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Mapping the Regulatory Landscape for Digital Assets: A Worldwide Overview

Last Updated January 13, 2024 11:12 AM
Giuseppe Ciccomascolo
Last Updated January 13, 2024 11:12 AM

Key Takeaways

  • Regulatory frameworks governing digital assets had a tremendous year in 2023.
  • US, EU, UK, and other major countries have announced new laws to regulate digital market.
  • What is the state of the art, from a regulatory point of view, in the main economies of the world?

In 2023, there were significant advancements in regulatory frameworks governing digital assets. The EU’s introduction of the Markets in Crypto Assets (MiCA) regulation and the implementation of the DLT Pilot Regime marked crucial milestones. In the UK, regulators put fortward comprehensive proposals for overseeing various aspects, including fiat-backed stablecoins, issuers, custodians, and systemic payment systems utilizing stablecoins.

Both the United Arab Emirates and Hong Kong introduced novel licensing regimes for virtual assets, poised to attract a fresh wave of regulated market participants. Notably, Hong Kong and Singapore fortified their regulatory frameworks, emphasizing enhanced customer and investor protection. These jurisdictions also clarified guidelines regarding tokenized securities and digital currencies. This underscored a commitment to fostering a secure and transparent digital asset landscape.

A General Overview

Nations such as Switzerland, Germany, Luxembourg, Liechtenstein, and Japan have been pioneers in the realm of digital bonds, asset tokenization, and the modernization of payment systems. These countries had already established comprehensive frameworks in preceding years to govern these innovative financial instruments. Meanwhile, Brazil (Ba2 stable), actively engaged in the developing a Central Bank Digital Currency (CBDC), has also issued guidelines on virtual assets. Brazil continues to explore further developments in Distributed Ledger Technology (DLT) infrastructure.

Moody's
Hong Kong clarified views on tokenized securities and virtual assets ahead of EU’s MiCA implementation and UK’s stablecoin proposals; US proactively enforcing against illicit finance.

The tokenization landscape and the issuance of digital bonds are expected to receive dedicated support from specialized regulatory frameworks, particularly in European and Asian Nations.

In the United States, regulators will continue taking action against participants in the digital asset market who fail to adhere to existing federal securities and money transmitter laws, as well as the Bank Secrecy Act.

US’ Novel Activities Supervision Program

The Federal Reserve set up the Novel Activities Supervision Program to effectively manage risks associated with services enabled by Distributed Ledger Technology (DLT) and digital assets conducted by regulated banks. Supervised banks must obtain pre-approvals for involvement with stablecoins, with formal approval from the Federal Reserve. In 2023, the regulatory landscape saw a continuation of enforcement actions. Exchanges such as Bitzlato, Coinbase, and Kraken faced action. High-profile court decisions involving Ripple, FTX, and Binance further shaped the regulatory environment.

While some bills progressed in Congress, the legislative process faced challenges due to a lack of bipartisan support. In the Senate, the focus shifted towards bills addressing illicit finance and adapting anti-money laundering laws to accommodate decentralized features.

Influence On Elections

The upcoming 2024 presidential election will probably influence progress in Congressional legislation. Anticipated in 2024 are two bills gaining momentum. One will regulate US stablecoin issuers and another should establish comprehensive rules for crypto markets. The bill should clarify the jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) over the digital asset industry.

Illicit finance and national security are central themes guiding regulatory enforcement and new legislation in the US. Legal clarity for digital assets may evolve through court decisions stemming from enforcement actions by US regulators against market participants failing to comply with federal securities, money transmitter laws, and the Bank Secrecy Act. Potential targets include platforms and protocols enabling illicit finance or providing financial services without traditional licenses.

US regulators implemented third-party sanctions compliance monitors, mandated by the Department of Justice and the Department of the Treasury for durations of three and five years, respectively. This grants the government access to cryptocurrency exchange Binance’s systems, accounts, and transaction history.

Collaboration between American regulators and their international counterparts is ongoing to combat illicit transactions. The US Treasury has advised Congress on the integration of new enforcement tools into legislation proposals. These are aimed at preventing and monitoring illicit finance in the digital asset industry, with a focus on exchanges, mixers, and dollar-pegged stablecoin issuers.

EU Boosted Regulations

The implementation of the Markets in Crypto Assets (MiCA) regulation will be staggered, with stablecoin regulations taking effect in June 2024. Meanwhile, rules for crypto assets and crypto asset service providers will become effective in December. This framework aims to attract digital asset market participants to the EU market, offering the convenience of operating across the 27-nation bloc under a single license. The supportive pilot program for Distributed Ledger Technology (DLT) innovations further adds to the appeal.

The European Central Bank has also unveiled plans to enter the preparation phase for the digital euro, a two-year initiative. This phase involves finalizing a potential rule book for the CBDC and selecting providers for developing the digital euro platform and infrastructure.

