The use of digital currencies has taken a bigger role in international finance following the advent of cryptocurrency, stablecoins, and blockchain payments, making transactions faster and increasingly institutional.
In reaction to the development of the industry, governments and regulators have stepped up their initiatives to develop legal frameworks to govern digital assets. Cryptocurrency regulations have evolved rapidly through licensing frameworks, stablecoin rules, and compliance requirements.
Nevertheless, enforcement has been lagging behind. The challenges in implementing the new frameworks relate to international transactions, the decentralized nature of some blockchain applications, inadequate regulatory resources, and rapidly developing blockchain use cases.
Crypto Regulation Expands Across Major Markets
The use of specialized regulations, rather than simply relying on pre-existing laws, to govern cryptocurrencies has increased among governments. The European Union has the MiCA regulation, and there are efforts to regulate stablecoins in the U.S. As well, licensing regulations have increased in such places as Singapore, Hong Kong, and the UAE.
International collaboration is also increasingly a part of crypto regulation policymaking. Standardization organizations continue working with governments to improve consistency across markets, while also addressing money laundering, stablecoin regulation, and financial stability issues.
While regulations are increasingly being developed in different ways, there is increased recognition of the need for specialized regulations.
Difficulties in the Implementation of Crypto Regulations
Although the pace of regulation creation has significantly picked up, the process of its implementation faces many technical and practical difficulties.
The first difficulty lies in the international nature of blockchain networks. Transactions within the crypto sphere can pass through multiple jurisdictions within minutes, while the exchange, the protocol, the wallet provider, and even the user may belong to different jurisdictions.
Decentralized technology further complicates matters. Centralized exchanges tend to have identifiable operators who can obtain licenses and comply with regulations. However, some DeFi applications, DAOs, and smart contracts have no single identifiable controller, which can create significant challenges regarding responsibility and enforcement.
Specialization continues to increase in regulatory agencies. The enforcement process requires blockchain investigators, digital forensics, and cybersecurity experts, along with the necessary infrastructure to monitor blockchains. This is an expensive and lengthy process.
Most regulatory frameworks are still fairly recent as well. Judicial precedents have yet to be set by the courts in regard to many existing digital asset regulations, while regulators are still publishing guidelines aimed at defining compliance standards ahead of broader enforcement.
The fast evolution of technology is another challenge. New use cases involving artificial intelligence agents, tokenization, real-world assets, Layer-2 protocols, zero-knowledge technology, decentralized physical infrastructure networks (DePIN), and decentralized identity continue to emerge as regulations are being implemented.
Enforcement issues may include the following:
- Cross-jurisdictional enforcement and decentralized architecture.
- Lack of technical expertise and investigative capabilities.
- Fast pace of technology development ahead of legislation.
International Standards Are Still Being Developed
Several international organizations continue their efforts to foster coordination among regulators. The Financial Stability Board (FSB), the Financial Action Task Force (FATF), and the International Organization of Securities Commissions (IOSCO) have all produced recommendations on anti-money laundering standards, stablecoin regulation, systemic risk monitoring, and cross-border supervision.
Despite the availability of such standards, implementation varies from country to country because every jurisdiction has its own legal regime and priorities when it comes to supervision and enforcement.
Examples that Highlight the Problem of Enforcement
The following examples show the gap between rulemaking and implementation.
The MiCA framework of the European Union is among the most extensive regulatory regimes that can be applied to digital assets. Yet, implementation falls on the national regulators of EU members.
Similarly, many countries have integrated the FATF Travel Rule into their national laws. This process, nonetheless, is still evolving due to the complexity involved in integrating the rule technologically within virtual asset service providers, as well as coordinating between multiple jurisdictions.
The enforcement of this rule in relation to DeFi protocols is also still evolving, as regulators continue to examine questions around developer liability and decentralized governance.
