Crypto asset markets are going through their so-called “third winter.” Two things are needed to see them come out of it stronger: smart regulation and measures from reputable industry players to regain the trust of consumers.
On the back of the insolvencies of crypto service providers FTX and BlockFi and the collapse of TerraUSD (UST) and Terra (LUNA), the global crypto market cap fell to $858.43 billion at December 1, 2022, from highs of $3 trillion in the fourth quarter of 2021.
Such high-profile failures understandably have unsettled investors since, but more than 300 million people use crypto worldwide, attracted by the transparency of transactions, efficiency through avoiding intermediaries, speed and lower fees in comparison to traditional banking.
As the use case becomes clearer, firms that stay on the right side of the law are keen to regain the trust of investors in the crypto space as a whole.
In parallel, financial regulators are ramping up their efforts to improve consumer protection in crypto markets and reinforce stability.
Leading the way is the EU, which in September finalized the text for its Markets in Crypto Assets (MiCA) regulation, expected to come into force in 2024. As part of the EU’s digital finance strategy, MiCA will regulate the crypto assets e-money tokens and asset-referenced tokens, which are commonly known as stablecoins, and the providers of crypto services.
Meanwhile, in the US, an executive order on “Ensuring Responsible Development of Digital Assets,” released in March, outlined the government’s approach to “addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”
Moving forward with sensible regulation
Leading crypto firms—including Binance, which operates the world’s biggest bitcoin and altcoin exchange—welcome the advent of sensible regulations that increase consumer confidence in crypto assets and enable responsible innovation across the industry. In fact, Binance argues that if these regulations had already been in force, coupled with adequate risk management and corporate governance practices, some of the market upsets this year may have been avoided.
However, given the potential for divergence in regulations across different jurisdictions, Steven Christie, senior vice president of compliance at Binance, says frameworks should be “comprehensive and consistent” and align with the work done by global standard setters such as the Financial Action Task Force.
Regulators must work hand in hand with companies on implementation to ensure a level playing field across the board as well as creating the framework that fosters innovation rather than hampering its opportunities. Binance also believes it has a fundamental responsibility to work with regulators and a well-regulated crypto market provides greater protections for everyday users,
Steven Christie, senior vice president of Compliance at Binance
Christie says Binance and its local entities “have a policy of cooperation and compliance” with all lawful information requests and legal inquiries from government, local regulatory authorities and law enforcement authorities pertaining to investigations, prosecutions and forfeiture actions.
The next generation of the internet
Regulation of the crypto asset market is essential if innovation—including the third iteration of the internet, Web3—is to gather pace. Only when users have complete confidence in the technology can there be mass adoption.
Web3 has the potential to shift power away from large tech platforms and back to users who can take control of their interactions through decentralized blockchains and smart contracts. This creates the opportunity to return revenues to content creators and users who would have incentives to innovate, test, build and scale.
According to consultancy McKinsey, Web3 “could mark a paradigm shift in the business model for digital applications by making disintermediation a core element,” but they note that scaling up requires suitable regulatory oversight.
There is no bigger opportunity right now than in Web3, the next generation of the internet. Binance’s mission is to be the infrastructure provider to the blockchain ecosystem. We are working on many Web3 experiences and solutions that will be transformative to billions of people, starting with the freedom of money.
Mayur Kamat, head of product at Binance
“The biggest opportunities are often found in the emergence of new and disruptive technologies,” says Mayur Kamat, head of product at Binance. “And there is no bigger opportunity right now than in Web3, the next generation of the internet. Binance’s mission is to be the infrastructure provider to the blockchain ecosystem. We are working on many Web3 experiences and solutions that will be transformative to billions of people, starting with the freedom of money.”
A thriving, pro-innovation Web3 ecosystem—powered by sensible regulatory frameworks—could propel countries to global leadership in the next wave of technological revolution.
Globally, Web3 start-ups have generated $89 billion in venture capital funding and can attract the best talent.
Meanwhile, growth in blockchain technology is set to become a core differentiator and critical measure of international competitiveness in the next decade. By 2030, the blockchain market could boost global gross domestic product by $1.76 trillion.
Blockchain has boosted the US’s GDP by $407 billion, Germany’s by $95 billion and the UK and Japan’s by $72 billion each.
A framework for stablecoins
MiCA will protect users of e-money tokens, which are an essential part of the crypto economy because they bring stability and strength to the market.
E-money tokens are pegged to fiat money such as the US dollar or euro. They have the potential to transform cross-border payments on the wholesale, retail and remittance fronts.
Stablecoins bring significant cost, time, access and transparency benefits to cross-border payments—in line with the Financial Stability Board’s recommendations—with the added benefit of value stability compared with unbacked crypto assets.
These are all factors that have seen the market capitalization of stablecoins increase from 23 billion euros in early 2021 to just under 150 billion euros in the first quarter of 2022.
MiCA will protect consumers by requiring issuers to build up a sufficiently liquid reserve, with a 1-to-1 ratio and partly in the form of deposits.
Every e-money token user will be offered a permanent fiat redemption right free of charge. In addition, the new rules will see the significant e-money tokens fall under the supervision of the European Banking Authority.
Enabling responsible innovation
Future crypto EU regulation will also focus on the climate and social impact of the sector to encourage more environmentally friendly practices and limit money laundering.
Issuers of crypto assets will be required to disclose information about the energy consumption of mining, and the climate- and environment-related adverse impacts. Increasing energy efficiency will benefit cryptocurrency users and the entire blockchain industry. Plus, it will improve the environmental credentials of the sector by way of sustainable innovation.
Regulation will also be designed to counter concerns about the potential use of crypto assets for money laundering for drugtrafficking organizations and others—and the funding of what the US government calls “rogue regimes.”
Crypto asset service providers are considered “obliged entities” under the EU anti-money laundering (AML) rules. They will be subject to customer due diligence, transaction monitoring, reporting and other AML requirements, which, in some instances, go beyond the rules for payment service providers.
These provisions are in line with Binance’s existing policies. The company has one of the strictest AML policies in the fintech industry and plays a significant leadership role in helping law enforcement combat cyber and financial crime and terrorism.
Binance also leverages blockchain technology for social responsibility through Binance Foundation programs.
A legitimate system
A smart regulatory regime that is borne out of constructive conversations between policymakers and industry players—and based on global standards—will improve the crypto asset space.
Not only will users feel more confident in participating in the market, but providers will be able to forge ahead with new and exciting innovations that support an efficient and modern financial architecture.
Binance is committed to working with regulators and policymakers to shape policies that protect consumers, encourage innovation and legitimize this important sector.
Steven Christie, senior vice president of compliance at Binance