The World Economic Forum (WEF) recently released a paper in collaboration with its Digital Currency Governance Consortium, titled “Pathways to Crypto-Asset Regulation: A Global Approach.” The paper highlights the urgent need for global regulation to prevent inconsistent enforcement, regulatory arbitration, and ambiguity in the crypto market.
One of the primary challenges identified by the authors in regulating crypto assets is the issue of “same activity, same regulation.” Crypto-assets don’t always fit seamlessly into existing regulatory frameworks, even when their activities mirror those of the traditional financial sector. This is further complicated by the anonymity provided by crypto mixers, self-hosted wallets, and decentralized exchanges, which makes regulation even more difficult. Additionally, the growing interdependence of the crypto industry with traditional finance raises concerns about potential contagion risks.
Several classifications of regulatory frameworks are suggested in the paper for easier comparisons, such as outcome-based and risk-based regulations. The authors also emphasize the need for collaboration between policymakers and industry stakeholders across jurisdictions. They believe that the transparent nature of these new technologies can support improved regulatory tools to address cross-border concerns.
On the other hand, the WEF paper criticizes the US approach to crypto regulation, stating that regulation by enforcement is not recommended for building a viable framework. The authors argue that regulation by enforcement prevents any meaningful discussion about what should and should not be regulated. Notably, the US is the only country mentioned in the paper as having adopted this approach.
US regulatory agencies, particularly the Securities and Exchange Commission (SEC), have pursued aggressive enforcement in response to events such as the collapse of FTX cryptocurrency exchange last year. The SEC has since taken action against crypto exchanges Bittrex and Gemini, crypto lender Genesis, and individuals accused of manipulating crypto assets, including entrepreneur Justin Sun and Terraform Labs founder Do Kwon. Recently, it also issued a “Wells notice” to Coinbase, warning the exchange of potential legal actions regarding several of its services.
The WEF paper offers three broad recommendations to international organizations, regulatory authorities, and the crypto industry, focusing on sharing best practices and coordination. Policymakers and industry stakeholders must work together across jurisdictions to achieve consistency and clarity. By doing so, they can harness the inherent transparency of new technologies to develop even better regulatory tools that address global concerns in the rapidly evolving crypto landscape.