Report suggests global coordination for regulating cryptocurrencies ‘only chance’ for effectiveness

“Globally coordinated” regulation of cryptocurrencies (and cryptoassets) is the only chance for the supervision of the electronic payments to be effective, a report published recently observes.

In its Annual Economic Report 2018, the Bank of International Settlements (BIS) offers three considerations for supervising the crypto- tools.

“First, the rise of cryptocurrencies and cryptoassets calls for a redrawing of regulatory boundaries,” the report states. “Those boundaries need to fit a new reality in which the lines demarcating the responsibilities of different regulators within and across jurisdictions have become increasingly blurred. Since cryptocurrencies are global in nature, only globally coordinated regulation has a chance to be effective.”

Interoperability with regulated financial entities is the second area that could be addressed, the report states. “Only regulated exchanges can provide the liquidity necessary for distributed ledger technology (DLT)-based financial products to be anything but niche markets, and settlement flows ultimately need to be converted into sovereign currency,” the report observes. Tax and capital treatment rules for regulated institutions desiring to deal in cryptocurrency-related assets could be adapted, the report suggests – and regulators could monitor whether and how banks deliver or receive cryptocurrencies as collateral.

Finally, the report suggests that regulators could devise rules that target institutions offering services specific to cryptocurrencies. “For example, to ensure effective AML/CFT (anti-money laundering/ combating financing of terrorism), regulation could focus on the point at which a cryptocurrency is exchanged into a sovereign currency,” the report states.

The report notes that other existing laws and regulations relating to payment services focus on safety, efficiency and legality of use. “These principles could also be applied to cryptocurrency infrastructure providers, such as ‘crypto wallets.’ To avoid leakages, the regulation would ideally be broadly similar and consistently implemented across jurisdictions,” the report suggests.

The report also outlines several challenges ahead for crypto- regulation, including:

  • AML and combating the financing of terrorism (CFT): “The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your-customer standards, to be evaded.”
  • Securities rules and other regulations ensuring consumer and investor protection (including the common problem of digital theft): “Many users who turned to cryptocurrencies out of distrust in banks and governments have thus wound up relying on unregulated intermediaries. Some of these (such as Mt Gox or Bitfinex) have proved to be fraudulent or have themselves fallen victim to hacking attacks.”
  • Stability of the financial system (over the long term): “It remains to be seen whether widespread use of cryptocurrencies and related self-executing financial products will give rise to new financial vulnerabilities and systemic risks.”

Cryptocurrencies: Looking beyond the hype (BIS Annual Economic Report 2018)