Following recent weeks of uncertainty, an expert-led panel was hosted at the AIBC Eurasia Summit held at the Dubai Festival City where the inevitability of crypto regulation was discussed.
With warning signals on the horizon for some time, institutions and investors within the financial services sector – both traditional and decentralized – are calling for more scrutiny and sharper compliance and regulation in an effort to reduce risks in the sector. Traditional and decentralised finance are essentially linked causing a turbulent domino effect.
Lawyer Dr Joseph Borg specialises in Fintech and emerging technologies. He also heads the gaming sector at WH Partners. Borg co-founded Bitmalta, an NGO that promotes discussion on the use of blockchain and cryptocurrencies. He was previously Chief Regulatory Officer of the Lotteries Authority.
Robert Kopitsch is a specialist in solutions for client support in the financial services and technology sectors covering issues relating to capital markets and payments in digital and Fintech regulatory environments. He is director of public affairs for APCO based in Brussels.
Yanislav Malahov is founder of aeternity.com, a blockchain platform that offers innovative functions and access to digital interactions for its users.
Marc Taverner is Chief Operations Officer of Xerof.com, a Swiss-licensed boutique crypto exchange that enables clients to purchase high-value items using crypto with settlement direct to third-party accounts in fiat. He also sits on the Board of a number of corporates.
“Regulation is only as good as its participants” said Robert Kopitsch who opened the panel. Kopitsch implied that sustainability of the crypto industry requires regulation to survive and that the risk of scams and fraudulent activity can only be minimized by regulation.
If some entities don’t want to play the game then crashes like FTX will happen.” Robert Kopitsch – APCO
Kopitsch added that big operators play by the rules within a regulatory framework but claim that they are no longer competitive. He believes that regulation has to be done in a very “careful way”. One has to find the right balance and at the same time allow for innovation. This may be quite difficult to achieve.
Does too much regulation stifle innovation?
When the abrupt failure of Silicon Valley Bank together with two other lenders came to a head this week, Chairman of the Federal Reserve Jerome Powell advised senators that he could identify several risks when it came to crypto assets. However he argued that innovation should not be stifled but financial institutions needed to be cautious into future interaction with crypto.
VFA Regulatory Framework in Malta and Abu Dhabi
The first VFA (Virtual Financial Assets) framework was established by Malta and Abu Dhabi and this was the right way forward with safeguards in place for both consumers and businesses in the sector. Dr Joe Borg explained that although both jurisdictions were first to set the stage for a VFA regulatory framework, Malta may have lost its ‘first adopter advantage’ as although the community recognized that it was the right way forward, it may have appeared to stakeholders that regulation was tougher than that in other jurisdictions. Investors and service providers may have questioned whether Malta was the right place to set up a crypto company if the framework in other jurisdictions such as Estonia was less regulated.
Regulation is necessary. Ideally we can work off a self-regulatory model, but self-regulation as we have seen does not work as some bad actors will always fall off the wagon. However when you create regulation, you are stifling innovation. A balance has to be achieved.” Dr Joseph Borg – W H Partners
Background: In 2018 the Government of Malta introduced a regulatory framework for virtual financial assets (VFAs). This allowed emerging technology companies to operate in a highly regulated environment, explained Dr Joseph Borg. This way investors could be protected and operators would have the parameters to develop innovation and offer crypto services.
In September 2020, the European Commission introduced a proposal for regulation on Markets in Crypto-Assets (MiCA) as part of its digital finance strategy. MiCA will also address crypto-assets that are not regulated such as e-money tokens, utility tokens and asset-referenced tokens. It will introduce a legal framework for crypto-asset service providers and give protection to users. Crypto-asset services will also include the custody and administration of crypto-assets for and on behalf of third parties.
Borg added that the MiCA (Markets in Crypto-assets) proposal is nearly identical to the crypto regulation in the Maltese jurisdiction. In fact the major points of the MiCA proposal comply with the regulatory framework in Malta. He noted that when MiCA ‘comes into course’ licencees in the Malta jurisdiction would be ready to passport their services and operate anywhere in the world. At the moment there are 25 licensees in the jurisdiction that will have a massive advantage over their competitors once MiCA is fully approved and adopted.
Modern financial system
Yanislav Malahov argued that innovation often means that regulators are less able to follow what is being executed. He believes that innovation should be accompanied by good standards and good security.
Lots of space to innovate and lots of law still needs to be created. Banking laws cannot simply be transferred. Your passport is the property of your government, identity must be revolutionised in a digital future” Yanislav Malahov – Founder aeternity.com
Self custody is a privilege of the modern financial system. The US $3 trillion crypto market is facing many challenges with the downfall of three of the industry’s crucial crypto institutions this week. Malahov points out that self-custody and “acting as your own bank” worries regulators and governments.
The Securities Exchange Commission (SEC) has expressed concerns about the need for more transparency and for crypto firms to segregate customer assets from institutional assets. In addition recommendations are being made for crypto firms to undergo annual audits from public accounting firms, in addition to requirements to observe several additional transparency measures.
On the bright side the crypto market has managed to recover in the last few days as market capitalization rose back to over US $1 trillion.