The inevitable reality of cryptocurrency regulation is gathering pace. With the draft proposal opened to public comment closing last month, the initial steps are in process to bring some formality to this growing and popular asset class.
It is vital crypto-assets become more regulated than is the case at present, to align with TCF and thus, consumer – as well as stakeholder – protections.
This will allow for crypto-assets to be used in the financial system properly as we avoid the current scenario, which essentially bypasses key regulations such as FICA as any efforts to identify a source of crypto-funds is currently virtually impossible. A phased approach to regulation is proposed, with the first phase focussed on getting everyone ‘on the books’ – I would agree this is a good place to start.
Current regulatory change at the FSCA lends itself to the process as well, with new over-arching legislation for the entire financial services industry via COFI and related conduct standards. While a process, it’s a great opportunity to bring crypto-assets into the mix as well, which covers the proposed second phase of the potential regulations.
The train is moving – all aboard
Appetite for crypto-assets will result in them becoming just another financial product that FSPs can be authorised for, before they can trade or place cryptocurrencies into client portfolios.
Taxation issues will come to the fore as well. While there are a few exceptions, many countries are struggling to find money for their fiscus. As plenty of upset already exists around cross-border taxation and companies moving profits into low tax jurisdictions, global tax authorities are looking to clamp down on companies not playing their fair portion of tax. I believe with certainty that cryptocurrencies will be taxed eventually, as it would be unaffordable for government not to do so.
There is speculation that if you transact in an unauthorised cryptocurrency, you will be contravening SARS rules, but it remains to be seen exactly how this – and other regulations – will play out.
Challenges and opportunities
The outdated market rules and legacy infrastructure already in place do seem to indicate slow adoption to change by top level, and skills or system shortages contribute as well.
There may be some stakeholder resistance, but I believe that overall, many stakeholders will want the regulations to come in, to encourage protection for all.
Regulation could even bring stability to the cryptocurrency marketplace and should not be a reason for its value to fall through the floor. Once regulated, it will become just like any other investable asset.
The role of the compliance offer will not change once crypto-assts’ regulations are in place – it will simply be another asset with rules to address. It will expand the compliance officer’s scope, but not change the game.
What will change the game, however, is the bigger shift towards artificial intelligence and the Fourth Industrial Revolution impacting financial services, but that is a story for another day.
Not just a phase
The authorities are on the right track in taking a phased approach to applying regulation to cryptocurrencies, keeping a keen eye on how other jurisdictions are dealing with the process. While it will take time, the reality is clear: we will see regulations for governing cryptocurrencies down the line, and it will be interesting to see how the ‘powers that be’ determine what these will look like.
One thing is for sure, cryptocurrencies are here to stay.
By Richard Rattue, Managing Director, Compli-Serve