Global Cryptocurrency Regulation Outlook: Financial Risks, Data Governance, and Cybersecurity are Key Regulatory Focuses

Author | Julius Mutunkei

In the new year, a surge in regulatory efforts in the cryptocurrency space is expected. These rules will expand to cover anti-money laundering and counter-terrorism financing risks, the behavior of companies operating in the cryptocurrency sector, and regulatory actions related to token sales.

In the United States, there are no signs of a slowdown in the pace of regulatory actions. Similarly, the UK has introduced a set of rules that equate the sale of crypto tokens with the sale of traditional financial products. Likewise, the European Union is set to become the first major jurisdiction to formally enact a comprehensive set of laws and regulations for the cryptocurrency industry in 2024. The Markets in Crypto-Assets Regulation (MiCA) aims to establish a unified EU crypto regulatory framework and provide legal certainty for digital assets that fall outside the current scope of EU financial services legislation.

Overall, analysts expect that the focus areas in 2024 will extend beyond the general trend of increased regulatory intensity. They predict that financial institutions will develop stronger risk management frameworks and raise capital and liquidity requirements to reflect the current economic environment. Additionally, the importance of data and artificial intelligence in both traditional finance and the cryptocurrency space is expected to increase the demand for data governance and model risk management in global cryptocurrency regulation. Analysts also anticipate that sustainability and environmental, social, and governance (ESG) factors will play a larger role in international cryptocurrency regulation, while cybersecurity remains a top priority, as digital asset platforms continue to be targets for hackers and scammers.

Let’s briefly explore the current cryptocurrency regulations and the expected legislative outlook for 2024 from a geographical perspective.

U.S. Cryptocurrency Regulation

Cryptocurrency regulation in the United States is a combination of state and federal oversight, allowing multiple agencies to participate in the control of the industry. These agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), largely utilize existing legal frameworks to regulate digital asset activities.

In 2023, the SEC and CFTC initiated over 200 enforcement actions against cryptocurrency companies. The backdrop of increased activity by U.S. regulators is a sector rife with bankruptcies, scams, fraudulent operations, and illicit fund flows.

As 2023 comes to a close, some participants in the cryptocurrency space have criticized regulators, particularly the SEC, for their approach to overseeing the industry. They have also renewed calls for policymakers and regulators to clarify cryptocurrency laws and adopt a more comprehensive rule-making approach.

However, these requests have largely gone unheeded. By the end of the year, the SEC faced multiple legal setbacks, particularly in cases against Ripple (XRP) and Grayscale. Yet it did have the last laugh. On December 15, the agency rejected Coinbase's petition to establish new rules for the cryptocurrency industry.

Anton Titov, CEO of fiat-to-crypto payment processor Archway Finance, told crypto.news that he believes the SEC's decision is reasonable. As he explained, the agency's role is to protect investors, maintain market integrity, and promote capital formation. Therefore, he believes that rejecting Coinbase's petition aligns entirely with investor interests. "Because for most people engaging with cryptocurrency this year and next, it is purely for speculative purposes. Even utility tokens equate to the ambition of making money, which equals investment. So this means the SEC's actions are entirely in line with investor interests and are trying to maintain market integrity."

However, Titov pointed out that this decision also highlights the SEC's reluctance to fully embrace cryptocurrency. He believes the agency views Bitcoin and stablecoins as threats to established and controllable monetary flows. Furthermore, in his view, U.S. regulators do not aim to be an "innovation hub" for new technologies like blockchain and digital tokens, indicating a fundamental disconnect between its mission and the goals of the crypto industry.

However, the growing market size of certain cryptocurrencies, particularly dollar-backed stablecoins, which have surpassed the $50 billion systemic importance threshold, has caught the attention of U.S. lawmakers, leading them to draft more legislative proposals to regulate cryptocurrency activities.

One such proposal is the bipartisan Responsible Financial Innovation Act (RFIA), which aims to classify most digital assets as commodities. It would assign primary oversight responsibilities to the CFTC and establish regulatory requirements for stablecoins.

The Biden administration has also issued an executive order outlining the U.S. government's approach to cryptocurrency regulation. Additionally, a bill passed by Congress in 2021 requires new reporting requirements for individuals involved in large-scale cryptocurrency transactions, which will take effect in January 2024.

According to the cryptocurrency advocacy group CoinCenter, the Infrastructure Investment and Jobs Act mandates any entity receiving $10,000 or more in cryptocurrency in the course of its regular business operations to report the transaction to the IRS. Failure to report within 15 days of the transaction may lead to felony charges. This legislation is self-executing, meaning no additional regulatory measures or enforcement actions are required by any government agency upon implementation. Once signed into law, it takes effect immediately and is enforceable. Therefore, all U.S. citizens handling cryptocurrency are now bound by this law.

Looking ahead to 2024, many predict that efforts to pass cryptocurrency legislation in the U.S. will primarily focus on two bills: one seeking to regulate stablecoins at the federal level, and the other proposing a comprehensive market structure approach for cryptocurrencies.

