The technological and economic particularities of cryptocurrencies require prudent regulation that accommodates the characteristics and use cases of cryptocurrency.
Cryptocurrencies and the underlying blockchain technology are becoming a pervasive force in the global economy, affecting everything from cross- border retail payments to interbank transfers. The growing adoption and decentralized nature of cryptocurrencies pose unique and unprecedented challenges for financial authorities, capital markets regulators, consumer protection and privacy bureaus, and tax authorities around the world. However, cryptocurrencies also bring opportunities in terms of leveraging the internet to provide new digital pathways for individuals and micro-, small- and medium-sized enterprises (MSMEs) into the global financial system. Further, cryptocurrencies and underlying blockchains contribute a new paradigm for secure data and value transmission, storage and access. As such, the technological and economic particularities of cryptocurrencies require prudent regulation that accommodates the characteristics and use cases of cryptocurrency.
In simple terms, cryptocurrencies are digital “coins” or “tokens” secured using cryptography. These assets are fully digital; using blockchain or other decentralized ledger technologies (DLTs), they are stored and operate on a decentralized network, with which users can transact directly without the need for a central authority. The assets can be sent instantly at a peer-to-peer (P2P) level, without involving an intermediary such as a bank or central bank. In principle, and in the absence of additional cryptography schemes or failures in security, cryptocurrency transactions are fully traceable and unalterable, and users may remain pseudonymous unless their assets are matched – for example, to a validated know your customer (KYC) file through an exchange.
Regulators around the world should develop frameworks to responsibly monitor and guide cryptocurrency activity in their jurisdictions, ensuring, among other things, fair market conduct, market competition, the application and enforcement of tax rules, and consumer protection within the parameters of the assets’ unique properties, while nurturing the growth of a lucrative cryptocurrency-based economy. At the same time, cryptocurrencies are cross- jurisdictional and, as such, regulatory challenges do not stop at national borders. Regulators should work towards cross-jurisdictional regulatory standards in order to create regulatory clarity, close loopholes and mitigate regulatory arbitrage, while ensuring inclusion of all users is maintained.
Well-designed cryptocurrency regulations have been implemented in many jurisdictions, encouraging crypto-based innovations and efficiencies in finance and commerce, particularly for cross-border transactions. Regulators should look at examples elaborated upon in this guide to bolster their understanding of the parameters and variables that are pertinent to the design of regulatory frameworks.
This regulatory guide from the Global Future Council on Cryptocurrencies reflects the perspectives of a broad cross-section of the cryptocurrency ecosystem and should be used as a tool to assist financial regulators around the world in developing prudent policies, regulations and ideation to mitigate risks and enable opportunities related to cryptocurrencies. In this guide, we address important themes and considerations for the financial regulation of cryptocurrencies, using insights from the leading authorities on blockchain technology and financial regulators navigating these transformations to the global financial and monetary system.