The beginning of cryptocurrency regulation by regulators; a review of cryptocurrency regulation from the past to the present; and an examination of the challenges and regulatory trends in countries around the world in 2024.
Challenges and regulatory trends of digital currencies in 2024: A look at the future of the cryptocurrency industry.
Cryptocurrency service providers initially operated without regulatory oversight or specific legal frameworks. At that time, policymakers and regulators were just beginning to understand the concepts underlying digital currencies, with no clear ideas on how to establish appropriate regulations. This lack of regulation facilitated rapid industry growth, enabling the development of new products and services to meet the demands of an expanding user base. However, it also introduced significant risks and challenges. Many operators needed regulatory clarity to ensure compliance, creating economic opportunities for regions willing to embrace the challenge of regulating emerging crypto service providers. This laid the groundwork for the regulatory journey of cryptocurrencies. In this article, we will explore the history of cryptocurrency regulation and analyze the challenges and regulatory developments across the globe in 2024.
Table of Contents
In 2018, the Financial Action Task Force (FATF), which sets global standards for anti-money laundering (AML) and combating the financing of terrorism (CFT), declared that its standards also apply to virtual assets (VA) and virtual asset service providers (VASP). This marked the beginning of broader regulatory developments in the crypto sector. While countries began to slowly implement AML/CFT regulations for cryptocurrencies, by December 2023, fewer than half of FATF’s 209 member jurisdictions had applied such laws to cryptocurrencies.
Anticipation of Stronger Crypto Regulations
To date, many regulators worldwide have not developed specific provisions for cryptocurrencies to protect consumers, ensure fair and orderly markets, or require companies to maintain sufficient resources to cover potential losses. However, this is set to change in 2024. Learning from the high-profile failures of 2023, major global economies are expected to implement more comprehensive oversight. Regulators will likely require cryptocurrency service providers to establish policies addressing corporate governance, conflict of interest, risk disclosure, customer asset protection, cybersecurity, and capital adequacy.
Some jurisdictions may adopt innovative approaches to cryptocurrency regulation, focusing on stablecoins, decentralized finance (DeFi), staking, and lending activities. Others may regulate cryptocurrency derivatives under tailored legal frameworks.
FATF is expected to maintain pressure on countries lagging in implementing AML/CFT policies for virtual assets, with a report highlighting non-compliant nations anticipated in April 2024. This is likely to accelerate adoption, particularly in Latin America and Africa, where cryptocurrency use cases are evident.
Global Elections and Their Impact on Crypto Regulation
The year 2024 will be pivotal for global democracy, with national elections in over 40 countries, including eight of the ten most populous nations, such as Bangladesh, Brazil, India, Indonesia, Mexico, Pakistan, Russia, and the United States.
Taiwan, the United Kingdom, and the European Union also have significant elections scheduled. The outcomes of these elections could profoundly influence cryptocurrency policies worldwide.
Elections in countries, including in Iran, can have significant impacts on the process of determining strategies and policy solutions, especially in areas like cryptocurrencies and financial technologies. These impacts can serve as a key factor in shaping cryptocurrency policies and the regulations associated with them. With changes in government and elections, priorities, regulations, and attitudes towards cryptocurrencies may also change.
In countries with periodic elections, changes in leadership and government can lead to shifts in financial and cryptocurrency policies. Elections may result in the rise of new institutions or shifts in governance priorities, which could bring about changes in laws and regulations regarding cryptocurrencies. For example, new governments might introduce new policies on finance and cryptocurrencies or modify existing regulations to achieve their objectives, or address new challenges and opportunities in the financial technology sector.
The continued enforcement of strict U.S. regulations against cryptocurrency companies and the efforts of businesses to find a second home for their operations!
According to data provided by VASPnet, a team of pioneers in cryptocurrency regulation that includes technologists, specialists, and data analysts, the U.S. Securities and Exchange Commission (SEC) currently oversees only 22 out of 1,371 virtual asset service providers that are likely offering virtual asset services in the United States. This situation is not expected to change significantly in 2024, as a broad range of enforcement actions taken by U.S. authorities against cryptocurrency companies over the past year will continue.
As a result, companies seeking the legal certainty required for their long-term business plans will look for a second location for their non-U.S. operations outside the United States. The Caribbean, the Middle East, and the European Union will continue to remain attractive regions for U.S. companies seeking a new place to operate.
