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Regulatory Scrutiny Increasing as Crypto Becomes Financial Stability Risk – Report

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There has been a sharp increase in regulations targeting the crypto space, with regulatory bodies mainly in North America and Europe aiming for everything from non-fungible tokens (NFTs) to stablecoins and ordinary cryptocurrencies, found a global RegTech (regulatory technology) firm CUBE.

In a new report on the regulatory outlook for the crypto space, CUBE said that there has been a 7,436% increase in crypto-related regulatory messaging in the past four years, compared to pre-2018.

For 2021, the report found a large increase in new regulations using the terms “Virtual & Cryptocurrencies.” 

Regulations focused on other crypto-related topics such as “Bitcoin,” “Digital asset,” “Crypto” and “Non-fungible token (NFT)” also saw significant growth last year, although to a lesser extent than “Virtual & Cryptocurrencies.”

The change in the use of various terms goes to show that “a new iteration” in crypto tends to be developed just as regulators have “come to terms with the latest development,” the report said.

Further, the report acknowledged that the crypto market has already grown to become a critical piece of the global financial system, and that risks from crypto could spill over into traditional markets.

“As the participation of investors increases for cryptocurrency, so too do the risks that market volatility for crypto could have a knock-on effect for the global economy. It is fast becoming a financial stability risk,” the report said.

CUBE added that most of the regulatory issuance comes from North America and Europe, accounting for 51% and 32%, respectively, of all new regulations in the space.

In these regions, the US Securities and Exchange Commission (SEC) and the UK Financial Conduct Authority (FCA) have been among the most active in issuing new regulations.

Among the issues that CUBE finds regulators have missed is the sustainability aspect of crypto. According to CUBE CEO Ben Richmond, global regulators need to drive forward regulations that show that crypto can “thrive without undermining” efforts to mitigate climate change.

And although Richmond admitted that there are “aspects of ESG [Environmental, Social, and Governance] and crypto that do work in tandem,” he argued that the failure to address the environmental impact of crypto will lead to “an inevitable clash of two titans that could set the trajectory of the modern financial world back significantly.”

Looking ahead, the report said that regulators face a universal challenge in managing crypto risks at a global level. And although many national regulators, for the time being, appear to be focused on stablecoins as the most urgent area to regulate, there is “uncertainty as to whether any regulatory regime will hold” without increased global cooperation.

In conclusion, the report said that “time is running out before the volatility of crypto bleeds into global financial stability.” As a result, it is likely that regulators – in an attempt to get faster results – will “stretch existing regimes to cater for cryptocurrencies.” 

The report added that,

“In turn, they may use stablecoins as a blueprint for new regulation to come. Undoubtedly, international bodies will work tirelessly to tie centralised regulation together with a decentralised currency.”

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