Same risk, same rules? How to not overregulate the crypto market

Government officials argue that their efforts to regulate the crypto market are aimed at protecting customers, but many in the community believe this to be a guise for exerting control and overregulation. In light of the recent failures of several major crypto companies, regulators may feel compelled to quickly enforce regulations without thorough consideration. This can lead to excessive oversight that could sabotage innovation, drive crypto businesses to weaker jurisdictions and increase overall risk. But most concerningly, it disregards the reality that recent failures were the result of misconduct by centralised entities, which ironically goes against the very nature of blockchain itself.

On the bright side, some jurisdictions have embraced blockchain technology and its potential for financial innovation. These jurisdictions seem to adopt a principle-driven approach to their regulatory efforts towards crypto, with a core emphasis on technology-neutrality and legal certainty. This means creating laws that do not limit innovation or discriminate against particular technologies while also holding entities accountable for any violations and misuse.

These jurisdictions have implemented progressive regulations without relaxing laws making them some of the world’s most advanced financial market infrastructures with thriving crypto hubs. They are leading the regulatory front by embracing crypto assets and trustless protocols as transformative technologies for future financial markets.

Technologies do not abuse customers, people do

It is no secret that the recent collapses of FTX, Alameda Research, Celsius and 3AC, have spotlit the risks associated with centralised finance (CeFi) entities. These companies serve as a stark reminder that greed, poor risk management and misconduct can lead to disastrous consequences, regardless of the industry in which they operate.

The recent charges against FTX founder Sam Bankman-Fried demonstrate that it is not crypto itself that misuses customer funds, but rather individuals who abuse the technology. It is crucial to recognise this distinction and not hold crypto accountable for the actions of bad actors.

But overregulation is not the right approach

It is the lack of transparency in CeFi entities that leads to many instances of malpractice, as they often operate under a veil of secrecy. But the fact that some crypto companies, like FTX, held multiples licences raises concerns about the limitations of (some) traditional regulatory methods, and whether they are sufficient to prevent abuse within the industry.

FTX exploited its position as a trusted, centralised exchange and the resulting loss of billions of dollars for customers sparked cries for stricter regulations. With the pressure to act quickly, regulators may lean towards imposing too much regulation, which could ultimately do more harm than good. Here’s why.

• It could hinder the full potential of crypto and blockchain as revolutionary technologies in traditional finance and other industries
• It could drive crypto companies to weaker jurisdictions, resulting in an increase in illicit activity and business abuse
• Crypto will continue regardless of any attempts to regulate it, so it is important that regulations find a balance between security and growth
• The crypto community is fiercely dedicated to the ideals of decentralisation and immutability, which are at the heart of blockchain technology
• The demand for trustless systems continues to grow, proving to be effective alternatives (and improvements) to legacy systems

Same risks, same rules principle – a fair approach to crypto?

But let’s not forget that regulatory bodies play a vital role in maintaining the stability of financial systems. Hence, it is necessary to have a set of clear and enforceable rules in place for new technologies, like blockchain, artificial intelligence (AI) or quantum computing. But in principle, these rules should be technology-neutral and non-discriminatory to support innovation and growth.

Interestingly, there are regulatory principles that support such an approach, like the ‘same risks, same rules’ principle. This means that crypto-related regulations must pertain to customer protection and market integrity, while also keeping barriers to entry low and not limiting the ability for crypto actors (of all sizes) to innovate effectively.

These principles are not arbitrary as they are the outcome of extensive financial regulatory discussions and documentation. Organisations like the Financial Stability Board (FSB), the Basel Committee for Banking Supervision (BCBS), the Commission de Surveillance du Secteur Financier (CSSF) and the Swiss Financial Market Supervisory Authority (FINMA), all acknowledge the ‘same risk, same rules’ principle for innovative technologies like blockchain in creating a competitive financial environment.

It is an approach that encourages digital change as well as recognising blockchain’s potential, rather than trying control it. Unfortunately, not all regulators share this perspective and instead view the growing industry as a threat to existing systems.

That being said, the silver lining shows which jurisdictions are truly open to new technologies like crypto and blockchain, and those who are not. Despite varying in their approach, it is encouraging to see how their positive regulatory developments have helped establish thriving crypto communities.

Regulatory innovators are pushing the industry forward

Switzerland: With a robust regulatory framework that integrates crypto and blockchain into its financial market infrastructure, Switzerland has attracted over 1100 crypto and blockchain companies, driving industry growth and setting an example for other countries.

Its regulatory approach to crypto proves that being crypto-friendly does not mean lax laws, but rather using a “same risk, same rules” approach for establishing clear rules and legal accountability for crypto companies.

Singapore: Known for its strong crypto regulations focused on customer protection, Singapore is a strong supporter of blockchain technology as a key financial innovation, but also emphasizes the risks associated with cryptocurrency trading for retail investors. Its Payment Service Act (PSA) offers a flexible framework for services with strict registration requirements and AML/CTF guidelines which include crypto businesses.

MAS’s rigorous licencing process ensures that only the best-qualified companies can service crypto, ensuring longevity, market robustness and customer protection.

Luxembourg: A smaller jurisdiction that is beginning to endorse crypto innovation, Luxembourg’s robust AML laws have set clear ground rules for crypto companies, underlining the importance of security, risk management and customer safety. Unlike Switzerland and Singapore, crypto companies are categorized as Virtual Asset Service Providers (VASPs).

The country’s regulator (CSSF) asserts its principle-based and technology-neutral stance to innovative financial technologies – which include cryptocurrencies and blockchain technology – much to the similarity of Switzerland, although less advanced on the regulatory front.

Scandals are in traditional markets too, but far greater in value

It is worth noting that traditional markets have also had their fair share of scandals and company busts. In most cases, these have resulted in even greater financial losses than those in the crypto industry (Enron scandal – USD 74 billion, Bernie Madoff – USD 65 billion, WorldCom – USD 11 billion, Wirecard – USD 4 billion, to name a few). Regulators and investors should always be mindful of this.

No regulatory framework is perfect

While some crypto laws and regulations are beginning to take shape, the challenge of achieving a global, unified approach is a daunting task. Many jurisdictions have failed to develop any workable framework, but some jurisdictions seem to be on a productive track forward. Under these regimes, investors can be confident that crypto companies are less likely to engage in malpractice, while realising that the technology within these regions will be used for its beneficial qualities – at least for the most part.

Of course, no regulatory framework is without its flaws and some may either endorse crypto, blockchain or both. But it will be interesting to observe how other regions tackle their regulatory efforts in light of the recent crypto busts.