In 2023, a crypto regulatory storm front is coming. Are we prepared for this?

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After the spectacular FTX crash of Sam Bankman-Fried and associated organizations, financial regulators around the world need to focus their attention in two places at once. While one eye is firmly fixed on the exclusion of terrorist financing, the other is on the impact among individual FTX investors and its spillover effects across the financial landscape.

There will certainly be moments of squinting as litigants introduce new and evolving legal frameworks, and even more so when fintech companies must comply. Whether it’s just a speck on the horizon or a major threat, this legislation is inevitable, but what form will it take?

Rising temperatures

Long before $8 billion in FTX deposits apparently disappeared, some regions had lawmakers drawing up plans to give more fuel to retail crypto operators. Indeed one of the most important regions whose legislation a habit Affected by the Alameda Research/FTX fallout is the European Union, where the Market Regulation of Crypto Assets (MiCA) has already been written and signed to protect consumers in such an incident. But it is not yet implemented. More on MiCA later.

Of course, big exchanges like Binance US and Coinbase were already heavily scrutinized for know-your-customer (KYC) and anti-money laundering (AML) compliance, so they were used to some heat. Compliance teams were accustomed to legalese that understood both the need for a seamless user experience and the challenges associated with some aspects of AML enforcement. This language has drawn some companies to the looser side of due diligence. Since Coinbase was recently fined $100 million by New York regulators for failing to comply with anti-money laundering regulations, at least when regulations like MiCA come down, this company will likely be better prepared — half of that $100 million should be invested in internal strengthening. compliance routines.

For decentralized finance (DeFi) companies that are not forced Fixing the leaks in their ship presents an obvious challenge: protect your customers or acclimate yourself to a worse legal climate, even if you are still acclimating to the AML climate.

Initial drizzle

At the end of a turbulent 2022, the regulatory frameworks of most major markets were still coming together. Like a bit of rain that promises strong winds and torrential rain, we can look to it for an idea of ​​what may come later this year.

Some regions, such as Singapore, had already implemented moderate controls aimed primarily at complying with the Financial Action Task Force’s AML guidelines and avoiding sanctions. Meanwhile, India has ratified a 30% tax on all virtual asset earnings in April 2022.

However, to protect retail customers from theft, fraud, and fraud, almost nothing is currently enforced using crypto-specific language.

MiCA will be one of the first major implementations and was originally proposed in the European Union Parliament in November 2020 to foster legal confidence in a notoriously volatile environment. Although it was signed into law in October 2022, it likely won’t require companies to be fully compliant until mid-2024.

At a glance, the MiCA will:

  • Establish a definition of “crypto asset” in the European Union.
  • Define which blockchain industries are outside this jurisdiction – such as insurance and pension providers.
  • Create four categories for assets that fall under: asset reference tokens, electronic money tokens, utility tokens, and everything else.
  • Set enforceable mandates for how stablecoins and non-stablecoins are brought to markets and then to the public, including disclosure laws modeled on the EU Prospectus Regulation.
  • Regulate how crypto-asset services, modeled after the MiFiD (Markets in Financial Instruments Directive), are authorized to continue as usual.

Similarly, the Singapore regulation mentioned above was aware of which Digital Payment Token Service Providers (DPTSPs) could trust with licenses to operate in the country. More recently, the Monetary Authority of Singapore has made proposals to enforce customer safety and anti-corruption protocols in license holders.

Singapore’s proposed regulations include details more appropriate to their size and culture, but set good benchmarks for other regions to potentially follow:

  • DPTSPs must conduct risk awareness assessments for clients.
  • DPTSPs should not incentivize retail investors (like an online casino might).
  • Retail customers should be prevented from borrowing money to invest in DeFi assets.
  • DPTSPs must guarantee that investors’ money is segregated from corporate money.
  • Self-identification and reporting of internal conflicts of interest.
  • Transparency for crypto firms when it comes to how they invest in new assets.
  • Adequate customer service infrastructure.
  • Mandatory emergency backups for major operating systems.

As other regions strive to wrap consumer safety in their security blankets, it seems likely that this will serve as a model for many.

