Forcing cryptocurrency into existing financial regulations is a mistake

Forcing cryptocurrencies into existing regulatory frameworks will undermine its potential as a global asset class, the head of Hong Kong’s Mandatory Provident Fund Schemes Authority, Alice Law Shing-mui, said.

Cryptocurrency poses a unique challenge to authorities worldwide, and regulation in different countries will require each country to devise its own legislation.

According to Shing-Mui, who previously served in Hong Kong’s Securities and Futures Commission, legislation concerning cryptocurrency regulation will have to be distinct from already existing frameworks and be defined according to the nature of the crypto market.

“If regulations are not fit-for-purpose, that actually goes to undermine the strength of the enforcer”, Shing-mui said.

Shing-mui’s comments should come as a warning to South African regulators.

The Intergovernmental Fintech Working Group published its position paper on crypto assets, stating that crypto asset service providers (CASPs) will be subject to existing regulations. These include:

  • Anti-money laundering regulations, overseen by the Financial Intelligence Center
  • Exchange control regulations, overseen by the Reserve Bank
  • Financial services regulations, overseen by the Financial Sector Conduct Authority

Despite the IFWG policy subjecting CASPs to existing regulations, a draft declaration under the Financial Advisory and Intermediary Services Act seems to provide some reprieve.

According to Webber Wentzel, the draft states that “subjecting crypto-asset services providers to the same fit and proper requirements and compliance obligations as incumbent [financial service providers] may impose unduly onerous regulatory requirements upon CASPs.”

The ambiguity in the South African approach is no surprise, as nations worldwide are grappling with the exact way that regulations must be set up.

The Financial Action Task Force (FATF) has been devising an international standard for a cryptocurrency regulatory framework since 2019. At its core is the reduction of anonymity in crypto transactions.

Elisa de Anda Madrazo, vice-president of FATF, believes that the anonymity afforded by blockchain transactions is one of the primary factors for the slow adoption of cryptocurrency in the private sector.

She said that 27 countries currently adhere to the FATF framework.

Asked whether the implementation of local regulations could see crypto service providers and traders move to countries without regulation — a form of jurisdictional arbitrage — Madrazo said that the FATF aims to have over 200 countries adhere to its regulations, implying that regulations will become unavoidable.

Madrazo revealed that non-compliance to FATF regulations could lead to countries being blacklisted, though she did not mention what the implications of this could be.

Though local legislation specifically adapted to cryptocurrency is necessary, crypto remains an international asset.

According to Shing-mui, it is paramount that nations work together to create international legislation that can function across any country’s local framework.

This will be important if crypto-related crimes are to be prevented and penalised.

However, an international regulatory framework is far-off, and it will first be necessary for countries to implement effective local regulations for an international system to exist in any form.

Now read: How to avoid a Bitcoin scam in South Africa

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Forcing cryptocurrency into existing financial regulations is a mistake