The World Economic Forum has released a white paper on crypto asset regulation, assisted by its Digital Currency Governance Consortium. The need for regulation is urgent and cooperation is key, the paper found.
Global coordination is necessary for crypto asset regulation to prevent ambiguity, regulatory arbitration and inconsistent enforcement, the paper argued. The authors identified a range of challenges to crypto asset regulation, including the presumption of “same activity, same regulation,” claiming:
“Crypto-assets and their ecosystem do not always fit squarely into the existing activity-based, intermediary-focused approach of regulation, even where crypto-asset activities mirror those of the traditional financial sector.”
The anonymity provided by crypto mixers, self-hosted wallets and decentralized exchanges also complicate regulation. Meanwhile, increasing interconnectedness with traditional finance increases potential contagion risks from the crypto industry, which was only recently full of “turmoil.”
The paper created a variety of classifications of regulatory frameworks for comparison’s sake. Outcome-based, which is characterized as “same risk, same regulatory outcome,” and risk-based regulation, where the level of regulatory intervention is determined by the activity’s level of risk, were considered.
Agile regulation “adopts a responsive, iterative approach, acknowledging that policy and regulatory development is no longer limited to governments but is increasingly a multistakeholder effort.” Regulatory sandboxes, guidance and regulators’ no-objection letters were cited as examples of an agile regulatory approach.
Switzerland’s Financial Market Supervisory Authority was held up as an example of an agile regulator. Switzerland and Japan were cited as examples of self- and co-regulation.
The United States alone was seen as the home of regulation by enforcement. The authors wrote:
“This approach is not recommended to build out a framework, as ‘regulation by enforcement’ precludes any meaningful discussion of what should and should not be regulated.”
The paper made three broad recommendations each to international organizations, regulatory authorities and the crypto industry. It emphasized best practice sharing and coordination. “Policy-makers and industry stakeholders need to collaborate across jurisdictions to ensure consistency and clarity,” the authors wrote. “As these new technologies start from a position of transparency, it is possible to imagine even better regulatory tools to address cross-border concerns.”