It’s crucial to note the preparation phase does not represent a definitive decision on whether to issue a digital euro. Instead, it encompasses a stage of testing and experimentation.

UK Regulated Crypto Firms Advertising

In 2023, the UK implemented stringent regulations governing promotional activities by crypto firms targeting UK customers. These regulations, introduced by the Financial Conduct Authority and the Bank of England, specifically address facets related to fiat-backed stablecoins. Stakeholders in the industry were invited to provide feedback on the proposed approaches, with the consultation period ending on February 6.

The regulatory focus in the UK initially centers on fiat-backed stablecoins and systemic payment systems utilizing stablecoins. After this, a broader set of regulations covering a spectrum of crypto assets and crypto asset service providers, akin to the MiCA regulation, is anticipated.

The Treasury will play a pivotal role in designating which payment systems utilizing stablecoins are systemic. It also has the authority to establish financial market infrastructure sandboxes. An example is the upcoming Digital Securities Sandbox, scheduled for launch in 2024.

At the same time, the Bank of England (BoE) and Treasury are actively shaping plans for a digital pound, intended for everyday use by households and businesses. The multi-phase initiative began with Phase 1 (research and exploration) in 2022. Phase 2 (design) runs between 2023 and 2025/2026. Meanwhile, Phase 3 (build) could start as early as next year, pending the decision to progress.

What’s New In Hong Kong, Singapore, And UAE?

Hong Kong

In June 2023, amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance established a comprehensive framework for regulating virtual asset service providers. This subjects centralized virtual asset trading platforms to the supervision of the Securities and Futures Commission (SFC). It also extends permission for retail users to engage in crypto trading.

The Hong Kong Monetary Authority (HKMA) issued a report in August 2023, following the launch of Hong Kong’s inaugural tokenized green bond. The report emphasized how existing legal requirements facilitated the issuance of the tokenized bond. This successful issuance served as a demonstration that current securities laws are robust enough to support the issuance of digital bonds. This, in turn, laid the foundations for potential growth in the digital bond market.

An upswing in the tokenized securities sector, propelled by clarifying guidance from the SFC and HKMA, is anticipated this year. This guidance underscores that tokenized securities are likely to be treated with similar risk considerations as traditional securities, with additional considerations related to ownership rights and technology and responsibilities managed by the intermediary involved.

Hong Kong regulators express a favorable view, considering virtual assets and tokenized securities generally suitable for investment by the public and professional investors alike. This should provide a strong foundation for the continued growth of the digital asset industry in the region.

Singapore

In response to the Terra-Luna stablecoin project fallout involving Three Arrows Capital hedge fund and FTX exchange, Singapore has undertaken significant enhancements to its digital asset regulations to fortify customer and investor protection. A comprehensive stablecoin framework, slated to be effective in 2024, will specifically address single-currency stablecoins pegged to the Singapore Dollar or any G10 currency. This will streamline payment and settlement processes, particularly beneficial for asset tokenizations and digital bond issuances.

Singapore’s digital money infrastructure and tokenization initiatives aim to advance following key announcements by the Monetary Authority of Singapore (MAS) . The Orchid Blueprint delineates the infrastructure for the secure and innovative use of digital money in Singapore. Meanwhile while the Interlinking Networks white paper outlines an interoperability design approach. This serves as a common framework for exchanging digital assets across independent networks. Also, MAS plans to expand digital money trials, initiate asset tokenization use case pilots, and launch a live wholesale CBDC initiative.

Commencing mid-2024, new regulations for digital payment token service providers will be implemented in stages, targeting the reduction of speculation in the retail crypto market. These providers will be subject to additional safeguards related to technology and cyber risks. These will align with existing requirements imposed on financial institutions.

Regulators will also introduce new consumer access restrictions and asset segregation measures, reinforcing regulatory measures for enhanced security and risk management.

United Arab Emirates

The Dubai Virtual Assets Regulatory Authority is the primary regulator in Dubai. Following the introduction of a legal framework for virtual assets, the Full Market Product Regulations have provided further clarity on the seven licensed virtual asset activities in Dubai. These regulations are supplemented by activity-specific rule books. They address aspects such as company operations, compliance and risk management, technology and information, and market conduct.

At the same time, Abu Dhabi has implemented comprehensive regulations pertaining to DLT Foundations. This encompasses Web3 entities, decentralized autonomous organizations, and traditional foundations integrating blockchain. Administered by the Abu Dhabi Global Market Registration Authority, these regulations facilitate token issuance and the governance of token-related activities.

The UAE’s regulatory approach in Dubai and Abu Dhabi, specifically tailored for virtual assets and DLT foundations, has positioned the country as an attractive destination for digital asset market participants. The frameworks not only establish regulatory clarity but also foster an environment conducive to the provision of digital asset services.

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