The Clairity for Payment Stablecoins Act, initiated by House Financial Services Committee Chairman Patrick McHenry, may be one of the first legislative items to be addressed in 2024. Although the White House and several powerful Democrats have expressed concerns about allowing regulators to approve stablecoin issuances without Federal Reserve involvement, the bill passed through the committee stage in July. However, SEC Chairman Gary Gensler has compared stablecoins to money market funds and suggested that those pegged to the dollar should fall under his agency's jurisdiction, which observers believe could pose obstacles to the smooth passage of the stablecoin bill.

The second bill, the 21st Century Financial Innovation and Technology Act, may also face challenges as it proposes to shift more responsibilities to the CFTC and requires regulators to establish a clear path for digital assets transitioning from securities to commodities.

Similarly, the potential approval of Bitcoin ETFs could enhance the legitimacy of the cryptocurrency industry. Several asset management firms, including BlackRock, Fidelity, and WisdomTree, are vying for a spot Bitcoin ETF, which still requires approval from the SEC but has not yet been granted.

Finally, the elections in 2024 may significantly impact digital asset legislation, as lawmakers' attention may shift from cryptocurrency regulation to re-election campaigns.

U.K. Cryptocurrency Regulation

Since 2020, U.K. law has required cryptocurrency companies to register with the Financial Conduct Authority (FCA) and comply with the 2017 regulations on money laundering, terrorist financing, and the transfer of funds.

However, in October 2022, as part of a broader strategy by the U.K. government to position the country as a global hub for crypto technology and investment and enable regulators to respond more swiftly to developments in the sector, the House of Commons voted to allow the Treasury to regulate cryptocurrencies as financial instruments under the Financial Services and Markets Act 2000.

Additionally, at the beginning of 2023, the government released a consultation document seeking input on regulating the cryptocurrency industry. Following this work, Whitehall indicated its intention to place various digital assets, including utility tokens and unbacked exchange tokens, under a regulatory framework similar to that of traditional financial assets.

The rules governing cryptocurrency advertising and sales in the U.K. are also changing, with the Treasury integrating cryptocurrency promotions with other types of financial advertising. Furthermore, the FCA has imposed additional restrictions on the sale, marketing, and distribution of crypto derivatives (excluding security tokens).

Moreover, similar to the U.S., stablecoins are expected to face stricter regulatory scrutiny in the U.K. The government plans to recognize them as a legitimate payment method. Observers predict that this can largely be achieved by extending existing electronic money and payment legislation.

Nathan Catania, a partner at XReg, told crypto.news that the U.K.'s approach to stablecoin regulation will play a crucial role in the country's financial future. Catania emphasized the proactive measures taken by the U.K. to address key regulatory risks and stated that the country is ensuring that issuers maintain low-risk, liquid, and secure reserve assets. "Overall, the major regulatory risks have been addressed. These include ensuring that issuers maintain reserve assets and that these assets are low-risk, liquid, and secure instruments. The focus on protecting customer assets and other prudential requirements will ensure that stablecoins issued in the U.K. are safer for consumers to use."

However, Catania also identified potential obstacles in the overseas regulation of stablecoins. Most stablecoin activities in the U.K. involve assets issued abroad, particularly Tether (USDT) and USD Coin (USDC). He noted that even as 2024 approaches, the impact of the regulatory framework on the listing and trading of these stablecoins on U.K. cryptocurrency exchanges remains unclear.

Additionally, the analyst expressed concerns that the stablecoin regime may not extend to peer-to-peer payment areas. He believes this could affect the U.K. cryptocurrency market and exchanges, potentially limiting consumer choices while protecting consumer interests. Therefore, he argues that the U.K. must maintain a careful balance when formulating future cryptocurrency legislation.

European Cryptocurrency Regulation

With the implementation of MiCA, the European cryptocurrency legislative landscape has made significant strides. This regulatory framework represents the first attempt to coordinate cross-jurisdictional regulation of digital assets and their related activities across the EU. MiCA is a key component of the European Commission's broader strategy to incorporate cryptocurrencies and blockchain technology into the financial services sector. MiCA forms the foundation of EU cryptocurrency regulation, aiming to synchronize the differing laws of member states while striking a delicate balance between encouraging financial innovation and mitigating the unique risks posed by various digital assets.

By 2024, cryptocurrency asset service providers (CASPs) and cryptocurrency asset issuers (CAIs) operating within or across the EU will be required to comply with a unified rulebook, replacing the previously disjointed national frameworks.

As the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) develop regulatory technical standards (RTS), implementing technical standards (ITS), and guidelines, the application of MiCA is expected to be further refined in the new year. Meanwhile, EU member states will also deploy their legislative tools to support the rollout of MiCAR, RTS, ITS, and guidelines.

The outlook for Europe in 2024 is that national competent authorities (NCAs) of EU member states will intensify efforts to provide regulatory guidance and expectations for the authorization and supervision of CASPs, CAIs, and traditional financial service providers involved in MiCAR regulatory activities.

