New technologies, especially those developed for the rapidly growing financial tech (fintech) sector, are often under the scrutiny of government-run regulatory bodies. Cryptocurrencies, in particular, are currently being put through the wringer by a number of governments, given the most recent actions taken against Binance in the UK and Bitcoin in China.
Cryptocurrency supporters have declared that standard forms of regulation previously used for financial instruments do not apply to cryptos or the blockchain technologies that power them. Likewise, they also decry the lack of understanding that government regulators have on how these instruments work.
One issue they particularly deplore is how cryptocurrencies seem to be interlinked with criminal activities such as ransomware and online fraud.
But, of course, as both regulators and traditional banking institutions learn and understand more about the cryptocurrency sector, adjustments are being made to this day. Nevertheless, it could be that properly regulating the use and distribution of Bitcoin and other cryptocurrencies could be the key to giving them a veneer of legitimacy.
Keeping up with rapidly changing technologies
The European Union, in particular, has introduced several regulations aimed at improving licensing models for cryptocurrency. In fact, Germany and some other member nations already have regulations in place for dealing with cryptocurrencies on a national level.
Practically all existing EU regulations present requirements that crypto companies need to submit in order to get a financial license. Regulators explain that corporate compliance with these requirements will actually draw more investors in towards these companies, as having a license can boost confidence and assure investors that they are putting their money in a safe place.
However, this doesn’t mean that both regulators and crypto companies should relax their guard. Instead, both parties should continue to monitor and address issues while complying with or enforcing restrictions. On a global level, the Financial Action Task Force (FATF) is attempting to do just that.
Essentially a “soft law”, the FATF covers general guidance about practices against money laundering and the financing of terrorist groups. Nevertheless, it has become a global standard, so to speak, for the regulation of virtual assets.
One particular clause in the FATF – Recommendation 16 – mandates that businesses should compile and store the individual information of those participating in blockchain transactions. Transparency is what they’re gunning for in this context: giving the authorities access to such information allows them to properly enforce related market regulations as they know what each participant is doing or is supposed to be doing.
Previously, Recommendation 16 applied to the banking sector but began to cover cryptocurrencies in 2019. Since then, several FATF member countries have integrated it into their local anti-money laundering laws.
However, Recommendation 16’s critics claim that it does not consider the innovative nature of blockchain technology. Some crypto companies have complained that it is difficult to implement, given how it calls for a great deal of effort in compiling recipient data.
Nevertheless, there is still a need for regulatory oversight within the cryptocurrency industry. While it obviously cannot be along the same lines as traditional financial institutions, regulators need to adapt and modify the rules to suit an entirely new industry operating in rapidly changing times.