Road to Comprehensive Crypto Regulatory Framework

The crypto and blockchain industries are evolving at a rapid pace, with the combined market capitalization of digital assets surging to nearly $1.9 trillion by April 2022. The cryptocurrency space has been the hotbed for numerous new trends, such as the DeFi boom, the NFT craze, and the more recent Play-to-Earn (P2E) revolution.

At the same time, while cryptocurrencies are gaining increased adoption among the global population, a growing number of institutional investors and businesses are joining the industry to reap its benefits.

As a result of all this activity, regulators all over the world are struggling to keep up with the swift evolution of the crypto market. Financial watchdogs and government agencies take a reactive stance, with their actions often coming across as inconsistent and confusing.

Consequently, market players are left unsure about how they should proceed despite their efforts to comply with regulatory rules.

The UK’s Case Study of Regulatory Confusion

From a complete lack of rules to extreme measures such as a blanket ban on digital assets, crypto regulation remains fragmented across the globe. At the same time, we can observe significant inconsistencies on the national level as well, for which the UK serves with an excellent case study.

Deeming digital asset ads as “red alert,” the Advertising Standards Authority (ASA) started to crack down on the promotional activity of local cryptocurrency businesses in July 2021. According to the regulator’s statement at the time, its goal was to protect consumers by taking down misleading and irresponsible crypto advertisements.

By March 2022, the regulator issued an enforcement notice to over 50 companies promoting crypto solutions, instructing them to review their campaigns and adhere to the new rules. Upon failure to comply by May 2, the ASA may take targeted enforcement action against digital asset firms.

The above actions are part of a joint effort between the ASA and the Financial Conduct Authority (FCA) that aims to reduce harm to investors by cracking down on ads promoting risky assets.

As one of the first targets of the regulatory operation, the advertising watchdog banned the Floki Inu memecoin project’s London underground “Missed Doge? Get Floki” campaign in March this year. A few months earlier, the same happened to Luno’s ads, which the ASA considered misleading.

In addition to that, the Bank of England also joined the group of crypto-skeptic UK regulators. As part of its statement, the BoE urged the nation’s banks to approach digital assets with “utmost caution,” warning about the potential financial risks cryptocurrencies could pose to the market in case they continue to grow.

Based on the above actions, the stance of different regulators appeared to be more or less in sync with each other. Yet, it took less than a month to replace consistency with confusion in the field of UK crypto regulation.

Going right against the crackdowns and strict stances of the other regulators, the UK’s Economic and Finance Ministry (HM Treasury) said it took a “forward-looking approach” towards cryptocurrencies.

With the goal to make the United Kingdom a global hub for crypto, the HM Treasury expressed its intent to amend its existing framework to incorporate stablecoins as a means of payment. At the same time, chancellor Rishi Sunak asked the Royal Mint to create an NFT, which could be issued by this summer.

Considering all the actions and the contradictory approaches, we see a case of incoordination between the different branches of the same government. As one side vies for stricter oversight and restrictions, the other seems to be willing to go forward with a regulatory framework that aims to boost the local crypto market.

Taking into account how the FCA handles crypto licenses, the Treasury’s forward-looking approach seems even stranger.

Since January 2021, it is mandatory for all cryptocurrency businesses serving UK customers to register with the financial agency in order to operate in the country. By March 2022, over 80% of the crypto companies that applied for a license either withdrew their applications or were rejected by the FCA as they were unable to meet the very high benchmark.

Is There a Solution?

The resulting confusion around local crypto regulatory frameworks leaves many market players wondering how they should adapt. But what is the way out of this rather unfortunate situation?

As the most realistic and effective solution, different regulators must put a significant focus on communicating, coordinating, and cooperating with each other. And they should not only do this within the UK but on the global stage as well.

Similar to how banks, stockbrokers, money transfer solutions, and other financial service providers are supervised, crypto regulation should be international and equally comprehensive. And this has to be a standard the entire industry should move towards.

At the same time, regulators should continue with their efforts to protect investors. Despite the seeming lack of coordination with other departments, it makes great sense that the FCA and the ASA are cracking down on misleading ads that fail to address the real risks behind crypto investments.

When consumers without prior knowledge or experience with сrypto see an ad about this asset class, many of them get the impression that it is something simple to grasp. Thinking that it would be easy to earn money quickly with cryptocurrency, they invest their savings in digital assets without putting much thought into it, especially if the ads urge people “not to miss out on a great opportunity.”

But more often than not, rushed decisions inspired by the fear of missing out result in investors losing money.

That said, regulation alone is not enough to truly change this market. It is not about the strictness of rules; it is about people actually understanding what kind of assets they are investing their money into.

And crypto is a complex asset class that introduces people to a great number of new concepts and technologies, such as blockchain networks, smart contracts, NFTs, DeFi protocols, and decentralized autonomous organizations (DAOs).

For these reasons, regulators should not only oversee cryptocurrencies and issue laws and bans, but also explain how they work to the public by developing educational courses. In addition, it may also be a good idea to implement these topics to be studied in universities that cover financial and technical subjects. This would help ensure that the newer generations of market players come better prepared to engage with the crypto industry.

The Road to Effective Crypto Regulation

Whenever the world faces new emerging technology, there is always an initial period of confusion and adaptation as it struggles to be accepted by society.

This is very much the case with cryptocurrencies today. They have proven by now to be more than a passing fad, but there are still ways to go before they can reach mainstream adoption.

However, if this industry is to move forward in the truest sense, it is crucial to introduce comprehensive and unified regulatory standards as well as educate the public about crypto.