Strengthening Europe’s Cryptocurrency Market in 2024 and the Emergence of New EU Crypto Hubs
The EU’s Markets in Crypto-Assets Regulation (MiCA) will come into effect in July 2024 for stablecoin issuers and by the end of 2024 for crypto-asset service providers (CASPs). The resulting increase in compliance costs will significantly consolidate the 4,170 known entities offering crypto services in the EU. By 2025, the centralized EU crypto market will be dominated by a few key players.
Most CASPs in the EU are not ready for MiCA and remain reluctant to take the necessary steps for compliance. Popular EU jurisdictions with relatively lenient registration systems face significant gaps between their existing frameworks and MiCA requirements. Companies that underestimate the effort required for MiCA compliance risk losing their licenses to operate.
Preparing for MiCA poses challenges not only for the crypto industry but also for regulators. For countries with limited resources and numerous CASPs registered for AML/CFT purposes, implementing MiCA-compliant national policies by the June 30, 2026 deadline will be difficult. Regulators may look for reasons to reject applications to reduce the number of entities they oversee.
Jurisdictions like France and Malta, which have taken early steps to align with MiCA, will compete for recognition as the EU’s main crypto hubs. While France has attracted significant interest from international firms, it remains to be seen whether these companies will navigate operational complexities and bear the costs of establishing headquarters in Paris. Each jurisdiction will adopt its own approach, and by 2024, only a few will emerge as the most attractive centers for the crypto industry.
The FATF’s stringent actions against countries that have failed to carry out national AML/CFT assessments or comply with the Travel Rule
Last year, FATF clearly emphasized the requirement for countries to conduct national risk assessments (NRAs) to evaluate the crypto sector and its unique fundamental risks. Even jurisdictions that have banned crypto are required to carry out national risk assessments to ensure adequate protection of their environment. In 2024, the private sector will continue its efforts to provide better data to countries so policymakers can understand the risks and create regulations that appropriately mitigate these challenges and risks.
As countries begin to better understand their exposure to cryptocurrencies, they will release more comprehensive and complete lists of companies that are non-compliant with laws and regulations. These lists will help individuals and the private sector avoid trading with companies that lack regulation or are involved in illegal activities.
Another area of special focus for FATF this year is the implementation of the Travel Rule by national authorities, or the requirement for VASPs to exchange specific information with each cryptocurrency asset transfer. The implementation and acceptance of this issue has been slow worldwide so far. By the end of 2024, the EU’s Transfer of Funds Regulation (ToFR), or the European version of the Travel Rule, is expected to come into effect. This development will subject cryptocurrency asset service providers to stringent AML/CFT requirements. These measures will significantly impose specific requirements on companies outside Europe that decide to engage in business transactions with EU CASPs.
Other jurisdictions will move towards implementing the Travel Rule over the next 12 to 18 months. Many of them are likely to follow the lead of the UK, Hong Kong, Japan, Korea, the Philippines, and Singapore, moving towards explicitly requiring financial institutions to conduct proper due diligence on their VASP counterparts.
A Focus on HighFi Projects
Not all DeFi projects are created equal—a reality that will become more apparent in 2024. Most DeFi projects exhibit varying degrees of centralized control, placing them on a spectrum between centralized finance (CeFi) and decentralized finance (DeFi). Those in the middle, referred to as HighFi or Hybrid Finance projects, blend elements of both models.
So far, international standard-setters have primarily focused on CeFi, leaving DeFi largely outside the scope of existing regulatory frameworks. HighFi projects, often labeled as true DeFi, have evaded regulatory scrutiny by operating in this gray area.
However, regulators are gaining a clearer understanding of the crypto and DeFi landscapes. This year, they are expected to focus more closely on DeFi activities that fall within existing frameworks. HighFi projects with identifiable and accountable individuals, especially in the U.S., will attract regulatory oversight.
Pure DeFi will likely remain beyond the reach of current regulations due to its decentralized nature. Nonetheless, the industry may see more crypto projects either fully embracing centralized models or genuinely operating as decentralized entities.
In 2024, the cryptocurrency and blockchain industries will undergo significant transformations driven by new policies and regulatory measures. These changes will play a crucial role in enhancing the stability and growth of the sector.
