Oct 20, 2022 - Economy & Business

Crypto regulation's global challenge

Photo illustration of Mitzi Chang.

Photo illustration: Aïda Amer/Axios. Photo: Courtesy of Goodwin.

The world of crypto runs 24/7 and has no borders, but it's no monolith. The rules, however, might be applied that way. And that creates a challenge.

The big picture: "Law is jurisdictional, but crypto is not," Mitzi Chang, a partner at Goodwin, who also serves as co-chair of its fintech practice and digital currency and blockchain technology practice, tells Axios.

Driving the news: The Financial Stability Board (FSB), the global watchdog aiming for consistent application of crypto rules, last week proposed an international framework in an effort to "promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches."

Why it matters: While it's uncertain whether the FSB's proposal would lead to any meaningful change in each country's independent efforts to create rules, it's noteworthy that they care at all.

  • "They think crypto is important enough to have these conversations," Chang notes.

Context: Indeed, when the FSB references the year's "turmoil," the collapse of Three Arrows Capital, Terra, and other events come to mind.

Details: The FSB's framework was grounded in "same activity, same risk, same regulation.”

  • That is, "Where crypto-assets and intermediaries perform an equivalent economic function to one performed by instruments and intermediaries of the traditional financial sector, they should be subject to equivalent regulation," the proposal reads.

Between the lines: To Chang, those words were evocative of Gensler's stance that existing securities laws should apply to crypto.

  • "To me, I don't see what's the same. This is 100% a new way of doing things," Chang says.
  • "Like in the U.S. applying decades-old securities laws to something that's new—we need to make sure that [complying to the rules] can operationally work, that it can actually be done."

Flashback: Recall Chair Gensler's recent speech referencing Joseph Kennedy and the advent of the SEC back in the early 1930s.

  • He said: "Nothing about the crypto markets is incompatible with the securities laws."

Yes, but: As influential as the FSB is as an advisory group, there is no regulatory or enforcement authority that would make sure their recommendations are heeded.

  • The FSB will finalize its proposed recommendations by mid-2023.
  • Again, those are "non-binding" and any member can opt out. In the meantime, they're soliciting public comments until December.

What's next: Several members of the G20 group are already putting together their own rules for digital assets and could have them finalized before the FSB finalizes their own guidelines.

  • "From a timing perspective, it is certainly possible that some G20 countries are out ahead of any final recommendations from the FSB," Chang says.

Crypto firms pick and choose the jurisdictions to operate in, now, but consistency is likely to be welcomed by the industry.

  • "Many in the industry would welcome consistent rules and regulations given the operational difficulties of the current patchwork of regulations where the same product in two different countries is treated differently, or it is unclear how it is treated," Chang explains.

The intrigue: Countries could try to nurture industry growth, though, which could mean more relaxed rules in some areas versus others.

  • "There is likely always going to be some form of regulatory arbitrage in any industry so it would not be surprising that certain countries may want a lighter or different regulatory approach," Chang says.

Bottom line: That's the rub. "It’s hard to affect change if everybody doesn’t participate," Chang said.

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