Efforts by individual African countries to implement regulations for the cryptocurrency industry may not be effective unless they are supported by globally coordinated initiatives to regulate the sector, the World Economic Forum has said.
The global economic lobby highlights the challenges posed by the borderless nature of crypto assets, making it difficult for any single jurisdiction to effectively regulate the sector in isolation.
The organization stresses that a coordinated effort among multiple jurisdictions is necessary to address the complexities and potential risks associated with cryptocurrencies.
“The evolving crypto-asset ecosystem and recent market events have underscored the pressing need for collaboration and the building of robust guardrails,” said Matthew Blake, head of the centre for financial and monetary systems at WEF.
“While jurisdictions may take different approaches to regulating crypto assets, it is important to foster partnerships between international organisations, national authorities and industry stakeholders to ensure a baseline level of consumer protection and market integrity,” he added.
Accordingly, the organization advises that countries need to:
- Harmonize their understanding and classification of digital assets
- Set common standards, and
- Establish data-sharing initiatives
This comes as the organization unveiled a new whitepaper ‘Pathways to the Regulation of Crypto-Assets: A Global Approach in May 2023.’
According to the paper, the anonymity provided by crypto mixers, self-hosted wallets, and decentralized exchanges also complicates regulation. Meanwhile, increasing interconnectedness with traditional finance increases potential contagion risks from the crypto industry, which was only recently full of turmoil.’
“Crypto-assets and their ecosystem do not always fit squarely into the existing activity-based, intermediary-focused approach of regulation, even where crypto-asset activities mirror those of the traditional financial sector.”
WEF argues that there is yet to be a standard definition or characterization of crypto assets. For instance, the UK’s revenue authority considers crypto assets to be ‘exchange tokens’ for use in payment while the EU considers them as ‘digital assets or property.’
According to @wef, a lack of a common minimum understanding to regulate the crypto assets space will lead to:
1.) Inability to develop ecosystem consensus
2.) Increase in cost for compliance and setting up legitimate global businesses
3.) Lack of consumer… pic.twitter.com/6PQxtT0AH9
— BitKE (@BitcoinKE) June 17, 2023
The whitepaper generated various classifications of regulatory frameworks to facilitate comparisons. Two of these classifications mentioned were outcome-based regulation and risk-based regulation. In outcome-based regulation, the principle of “same risk, same regulatory outcome” is applied, meaning that similar risks should be subject to equivalent regulatory measures.
On the other hand, risk-based regulation involves determining the level of regulatory intervention based on the level of risk associated with a particular activity.
The whitepaper also highlights the concept of agile regulation, which involves adopting a responsive and iterative approach to policy and regulatory development. It recognizes that the process is no longer solely governed by governments but also involves multiple stakeholders. Agile regulation embraces mechanisms such as regulatory sandboxes, guidance frameworks, and regulators’ issuance of no-objection letters.
The whitepaper pointed to Switzerland’s Financial Market Supervisory Authority (FINMA) as an example of an agile regulator. Additionally, the whitepaper mentioned Switzerland and Japan as examples of countries that have embraced self-regulation and co-regulation in the cryptocurrency industry.
The United States was seen as the home of regulation by enforcement. “This approach is not recommended to build out a framework, as ‘regulation by enforcement’ precludes any meaningful discussion of what should and should not be regulated.”
You can read the full paper here.
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