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The year 2021 was a turning point for cryptoassets. Banks and other large financial institutions have made great strides towards launching new crypto products and services. Furthermore, the explosive growth of innovations such as decentralized finance (DeFi) and non-fungible tokens (NFT) have raised the prospect that mainstream adoption of cryptoassets is just around the corner.
An important catalyst for this activity has been the maturing regulatory framework for cryptoassets.
The Financial Action Task Force (FATF) – the global anti-money laundering and countering the financing of terrorism (AML/CFT) standard setter – has issued new guidelines on cryptoassets during 2021. This aligns the regulatory standards for cryptoasset market participants with those already in place in place for banks. Regulators have responded by tightening their grip on the crypto-asset sector – setting new rules and requirements.
The accelerated pace of regulatory oversight has dispelled the perception that cryptocurrencies are an unregulated “Wild West” and given consumers and businesses greater confidence.
Even bigger regulatory changes are coming in 2022. This article provides a region-by-region overview of what the year holds for cryptoasset regulation.
America
In 2022, US regulators will tighten an already aggressive enforcement posture.
Since 2010, they have issued more than $2.5 billion in fines and penalties to cryptocurrency businesses for violating the rules.
The United States will increase these numbers significantly in 2022, with regulators holding firms accountable for compliance with securities trading, sanctions, consumer protection and other requirements.
In particular, US regulators will devote significant resources to the enforcement of the DeFi sector, which is characterized by the provision of financial services through self-executing smart contracts that allow consumers to access services without the presence of an intermediary. With the total value of assets traded on DeFi platforms growing by 1,700% to reach $247 billion in 2021, US regulators will want to ensure that DeFi does not enable regulatory arbitrage, and will rely heavily on their enforcement powers to pull in DeFi into the regulatory sphere.
US regulators will also work throughout 2022 to clarify how banks can interact with cryptoassets. In November 2021, the US Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly released a high-level policy plan on digital assets. The agencies will clarify issues such as the launch of crypto-asset custody and lending services to banks, among other topics. These guidelines will give banks the confidence to work more closely with crypto assets throughout 2022.
Similarly, following a report released in November 2021 by the President’s Financial Markets Task Force, US regulators will now push for a strict regulatory framework to govern stablecoins – a crypto-asset that is backed by fiat currencies or other assets to maintain a fixed value. The US Treasury Department and other regulators will seek to limit stablecoin activities to insured depository institutions, stressing that US regulators want the crypto-asset industry to be subject to the same strict compliance standards as banks.
This increased scrutiny will inevitably prompt the increasingly influential crypto-asset lobby in Washington, DC, to oppose the perceived usurpation of regulatory power. Crypto-friendly lawmakers — such as Wyoming Republican Sen. Cynthia Lummis — are likely to propose legislation to streamline oversight of the sector and prevent regulatory overreach.
In addition to the United States, 2022 will see a lot of regulatory activity across the Americas. Having already established a regulatory framework for cryptoassets, Canadian regulators will further strengthen their enforcement posture during 2022.
In Latin America, countries such as Mexico, Brazil and Argentina are likely to introduce measures that align their domestic regulatory frameworks with FATF standards, bringing new AML requirements for the industry. Additionally, it is likely that at least one or two countries in Latin America will adopt Bitcoin as legal tender in 2022. This follows the lead of El Salvador, which in 2021 became the first country in the world to accept Bitcoin as legal tender.
EMEA
In the EU, the focus will be on the ambitious collection of the European Council’s regulatory proposals by the European Council. This will include the finalization and enhancement of the Market Regulatory Framework in Cryptoassets (MiCA), creating a harmonized regulatory framework for cryptoassets across the bloc. Similarly, the EU will continue this year with measures forcing crypto-asset companies to comply with the Travel Rule – a requirement that regulated businesses share information about payers and payees. These new regulatory measures will present challenges for EU-based cryptoasset companies, who will face new compliance costs to ensure compliance.
In the UK, despite a slow start, the Financial Conduct Authority (FCA) in late 2021 greatly increased the pace of registering cryptoasset businesses under its AML/CFT regulatory regime, offering the industry a glimmer of hope that the FCA will not create excessive barriers to entry.
Further, regulators in Abu Dhabi, Dubai, Switzerland and other financial centers in the region will try to fulfill their public promises to maintain regulatory frameworks that are robust but also enable those jurisdictions to be leaders in the crypto-asset sector.
Africa will present a mixed bag. Some countries, such as South Africa, have signaled a progressive approach, laying out plans for regulation that will allow the crypto-asset industry to exist and innovate while setting clear standards. Other countries, such as Nigeria, have taken a more skeptical approach and have told banks and other financial institutions to avoid entering the crypto-asset sector. In 2022, an even tighter line will be drawn between countries in Africa that are willing to accept and regulate cryptoassets and those that want to restrict their use.
APAC
The Asia-Pacific region will be a similar mix of different approaches.
Certain countries in the region have long-standing regulatory frameworks for cryptoassets, including Singapore, Australia, the Philippines and Japan. In 2022, these countries will strengthen their frameworks through increased enforcement and will require compliance with measures such as the Travel Rule.
Several other jurisdictions in the region – such as South Korea, Hong Kong and Thailand – have only recently begun to regulate cryptoassets, so they will be focused on updating and improving their regulations to align with evolving international standards.
China will continue its hostile stance towards cryptoassets, restricting trade in Bitcoin and other digital assets as it paves the way for domestic adoption of its central bank digital currency (CBDC).
India remains the main wild card. In 2022, the country is likely to advance plans to launch its own CBDC, aiming to position the digital rupee as a counterweight to China’s CBDC. What remains unclear is whether India will adopt a welcoming or hostile stance towards Bitcoin and other decentralized cryptoassets.
The country is expected to consider cryptoasset legislation this spring, and industry watchers hope the government will back down from previous threats to ban cryptoassets and instead decide to regulate the industry. Whether India’s vast market opens up fully to cryptocurrencies will depend on the approach the government decides to take.
It is clear that 2022 will prove to be another year of huge regulatory changes for cryptoassets. Compliance teams that understand these developments and their implications will be well positioned to successfully navigate the changing landscape.
Originally published by Thomson Reuters © Thomson Reuters.
Regulation Global regulators and government
