Over the last few years, the cryptocurrency business has grown at an exponential rate. But because it has mostly functioned in a grey regulatory area, several legislators and financial agencies have demanded more control and governance.
A number of big economies are attempting to enact regulations and policies unique to the cryptocurrency space, thus it seems that the sector will witness huge regulatory shifts in 2023 and beyond. What would these new regulations signify, however, in terms of acceptance, innovation, and cryptocurrency prices? This thorough overview looks at the most probable effects on regulations.
Timeline for Crypto Regulation: What’s Up Next
|Key Regulators and Policymakers
|Upcoming Regulations and Policy Changes
|– Securities and Exchange Commission (SEC)<br>- Commodity Futures Trading Commission (CFTC)<br>- Treasury Department
|– Stringent rules around crypto security classification<br>- Increased enforcement against unregistered crypto companies<br>- Comprehensive crypto tax policy
|– SEC crypto rules expected in 2023<br>- Several crypto bills proposed, unlikely to pass before 2024
|– European Commission<br>- European Central Bank (ECB)<br>- European Banking Authority (EBA)
|– MiCA regulations around licensing, consumer protection etc.<br>- Ban on energy-intensive proof-of-work mining
|– MiCA expected to be implemented across EU in 2024
|– Financial Conduct Authority (FCA)<br>- Bank of England (BoE)
|– Comprehensive crypto asset regime similar to MiCA<br>- Rules around stablecoin issuance
|– Crypto asset regulations in 2023-2024
|– Ministry of Finance<br>- Reserve Bank of India (RBI)
|– 1% TDS on crypto transactions<br>- Stricter KYC process
|– New taxes from April 2023
|– People’s Bank of China (PBOC)<br>- State Administration of Foreign Exchange (SAFE)
|– Ban on crypto transactions and mining
|– Crypto ban effectively in place since Sept 2021
Major crypto economies like the US and EU are set to enact significant regulatory changes over the next 12 to 18 months, as the timeframe suggests. Let’s examine how these new rules could particularly affect important aspects of the cryptocurrency sector.
Cost and Market Influence
More regulation often gives emerging asset classes, like cryptocurrency, more credibility. Strict regulations pertaining to trading, derivatives, and stablecoins, however, may temporarily limit market activity.
- Limitations on trading leverage: Regulations restricting margin trade leverage to 2–5 times may reduce market fervour and volatility. Reduced speculation may result in lower cryptocurrency prices, which is good for financial stability.
- Limits on stablecoin issuance: Large-scale withdrawals of stablecoins run the danger of spreading to other cryptocurrency markets, as shown in previous market collapses. Stablecoin reserves and redemption policies that are more stringent might boost trust, but at the expense of flexibility.
- Transaction taxes: To increase income, several governments are considering imposing taxes on the purchases and sales of cryptocurrencies. Even though they are often just 1% to 2%, this might discourage individual investors and lower the value of smaller coins.
- More reporting requirements: Tighter KYC regulations that demand user verification before to trading may make investing more difficult and discourage new investment, particularly in privacy currencies like Monero.
Overall, anticipate further turbulence in an already volatile market over the next few years, even while regulation-driven transparency and stability measures may strengthen the long-term basis for cryptocurrencies.
Adoption and Utilisation of Cryptocurrencies
In the medium to long term, new regulations may increase mainstream public acceptance of cryptocurrencies by offering more consumer protection and legal certainty. Limitations pertaining to transactions, however, could also surface.
- Encouragement of innovation Clear regulatory boundaries provide investors and entrepreneurs who want to put money into cryptocurrency innovation peace of mind. The subsequent wave of blockchain adoption may be sparked by this.
- Enhanced consumer protection measures include restrictions on deceptive advertising, compensation fund mandates, and dispute resolution procedures. These measures safeguard common people. This gradually increases sceptics’ acceptance and sense of trust.
- Interoperability frameworks: A few countries are trying to establish uniform guidelines for cross-chain transactions and token taxonomy. Later on, this may significantly increase the usefulness of decentralised apps.
- Reduction of privacy coins: Pseudonymous cryptocurrencies like as Monero and Zcash may become unfeasible for regular transactions due to impending regulations that specifically target anonymity and impose reporting requirements surrounding transactions.
Over the next ten years, specified crypto legislation should allow for considerably broader integration with identity systems, supply chain trackers, financial services, and mainstream payments, notwithstanding certain potential constraints.
Consolidation and Compliance Expenses
The burden of compliance increases with the expansion of crypto legislation, particularly with regard to mandated licencing, transparency reporting, capital requirements, and operating rules. This may encourage the concentration of industries.
- Enhanced operating expenses – Crypto enterprises will have to pay for daily transaction reconciliation reports, recurring disclosure filings, and closely monitored reserve accounts, to name a few forthcoming compliance expenses. They are only absorbable by bigger players.
- Requirements for capital and balance sheets: Crypto exchanges must keep higher reserves due to required working capital and liquidity buffers dependent on trading volumes, which restricts profitability margins. Once again, this benefits larger centralised firms over smaller DeFi systems.
- Consolidation of cryptocurrency companies: Over the next several years, regulatory pressure may cause a wave of mergers, acquisitions, and collapses among cryptocurrency exchanges, brokers, kiosks, wallet providers, and tokenized platforms, similar to what has happened in conventional finance.
