Over the past few months a range of global regulatory changes have affected the cryptocurrency landscape. It is no secret that news of regulation influences the price volatility of cryptocurrencies. The Bank for International Settlements noted in their Quarterly Review published in September 2018 that the market reacts positively to news relating to the legal status of cryptocurrencies but that there is an adverse reaction to news on anti-money laundering and interoperability limitation. Governments and regulatory bodies across the globe must walk a fine line between regulating malicious behaviour and stifling innovation from an emergent industry. This article assesses the impact of recent regulatory changes on the future of the crypto markets.
In August, the SEC denied 9 Bitcoin ETFs citing a failure in the exchanges’ designs to prevent fraudulent and manipulative acts and practices. This was to be expected as Bitcoin is a manipulable and volatile crypto asset, demonstrably influenced by existing ETF timelines and as such, the SEC has not as yet developed satisfactory confidence to permit further ETFs. Further, near the end of August, the North American Securities Administrators Association (NASAA) shared that over 200 active investigations into ICOs are currently being undertaken by US and Canadian authorities under “Operation Cryptosweep”. The underlying aim of these investigations is to ensure that products qualifying as securities should be registered appropriately to provide investors with appropriate protection. More recently, the SEC suspended the American Retail Group from trading as the company had falsely advertised their ICO as SEC-endorsed. The SEC noted that investors should “use vigilance when considering an investment in an initial coin offering”.
Such regulation will likely be welcomed by investors and is beneficial for crypto ecosystems as it minimises predatory and fraudulent market practices whilst bolstering the chances of success for legitimate and innovative blockchain projects. True to tune, the SEC set-up the Strategic Hub for Innovation and Financial Technology (FinHub) just last week. FinHub aims to enable regulators and fintech start-ups to communicate with each other, with the latter having the ability to seek clarity on legal matters. This effort is similar to the Innovation Hub offered by the Financial Conduct Authority in the UK and is likely to be welcomed by entrepreneurs and investors across the board.
Europe has witnessed significant regulatory developments over the past few weeks. In the beginning of October, the blockchain project Brave Software published a submission they had made to the European Competition Directorate General For Competition on how the GDPR’s core principle of “purpose limitation” can be used to limit anti-competitive behaviour from the data hosting and collection giants Google and Facebook. Brave seeks to democratise how user data is collected and the project has a strong focus on privacy and transparency. The two core recommendations made by Brave were that individual purpose should be tightly designed to make anti-competitive conflation of multiple purposes easier to identify and address, and that the adequacy of enforcement of the purpose limitation principle should be critically appraised.
Brave’s advocacy for data protection coincided with the chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, stating that the agency would be assessing ICOs on a case-by-case basis given that only some ICOs involve financial instruments necessitating the employment of appropriate regulatory framework. European attitudes coincide with North America’s in that regulatory trends point towards cracking down on predatory behaviour whilst allowing upcoming projects to innovate.
With the recent announcement from the Financial Action Task Force (FATF), a cross-governmental organisation targeting AML practices, that they would be releasing a set of cryptocurrency oversight rules over the next few months, we are entering a stage of global regulatory harmonisation. This is likely given that countries failing to implement satisfactory regulations will be blacklisted by the FATF which would then restrict their access to the global financial system. It will be interesting to see whether projects like Brave can sustainably innovate and relinquish control back from pre-existing tech heavyweights given the undercurrents of data privacy regulation in Europe and the potential for blockchain technology to return control of users’ data back to users themselves.
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