Clouds worth dropping and danger of lightning

As the steps of 300 new hires hit the criminal division of the US Internal Revenue Service, one wonders if their boots will be weatherproof against the coming storms. Along with the “hundreds” of cases apparently being built by the IRS against crypto tax evaders, precedent legal cases are waiting to drop the hammer on the crypto space. Depending on how they settle, many in the industry see them as crucial in shaping the future of DeFi.

Until now, investing in decentralized currencies of any kind has been, by definition, investing in a less tightly controlled environment. A privacy mindset—ie, “stay off the grid”—is self-evident to much of the DeFi community. However, as FTX wealth holders know, that privacy comes at the cost of your unsecured deposits.

When you write for predicted, Michael Shing notes that this is a knife edge in terms of guilt. If almost all your customers connect a pseudonym, but some of them are criminals, where is the legal punishment? In the current legal framework, there is no other way than to pass the money to the exchange operators and owners.

Previous hail

There are currently three legal cases where this friction led to an accumulation of electricity and then lightning: FTX, Coinbase and Ripple.

In those cases where the absence of compliance checks allows operators to speed up their own negotiations, i.e. probably In the case of Sam Bankman-Frieds FTX and Alameda Research, regulation makes sense to create a safer and more responsible space to carry out daily business. SBF made it clear.

In terms of how the customer will be affected, the New York lawmakers stated that Coinbase did only what is necessary to force its customers to comply with the KYC mandates – a minimum that they believe actually was less acceptable. While some companies that are required to be KYC compliant use alternative data sources such as addition or dynamic friction on registration. This $100 million disruption will surely force Coinbase to reevaluate its risk appetite and onboarding processes, and will likely drag some of the mainstream crypto market down with it. Expect all of the customer due diligence (CDD) practices that Coinbase is now implementing to be mirrored around the world.

Finally, many crypto experts are picturing the upcoming Securities and Exchange Commission v. Ripple (XRP) for the future of the entire crypto landscape. This case will decide whether crypto assets are coins or securities, the latter falling within a legal framework that already has much more regulation on the books.

A perfect storm of legal complications

The coming calendar year could be the most turbulent yet in terms of coming storms and how crypto companies will keep dry – and solvent.

The lawmakers have a choppy, choppy ocean to navigate, and their ships have been looking less than seaworthy since many of their sailors aren’t quite sure where they’re going or even what exactly the water is. Finally, these types of virtual financial products are complicated to understand and the context around them includes the following:

  • SBF’s greed that (allegedly) fueled the larger DeFi ecosystem.
  • Sanctioned and aggressive Russia invested heavily in crypto after the wartime ruble collapsed and announced plans for a nationalized crypto exchange.
  • Businesses are increasingly being pushed into countries with less or at least firm control, causing some nations to lose taxes and economic prosperity.
  • Many governments around the world are planning to issue their own central bank digital currencies (CBDCs).

Given this context, some hesitation on the part of the SEC and other decision-making bodies is understandable. Before hard lines can be drawn to shape the future of the crypto space, balance sheets must be checked and calculations completed. For crypto operators, however, it remains to be seen whether regulators will allow them to continue with lighter regulations, or let everyone else go under and worry about enforcement when they’ve all sunk to the bottom.


Creating a block of law that puts a perimeter around such a troubled ocean seems a monumental task. The governing bodies are still discovering where and to what extent they want to get a place.

As the talk of crypto regulation rages on and the most lascivious examples of crypto culture are shown in the media, it’s hard to tell which side of the argument is making progress. While it seems obvious that rigorous customer due diligence will lead to reduced profit margins for exchanges, human greed gets a lot more attention these days, as do demands for regulatory certainty. .

As financial regulators around the world balance economic prosperity with the unfunding of wars and the protection of their citizens, it seems likely that whatever conclusion they reach, greater due diligence is required . DeFi merchants would be smart to either bring themselves into compliance or try to provoke regulatory moderation. Otherwise, they may feel rudderless in a sea of ​​litigation and sapphire sails when the oarsmen decide to abandon ship and get other programming jobs.


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