- Reducing the use of decentralised protocols: More identification of the beneficial token owners is also necessary to increase compliance. As a result, there could be less activity on totally permissionless protocols, with permissioned institutional DeFi being preferred by regulation.
This is similar to past fintech cycles in many respects, where laws first stifle innovation before fostering exponential development as a result of standardisation and consolidation. Based on anticipated legislative changes, the cryptocurrency market is ready for a comparable cycle throughout the 2020s.
Top Cryptocurrencies Affected and Sectors
Let’s also look at the particular ways that significant cryptocurrencies and the industry could be affected:
Ethereum and Bitcoin
Given their decentralised structure, Bitcoin and Ethereum, the two leading cryptocurrencies that account for more than 60% of the market, are likely to benefit from or at least be mostly unaffected by near-term restrictions. Particular effects could consist of:
- increased institutional investment after more precise asset categorisation, particularly in relation to US Bitcoin ETFs
- accelerated development as choices that are known to be “regulatory-safe”
- Growing activity of custodians and funds as reputable cornerstones of investment portfolios
- Stablecoin restrictions are posing a little obstacle to arbitrage-driven activities between BTC/ETH and stablecoins.
Coins with stablecoins
Stablecoins like as Tether, USD Coin, and Binance USD saw exponential growth between 2020 and 2022, putting them on the global regulatory radar. They are likely to be subject to the strictest limitations because of worries about the makeup of reserves, redemption rights, and possible runs. These worries include:
- Monthly attestations and mandated full-reserve backing are anticipated
- Limits on redemptions could be put in place during market downturns.
- Given the cross-border user bases, global policy coordination is desirable but difficult to implement.
- Over time, certain competitors with rapid development, such as Binance USD, may face complete prohibitions.
Tokens and Altcoins
Regulations for cryptocurrencies continue to be a double-edged sword. Legitimisation might hasten the adoption of interoperable tokens that are useful for payments, infrastructure, and utilities. However, security token offers and anonymity may come under fire. Among the effects across verticals are:
- Standards and usability enhancements help payment tokens like Stellar and Litecoin.
- Tokens with smart contracts like as Cardano, Polkadot, and Solana may bridge the growing blockchain divide.
- Meme coins will hardly be affected since most activity is driven by retail.
- Global AML regulations are expected to cause anonymity and privacy coins to eventually disappear.
- Tokens backed by assets that need strict due investigation in order to be redeemable
DeFi protocols, which have up till now been mostly an unsupervised crypto subsector, are expected to see significant effects, including possible disruption, if rules take effect in the next years:
- Transparency and accountability principles go counter to the spirit of decentralisation.
- Anticipate a division between restricted open-access models and permissioned DeFi for universities.
- Different methods related to lockup, leverage, and derivatives may be reviewed.
- Protocols for loan, yield, etc. that depend on stablecoin directly impacted
- Base-layer systems, like as DEXs, are probably going to change via compliance layers.
This suggests that although certain cryptocurrency industries, such as Bitcoin and decentralised infrastructure, may benefit from regulation, developments in the areas of anonymity, leverage, and stability are now facing obstacles. Future reform cycles may allow for even more decentralised finance as the sector develops.
What is going to be the strictest new rule?
The most extensive and strict crypto legislation being developed internationally is probably the Markets in Crypto Assets (MiCA) law suggested by the European Union. With regards to capital requirements, consumer protection, licencing, governance, and sustainability measures, MiCA seeks to establish the gold standard for crypto market supervision.
Which nations are embracing cryptocurrency in the most advanced ways?
A forward-looking approach to cryptocurrency promotion has been embraced by Switzerland, Singapore, the UK, Australia, and even regional blocs like as the Gulf Cooperation Council. This approach centres on calibrated criteria for investor rights, transaction reporting, and proportionate compliance. They take an evolutionary approach, in contrast to countries like China, Russia, and portions of Africa that have outright banned cryptocurrency.
How soon until crypto-specific legislation is passed in the US?
Most analysts don’t think the US will have a clear statutory crypto system at the federal level within the next two years, despite the fact that over 25 legislation have been presented. This is because of the slow-moving legislative procedures. Yet, there are still ongoing efforts to make piecemeal modifications to stablecoin definition, asset categorisation, and taxes on cryptocurrencies, particularly at the SEC.
How will crypto regulations affect employment and the overall economy?
The need for lawyers, auditors, analysts, consultants, accountants, and specialised recruiters has increased, thus it stands to reason that tightening rules around cryptocurrency and mandating trading, custody, and verification systems might paradoxically lead to job growth. With a current worldwide GDP of 2-3%, continually good crypto guidelines might solidify the industry’s status as a new asset class in contemporary countries.
The Curving Path Ahead
Growing regulatory scrutiny is likely as cryptocurrency makes the shift during the 2020s from first-generation invention to an institutionalised asset class. From the perspective of the public interest, the first policy changes pertaining to financial stability, consumer protection, and healthy competition make perfect sense. Nonetheless, worries about excessively forceful government actions hindering innovation in decentralised systems and producing unfavourable results still exist.
For Web 3.0 to fulfil its promise of revolutionising society, striking the correct balance is still essential. Given instances like FTX, the cryptocurrency sector must also improve its self-governance norms before intervention by draconian regulators. However, crypto still offers extraordinary levels of technical advancement and financial inclusivity over the next ten years, if smart policies and industry statesmanship are applied.