Crypto isn’t dead. After the systemic implosions in the crypto world last year, it is now on the brink of a tipping point in its journey towards mass adoption. This process is long, but it is well underway – just like the 2008 financial crisis.
I believe three regulatory trends will drive crypto closer to the tipping point. First, US public opinion is changing. Second, the “regulatory waterfall” – the term I use to describe the process of international rulemaking – has been activated. Third, the industry is self-regulating.
In the US, reasonable advocates of crypto market regulations understand that the adoption of digital assets is not only a matter of consumer protection, but also of national security and economic competitiveness. This viewpoint has been embraced by a bipartisan group in Congress, who have presented legislation to advance these core concerns.
The Payment Stablecoin law is symbolic. It protects consumers with conservative stablecoin requirements. It is important to identify the entities that can issue these certificates, which provides businesses with a clear route. Additionally, by creating demand for US dollars and treasuries, it safeguards the dollar’s role as the world’s reserve currency.
It is uncertain whether any crypto bill will pass, but we may be entering crypto’s moment of maximum leverage. As crypto gains support in district and circuit courts, it will become increasingly difficult for legislators to maintain the status quo. The US electorate will give those who still believe opposing crypto is a winning political strategy the chance to prove their hypothesis.
It is now time to regulate digital assets across the globe, regardless of US involvement. Just like after the financial crisis in 2009, standard-setters such as BIS, FATF and FSB will likely lead the way. We already have one example of the influence of the concept of “virtual asset service provider”, which FATF initially introduced and redefined in 2019. In just a few years, the VASP classification has been adopted as a fundamental one in crypto regulations and has been incorporated in various forms, such as the “crypto-assets service provider” in New York’s “Bitlicense”.
The endorsement of the IMF-FSB recommendations on crypto-asset regulation by the G20 implies a heightened concern at the multinational level. However, we have yet to observe the kind of global coordination that was so important for implementing uniform regulations after the financial crisis in 2009. This is a remarkable opportunity for regional power centres such as Dubai and Singapore. These countries stand to gain from thoughtful regulation, as it will attract talent from all over the world, grow the local economy and take market share away from those superpowers that are reluctant to change.
The digital asset industry is presented with both risks and opportunities due to the evolving regulatory environment. One of the greatest opportunities is offering blockchain products and services that fully comply with applicable law, both old and new. In January 2022, Fireblocks partnered with a liquid protocol called Aave to launch “Aave Arc”. The project aimed to bridge businesses and smart contract technology, to address legitimate concerns about sanctions and anti-money laundering. Although it was not a commercial success, the idea was adopted by the Monetary Authority of Singapore as part of their Project Guardian sandbox. This is testing the viability of “trust anchors”, which can serve as an entry point for new regulations.
At the same time, identity verification is being improved via on-chain technologies. Solutions secured by zero-knowledge cryptography, like “passport”, will enable businesses and individuals to participate in the digital economy while complying with all applicable laws. This could even lead to future collaborations with regulators.
It is morally right to make sure blockchains are not used to finance terrorists or aid criminals in money laundering. But the reason why I am confident it will happen at scale is because it is profitable. More importantly, it is the next crucial step to push crypto across the tipping point.
“We meet in the midst of a critical transition from crisis to recovery to turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy.” This statement, part of the G20’s response to the financial crisis of 2008, is even more applicable to the paradigm shift underway in crypto markets today.
Crypto markets have recovered completely and are now moving into the next phase. “Crypto Coroners: check the pulse.”
Jason Allegrante is the Chief Legal and Compliance Officer at Fireblocks, and a consultant on digital assets, advising clients on a wide range of issues. This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, or its owners.
