Despite a series of major collapses across the cryptocurrency sector, including that of the exchange FTX and the hedge fund Three Arrows Capital, some countries are still prepared to encourage crypto players to their jurisdictions.

In early October, the Monetary Authority of Singapore (MAS), the country’s financial regulator, awarded Coinbase – the world’s largest listed crypto exchange – a full payments licence, allowing it to offer digital payment token services to individuals and institutions in the jurisdiction. Singapore has emerged as one of Asia’s main centres for crypto in recent years.

The MAS has said it only grants licences to cryptocurrency companies if they have robust anti-money laundering controls. Most applicants, it says, are not successful. To date, just fourteen crypto companies have obtained a payments licence from the Singaporean regulator.

Even so, Singapore is regarded as one of the most crypto-friendly countries, alongside the likes of Canada, Estonia and Switzerland. These jurisdictions take an open attitude towards crypto companies and/or maintain industry-friendly legislation, in some cases offering tax breaks too. They have tended to view the industry as having the potential to transform financial services in the same way that artificial intelligence has altered the tech landscape.

But key financial centres – including the UK and the US – are still wary about crypto companies and the way they operate. The UK, for example, has called for better regulation at a global level before digital currencies gain enough traction to become a threat to the financial system.

In April the European Parliament endorsed the first EU-wide rules to trace transfers of crypto-assets such as Bitcoin and electronic money tokens so that crypto transactions can be monitored in the same way as other financial operations – and suspicious transactions blocked. Under these rules, the Markets in Crypto-assets (MiCA) Regulation, consumers will be better informed about the risks, costs and charges linked to crypto transactions. In addition, the new legal framework will support market integrity and financial stability by regulating public offers of crypto-assets.

The requirements of MiCA will apply from December 2024 to anybody providing crypto-asset services or issuing crypto-assets within the EU. The legislation includes safeguards against market manipulation and financial crime and covers crypto-assets that aren’t regulated by existing financial services legislation. Key provisions for those issuing and trading crypto-assets – including asset-reference tokens and e-money tokens – cover transparency, disclosure, authorisation and the supervision of transactions.

Dirk Bliesener, Senior Vice-Chair of the IBA Banking Law Committee and a partner at German law firm Hengeler Mueller, says recent crypto scandals have certainly made the case for greater regulation of crypto markets and better corporate governance. But he warns that ‘regulation of crypto markets and providers will always be a race between a hare and a tortoise’ because crypto is evolving faster than the rules to monitor it. In this environment, he says, ‘MiCA constitutes a quantum leap in the regulation of the EU crypto markets’. With ‘institutional money opening up for crypto as an asset class, sound regulation and supervision will become a competitive advantage. In that sense, MiCA has the potential to develop to [be] a catalyst of enhanced crypto regulation globally,’ adds Bliesener.

Ieva Dosinaitė, Chair of the IBA Structured Finance Subcommittee and a partner at pan-Baltic law firm Ellex Valiunas, agrees that regulation faces an ongoing challenge in keeping pace with the crypto sector’s rapid evolution. ‘The continual advancements in crypto products and services, characterised by their complexity, often surpass the regulatory frameworks established at the national or regional level, creating a lag in the adaptation of regulations,’ she says.

Nonetheless, it’s ‘crucial’ to recognise the significance of MiCA as an ‘unprecedented effort’ to introduce a comprehensive regulatory framework, she believes, with the regulation providing a degree of legal certainty for crypto service providers and establishing uniform rules for both crypto-asset service providers and issuers within the EU. ‘Despite the lack of a globally unified approach in classifying crypto products and determining the applicable regulatory framework, which results in regulatory discrepancies across different jurisdictions and complexities for companies operating in multiple regions, the introduction of the MiCA framework offers a sense of stability and predictability for market participants within the EU,’ she says.

Meanwhile, at a unilateral level, several jurisdictions have implemented robust measures to regulate the crypto services market effectively. Austria and Germany, for example, have opted to assimilate crypto service providers into their existing financial services licensing regimes. ‘By incorporating them within these established frameworks, these countries aim to ensure that crypto companies adhere to similar standards of oversight and governance as traditional financial institutions,’ says Dosinaitė. ‘In contrast, jurisdictions such as Gibraltar and Estonia have introduced separate licensing regimes dedicated specifically to crypto services.’

Dosinaitė says these regulatory efforts often entail that certain requirements are met, such as companies needing to maintain a designated level of capital and having management physically present within the jurisdiction. Moreover, supervisory authorities, such as the financial intelligence unit in Estonia and Lithuania, and Germany’s financial regulator, BaFin, have been entrusted with the responsibility of overseeing and monitoring these activities closely.

Recent crypto scandals, such as the FTX collapse, have highlighted the need for regulators to closely monitor crypto service providers, beginning with their integration into the supervisory regime – a ‘crucial’ step for establishing comprehensive oversight and ensuring adherence to established compliance standards within the industry, says Dosinaitė.

Furthermore, she says, regulators should pay increased attention to the due diligence procedures of crypto service providers seeking licences or authorisations, particularly when evaluating the financial stability and operational resilience of companies. Regulatory bodies should also assess the corporate governance standards of each applicant and the readiness of a company’s management to oversee the crypto business, as well as the operational model being applied. ‘Regulators could also advocate for the implementation of stringent disclosure requirements to ensure that investors are well-informed about the risks associated with their investments in the crypto space,’ says Dosinaitė. ‘Enhancing transparency through clear and accessible information could empower investors to make informed decisions, thereby mitigating the potential impact of market shocks.’

Ultimately, while the EU has taken a significant step forward, Dosinaitė believes that the creation of global standards would be highly advantageous: ‘such standards would facilitate the harmonisation of regulatory practices, minimise barriers to international cooperation, and promote a more coherent and consistent regulatory environment across the global crypto market.’

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