In a recent Coindesk webinar, Banking Circle Head of Web3, Daniel Lee, joined a panel of regulatory and crypto experts to discuss how the industry could and should be regulated today and in future. It is important the regulation protects businesses and individuals, but also ensures fair access and does not put unnecessary barriers in place.
- Richmond Teo, Co-Founder, Paxos
- Rahul Advani, Policy Director, APAC, Ripple
- Daniel Lee, Head of Web3, Banking Circle
- Nick Lord, session moderator, Founder, Blue Pool Communications
Looking ahead at the potential wider impact of current events in crypto, Daniel likened today’s challenges with the Pan-Electric crisis in Singapore, 1985. Stock exchanges in Singapore and Kuala Lumpur closed for three days to protect exposed brokerage houses and investors as a result of Pan-Electric ‘s insolvency. At that time, Daniel explained, there were no laws or statutes regulating equity, and the crisis led many to state they would never touch equities or shares again. However, a year later regulation was in place and it was a different market – the equity market soon grew. Similarly, the crypto market is struggling to retain trust, but suitable regulation could turn it around quickly.
Ripple’s Rahul agreed, adding that as with all innovation, digital asset activities have both benefits and risks. The challenge for the regulators is to balance protection against the potential risk, against the potential benefits. He also highlighted that when the digital asset markets became increasingly active around five years ago, the regulators focused on money laundering and terrorist financing as the key risks. Today, however, there are newly identified risks such as tech and cyber security risks, business conduct requirements, retail investment safeguards and market integrity measures. These have been addressed for the traditional financial markets but must now be revisited specifically for crypto.
Rahul went on to say that, given the cross-border nature of digital assets, global consistency and clarity is important for the industry to develop sustainably. In order to reduce regulatory uncertainty, regulators must provide regulatory certainty and safeguards that allow businesses to build frameworks that are forward-looking and flexible. He added that authorities must coordinate with each other domestically and internationally to encourage consistency of regulatory outcomes, a space in which global multilateral bodies will play an essential and increasingly vital role.
Daniel added that there are many activities which are illegal in other areas of the financial industry, but not yet within crypto, and this must change soon. For example: creating false markets, false trading, market rigging transactions, market manipulation, false or misleading statements. He believes that more regulation preventing this behaviour in the crypto world will have a significant impact on the number of bad actors in the market.
Paxos’ Richmond commented that firms find it all too easy to misrepresent themselves as regulated, and this is an area that must be addressed immediately, to improve trust.
Looking at how regulation should be implemented, Richmond continued, and pointed out that whilst a lot of regulation focused on older elements of finance are not relevant to crypto, there are many that are not entirely irrelevant and these could be used as a basis for crypto regulation. For example, principles-based approaches, like ensuring a company does what it says it will do, can be easily applied to crypto. We should, he goes on to say, also still be concerned about money laundering and consumer protection, and this can be done from a principles or a product standpoint, but either way should be more transparent.
Rahul added another principle that could be applied to crypto: Same risk, same activity, same treatment. As he explained, regulation needs to be proportionate to the financial stability risk posed: a digital asset that provides equivalent economic functions and poses the same risk as a traditional asset should be subject to the same regulatory requirement as that traditional asset. He pointed out that creating new frameworks for the sake of it could overcomplicate things. He believes regulation should be based on the activity and the risk that activity poses: the function, not the form.
However, Daniel argued that just as different traditional finance assets are covered under different regulations, so too should crypto. He believes new digital assets should be subject to new rules, not those built for other assets. He explained that different assets behave differently and pose different risks. While you can take on certain market provisions such as market abuse, regulators are beginning to acknowledge that good crypto regulation requires something specific, not an over-encompassing regime.
Richmond added that a principles-based approach would allow businesses to get a foot through the door and run their organisation successfully and securely, without having to wait years for regulators to develop long drawn-out policies.