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Why the case for regulating cryptocurrencies is becoming unanswerable

A Future of Finance webinar with regulators, lawyers, cryptocurrency players, exchanges, banks, digital asset players and technology companies

Thursday July 14 at 2pm UK time

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The peer-to-peer system of cash outlined by Satoshi Nakamoto in his famous paper of October 2008 did not mention regulators or regulations. But its ambition of dispensing with trusted third parties did mean jettisoning regulated financial institutions. Nearly 14 years on, only the irreconcilable libertarian wing of the Blockchain industry still considers regulation of cryptocurrencies to be unthinkable. Major cryptocurrency intermediaries are getting regulated already. Two of the major cryptocurrency exchanges (Coinbase and FTX) have multiple regulatory licences and even Binance has secured a licence in France and applied for licences in Bahrain and Dubai. Likewise, of a list of 100 digital wallet custodians, 42 have secured or applied for regulatory licences. Nor is it true to say any longer that cryptocurrencies are unregulated. The Financial Action Task Force (FATF) extended Know Your Client (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening obligations to the cryptocurrency markets as long ago as October 2018. Grumbling by cryptocurrency brokers and exchanges about the application of the Travel Rule – which obliges them to share identifying information about buyers and sellers of cryptocurrencies – is merely the latest instalment of this long-running set of obligations. Suspicious Activity Reports (SARs) now have to be filed. Besides, regulators are losing patience with the seemingly unending series of scams, hacks and thefts of cryptocurrency. Since hackers made off with US$500 million of Bitcoins from Mt Gox back in 2014, thefts of cryptocurrency have remained a constant. According to Chainalysis, thieves stole $3.2 billion worth of cryptocurrency in 2021 and another US$1.3 billion in the first quarter of this year, most of it from Decentralised Finance (DeFi) protocols. Chainalysis reports an average of 66 crypto-currency thefts a year since Mt Gox. But thieves are not the only people taxing retail cryptocurrency investors. Almost all the rewards of cryptocurrency trading go to professionals, including via pump-and-dump schemes. So it is not surprising that regulators are clamping down on the sale and distribution of crypto-currencies. Singapore has been particularly vocal about discouraging sales of cryptocurrencies to retail investors but the United Kingdom is now pondering similar restrictions. In emerging market economies, cryptocurrencies are used routinely to bypass capital controls or evade tax. As the cryptocurrency markets have tanked – the total market value of cryptocurrencies is down from its peak of US$2.9 trillion in November 2021 to less than US$900 billion in mid-June 2022 – concerns about negative spillovers to conventional markets have also increased, especially given the weaknesses of the underlying settlement and custody infrastructure. Almost everybody active in the cryptocurrency markets recognises that the recovery of the markets would be aided by institutional money, and they know that will not arrive at scale until cryptocurrencies are regulated. So there is a growing conviction that regulation is now only a matter of time. In the jurisdictions that matter, security tokens are regulated already under existing securities laws and so are payments tokens under “e-money” laws. Stablecoins backed 1:1 by holdings of fiat currency, which have emerged as the payment token of first choice pending the introduction of central bank digital currencies (CBDCs), will soon be brought within the regulatory perimeter in both the United Kingdom and the United States. The enormous array of “cryptocurrencies” currently in regulatory limbo are next. CoinMarketCap lists 9,918 “cryptocurrencies” of which 544 are categorised as belonging to DeFi protocols, 578 are classified as Non Fungible Tokens (NFTs) and 231 are said to belong to the emergent Metaverse. True, the vast majority of cryptocurrencies are so tiny it is hard to see why regulators should bother. The market is utterly dominated by Bitcoin (47.5 per cent of market value, Ethereum (16.3 per cent) and the two leading Stablecoins, Tether (6.4 per cent) and USD Coin (4.7 per cent).  In fact, the top ten cryptocurrencies account for 85 per cent of market value. So the market is highly concentrated but it is also fragmented, which does complicate the task of the regulators. The 9,918 include pure cryptocurrencies (Bitcoin, Litecoin, Dogecoin) but also platforms (Ethereum, Cardano, Solana), Stablecoins (Tether, USD Coin, Dai), native tokens (Golem, FTX Token), utility tokens (Huobi Token, Filecoin) and DeFi protocol tokens (Uniswap, Aave, Compound). These instruments also have a habit of changing their nature over time and morphing from one type of instrument into another. In such rapidly evolving markets, regulators everywhere are grappling with problems of definition as they try to draw up a taxonomy of cryptocurrencies they can use in regulatory measures. The challenge is that definitions have either to be very narrow (which prolongs uncertainty) or very broad (which also creates uncertainty). Indeed, the European Union, in its pioneering Market in Crypto Assets Regulation (MiCA), risks being out of date as soon as it comes into effect. If regulation of cryptocurrencies is now certain, how to do it is not. So this Future of Finance webinar will compare and contrast regulation of cryptocurrencies in a group of important jurisdictions; ask whether regulations are best based on principles or rules; ponder licensing cryptocurrency firms versus regulating cryptocurrency instrument; consider whether cryptocurrency concepts are novel enough to demand laws be re-written; and debate whether convergence or competition leads to better regulatory outcomes in the long term.

