Singapore (MAS) has released two consultation papers on proposed regulatory measures in October 2022. results were recently released on July 3, 2023.
As part of the Payment Services Regulations, MAS will require digital payment token (DPT) service providers to protect customer assets under a statutory trust, separate from the service provider's assets, in order to to mitigate the risk of loss or misuse of customer assets. DPT service providers will also not be able to facilitate the lending and staking of DPT tokens for their retail customers.
MAS acknowledged that, given the “supporting role in the broader ecosystem of digital assets,” we should not ban them. However, crypto trading is still considered “highly risky and not suitable for the general public.”
In December 2020, DBS launched one of the world's first bank-backed digital exchanges: DBS Digital Exchange (DDEx). DDEx is currently only open to corporate and institutional clients, family offices, accredited investors and eligible wealth clients of the bank. Learn more about DDEx here.
1: A protest wave to help bring blockchain into the real world in 2017