Asian Cryptocurrency Regulation

While China completely banned the use of cryptocurrencies in 2021, several of its neighboring countries have taken steps to embrace the industry, shifting the regulatory landscape in the region to focus on consumer protection and transparency within the industry.

Singapore led this trend in 2023, with the Monetary Authority of Singapore (MAS) announcing new rules aimed at protecting individual traders, which will take effect in mid-2024. These rules include restrictions on credit access for cryptocurrency trading, prohibiting incentives that encourage trading, and banning the use of locally issued credit cards to purchase cryptocurrencies.

Meanwhile, Hong Kong has adopted a more liberal stance, welcoming cryptocurrency companies and launching its own cryptocurrency licensing regime. By implementing a comprehensive regulatory framework, Hong Kong aims to position itself as a global hub for virtual assets, with more work expected to be completed in 2024. Currently, Hong Kong regulators categorize cryptocurrencies into security tokens and utility tokens, with the former falling under the jurisdiction of the Securities and Futures Commission (SFC).

Japan has been laying the groundwork for the growth of the crypto economy, even viewing web3 as a key pillar of its economic roadmap. From a regulatory perspective, Japan classifies crypto assets into several categories: crypto assets, stablecoins, security tokens, and other categories like NFTs, each governed by different legislation. The holding and sale of cryptocurrencies are regulated under the Payment Services Act (PSA), which does not impose specific prudential requirements on digital assets. However, service providers must maintain a specific proportion of customer funds in a highly secure manner (e.g., cold wallets). A PSA amendment in June 2023 further clarified the status of stablecoins denominated in fiat currency, distinguishing them from other digital assets. Currently, regulations limit stablecoin issuers to banks, remittance companies, and trust companies, while intermediaries must register with regulators and comply with strict AML/KYC guidelines.

Expectations for 2024 indicate that as regulation and clarification within the cryptocurrency space continue to strengthen, a safer and more favorable environment for cryptocurrency-related activities will foster ongoing growth in the cryptocurrency sector.

Global Cryptocurrency Regulation

Other regions around the world are also not lagging in cryptocurrency legislation. PwC's "2024 Global Cryptocurrency Regulation Review" lists over 40 jurisdictions with some form of cryptocurrency rules.

From the perspective of cryptocurrency regulation in various countries, outside the EU, only the Bahamas, Cayman Islands, Japan, Mauritius, Singapore, and the United Arab Emirates have comprehensive cryptocurrency legislation covering everything from licensing, registration, and travel rules to the handling of stablecoins.

Many other countries are still in the process of developing frameworks to incorporate them into the cryptocurrency regulatory map, with countries like Qatar, South Africa, Taiwan, and Canada engaging in varying degrees of ongoing regulatory activities, including discussions, consultations, and pending implementations of cryptocurrency laws.

Elsewhere, Australia is actively developing a regulatory framework for the cryptocurrency industry. As part of a multi-phase reform agenda, the Australian government released a token mapping consultation paper in February, laying the groundwork for subsequent regulatory measures.

In addition to Australia, the UAE has also made significant progress in cryptocurrency regulation, becoming one of the first jurisdictions to have comprehensive cryptocurrency laws. Given the rapid expansion of the virtual asset ecosystem, the UAE government has decentralized regulatory authority to the Securities and Commodities Authority (SCA) and the Central Bank (CBUAE), creating an environment conducive to the development of the cryptocurrency industry.

Meanwhile, New Zealand has taken a more cautious approach, focusing on how existing regulations apply to cryptocurrencies and crypto service providers before developing new specific legislation.

The New Zealand government recognizes that the cryptocurrency industry is still in its infancy and emphasizes the importance of adaptive rules that can evolve with the industry and align with global cryptocurrency regulation.

On the other hand, South Africa is planning its cryptocurrency regulatory journey. Observers in the country note that South Africa is eager to learn from the experiences and models of other jurisdictions, including those outside Europe and the U.S., as it seeks to understand the complexities associated with cryptocurrency regulation.

Expert Outlook

This "cryptocurrency regulatory map" highlights the global trend of developing tailored regulatory measures for the cryptocurrency industry.

Upcoming cryptocurrency regulations are expected to further refine and strengthen these measures, fostering a more robust and sustainable cryptocurrency market where innovation can thrive under regulatory oversight.

Industry analyst Anton Titov predicts that MiCAR will be implemented across the EU in 2024, achieving a unified anti-money laundering policy among all member states. He also believes that non-EU countries like the U.K., Switzerland, and the U.S. may adhere to these standards. Beyond the EU and the U.S., he anticipates a shift in the perception of cryptocurrencies in other parts of the world. He predicts that Indonesia's potential new president may be more open to cryptocurrencies and that India may welcome more foreign companies into its local market. This would involve establishing a framework consistent with banking policies to guide domestic and cross-border investments and transactions. However, he also expects that privacy on the blockchain will continue to be viewed negatively and prohibited, even in commercial transactions. Nevertheless, he believes that the emergence of the first central bank digital currencies (CBDCs) in the market, while not fully realizing Satoshi's vision of financial sovereignty, will convey the inevitability of blockchain technology and a strong message of regulatory approval.