The topics to be discussed include:

  1. How strong is the case for regulating cryptocurrencies?
  2. Do cryptocurrency markets need the “trust” conveyed by regulation?
  3. Are cryptocurrencies (like security tokens and payment tokens) providing services familiar enough to be regulated under existing laws and regulations?
  4. How effective are the KYC, AML, CFT and sanctions screening obligations laid on cryptocurrency industry proving?
  5. Will restrictions on retail distribution of cryptocurrencies continue to be tightened?
  6. Has the failure to regulate cryptocurrencies stymied the growth of the (regulated) security token markets?
  7. With cryptocurrencies, have regulators struck the right balance between innovation and regulation?
  8. Were regulatory “sandboxes” a mistake?
  9. Are “safe harbours” a useful tool for regulators?
  10. How much does a comprehensive taxonomy of cryptocurrency instruments matter in formulating regulations?
  11. Must crypto-currency regulation encompass Stablecoins or should they be regulated separately?
  12. Would a principles-based approach work better than a rules-based approach?
  13. Is a principles-based approach possible for civil law (as opposed to common law) jurisdictions?
  14. Is any regulation at risk of being overtaken by events?
  15. Will regulated cryptocurrencies outperform unregulated ones?
  16. To what extent is it necessary to re-write the law to take account of new concepts such as “smart contracts” and DAOs?
  17. How should regulators strike the balance between licensing cryptocurrency firms and regulating cryptocurrencies themselves?
  18. What does the fact that (a) cryptocurrency exchanges and (b) cryptocurrency custodians are getting regulated tell us?
  19. Are crypto-currency custodians taken on liabilities they can manage effectively?
  20. Can cryptocurrency regulation be technology-agnostic?
  21. Are markets converging on a single view of how cryptocurrency markets should be regulated?

Panellists

Barnabas (Barney) Reynolds is Global Head of Shearman & Sterling’s Financial Services Industry Group

Barney is one of the leading financial institution practitioners. He specialises in banking and financial markets law and regulation, clearing, settlement, derivatives, asset management and insurance regulation. He advises banks, asset managers, insurers, financial infrastructure providers, governments and public bodies on regulatory, governance, enforcement and securities law matters, as well as on acquisitions, disputes, bank resolution and insolvency matters. He has advised on many of the most transformative transactions and has extensive experience in helping clients with their domestic and cross-border legal and regulatory situations. He also helps smaller companies navigate their way to success.

Barney has authored numerous books on financial services, which have been highly influential around the world. His thinking on financial services policy, law and regulation has been adopted by the UK and other Governments. He has been called to give evidence to Parliamentary Committees in the UK and elsewhere, and he works with the main industry bodies and regulators. He has helped to set up new legal and regulatory regimes, including ADGM in the United Arab Emirates, leading the teams drafting the laws and regulations.

https://www.linkedin.com/in/barnabas-reynolds-financiallawyerlondon/

Oliver Linch, General Counsel at Bittrex Global

Oliver Linch is General Counsel at Bittrex Global, the most secure digital asset exchange in the world. Previously, he was a Senior Associate at Shearman & Sterling in the Financial Institutions Advisory & Financial Regulatory team based in London, advising clients across the United States, United Kingdom, Middle East, and the European Union. 

https://www.linkedin.com/in/oliver-linch-6a8abb7a/

Moderator

Dominic Hobson, Co-Founder at Future of Finance

Dominic Hobson has worked for himself for 30 years. He was one of the founders of Asset International, a transatlantic financial publishing, events and survey business, which was sold in 2009.

Since then, Dominic has contributed to the work of two data businesses covering financial markets, run a peer group network for hedge fund managers, and co-founded the Future of Finance, which hosts events on innovation in finance.

As one half of Hobson Cardew, Dominic also provides consultancy services to a number of financial services businesses and market infrastructures.

https://www.linkedin.com/in/dominic-hobson-49b8222/