Five Key Cryptocurrency Regulatory Trends in 2024:
1. The Bitcoin ETF Approval Trend
The U.S. Securities and Exchange Commission (SEC)’s January 10 decision to approve 11 Bitcoin Exchange-Traded Funds (ETFs) marks one of 2024’s major milestones. This decision suggests that future approvals for crypto ETFs in the U.S. may follow a clearer path, benefitting the cryptocurrency industry from these developments.
2. Stablecoin Challenges and Opportunities
Stablecoins continue to attract attention as one of the most innovative aspects of the cryptocurrency industry. In 2024, stablecoin-related opportunities and risks will become a key focus for governments. With the implementation of new regulations for stablecoin issuers in the EU and elsewhere, this sector will be subject to stricter oversight and supervision.
3. Advancement of Paris, Dubai, and Hong Kong as Key Crypto Hubs
Paris, Dubai, and Hong Kong will continue to play prominent roles in 2024 as significant centers for cryptocurrencies. These cities serve as attractive destinations for crypto companies seeking clarity in regulations and policies.
4. Mapping the Intersection of AI and Cryptocurrencies
The interplay between artificial intelligence and cryptocurrencies will be a novel topic of exploration in 2024. As advancements in this domain progress, regulatory authorities will need to focus more on addressing the risks and challenges associated with this integration.
5. The Evolution of DeFi
DeFi remains both a captivating and challenging area within the cryptocurrency sector. In 2024, regulators will pay closer attention to its development, focusing on its role in the crypto landscape and how it aligns with government regulations.
Five Countries with the Strictest Crypto Regulations
Global regulatory frameworks shaping the digital financial world reveal that some countries, through uniquely stringent measures, are leading the charge in setting rules and laws for this sector. Whether these measures are positive or negative depends on the perspective of those trying to operate within these jurisdictions.
United States: Responsible Financial Innovation Act (RFIA):
This act categorizes most digital assets as commodities, designating primary oversight to the U.S. Commodity Futures Trading Commission (CFTC) while establishing clear regulatory requirements for stablecoins.
Executive Order on Crypto Regulation: Highlighting President Joe Biden’s structured approach to managing the challenges and opportunities of digital assets, this order signifies a comprehensive government stance on cryptocurrency governance.
United Kingdom: Pioneering FCA Regulatory Frameworks:
Crypto companies in the UK must register with the Financial Conduct Authority (FCA) and adhere to anti-money laundering (AML) regulations, reflecting the government’s firm stance on crypto regulations.
Stablecoin Regulation as Payment Systems: The UK’s progressive steps to recognize stablecoins as a legitimate form of payment, subject to strict regulatory standards, underscore its innovative regulatory approach.
European Union: Harmonizing Crypto Regulations through MiCA:
MiCA establishes a unified regulatory framework across the EU, a significant step toward consistent oversight of crypto-assets.
Cross-Jurisdictional Supervision: MiCA aims to synchronize member states’ rules, ensuring a balanced regulatory environment across the EU.
Singapore: MAS Regulations for Consumer Protection and Market Integrity:
These include restrictions on credit for crypto trading and bans on incentives that promote trading, reflecting Singapore’s commitment to safeguarding traders.
Comprehensive Crypto Licensing System: Singapore emphasizes its leadership in crypto regulation in Asia with a robust licensing framework for crypto companies.
China: A Strict Ban Reflecting Government Concerns:
China’s outright prohibition of cryptocurrencies and related activities demonstrates its stringent stance on digital assets.
Tough Measures Against Crypto Transactions: The government’s strict policies aim to eliminate financial risks associated with cryptocurrencies.
Conclusion
As the cryptocurrency and blockchain industries grow in significance, government actions and policies in 2024 will play a vital role in shaping their future. Regulatory authorities are tasked with crafting flexible and intelligent policies to address challenges and trends, ensuring sustainable growth without undue disruption.
In 2024, regulators are addressing the industry’s weaknesses and essential needs, moving toward a more defined and orderly framework. This helps bolster public trust while fostering conditions conducive to industry growth.
However, challenges remain. Companies unprepared for regulatory changes may face legal risks and operational challenges. Yet, with cooperation and alignment between the industry and regulators, a balanced approach can be achieved. This not only promotes the industry’s success but also strengthens public confidence, laying a solid foundation for a brighter and more secure future.
