2023 marked a turning point for crypto regulation worldwide, with dozens of countries moving forward in the process of writing, finalizing and implementing new legislation for cryptocurrencies.
A PwC review of global crypto regulation found that lawmakers in more than 30 countries have focused on 4 key areas in 2023:
In terms of broad regulatory frameworks, PwC identified 14 countries that have passed dedicated legislation for the virtual asset sector. A further 12 jurisdictions are in the process of doing so. It also highlighted the EU’s Markets in Crypto Assets (MiCA) regulation, which was passed in June, marking one of the most comprehensive pieces of crypto legislation ever created.
Laying out a single rulebook for crypto exchanges, stablecoin issuers and other firms that deal with virtual assets, MiCA will not just affect businesses based in the EU, but those based elsewhere that serve EU customers too.
Although some EU countries have preexisting frameworks, MiCA harmonizes crypto regulation across the block. This means firms that gain MiCA registration in one member state can operate across the EU.
MiCA rules will start to apply from December 30, 2024, giving firms just a year to prepare.
Anti-Money Laundering and Counter-Terror Financing regulation is one of the few areas where nearly every country in the world has had to adapt to the advance of cryptocurrencies. While some have adjusted existing legislation, others have opted for custom enforcement regimes to prevent illicit crypto payments.
According to PwC, Kuwait and Oman are the only countries among those it evaluated that have made no progress on crypto AML/CTF regimes. But that doesn’t mean they are regulatory havens for crypto firms where AML/CTF rules don’t apply.
In June, the Capital Markets Authority (CMA) of Oman issued a decree requiring all virtual asset service providers (VASPs) to comply with existing AML/CTF rules.
Significantly, the CMA aligned with an increasingly standardized international definition of a VASP, despite the country lacking the kind of comprehensive crypto legislation that typically underscores such legal taxonomies. Looking forward, a consultation on proposed new regulations suggests the CMA is preparing to take a hard line on AML/CTF, potentially going as far as banning privacy coins.
Meanwhile, Kuwait’s CMA issued a circular in July expanding on its view of how existing AML/CFT rules apply to cryptocurrency. In essence, the circular enforces one of the most draconian crypto bans in the world, prohibiting businesses from offering any kind of virtual asset services and barring the use of cryptocurrency for payments.
In 2023, a growing number of countries have enforced, or are working toward introducing some form of “travel rule”. This would require VASPs to record and share information about the sender and receiver of crypto transactions they process.
The Financial Action Task Force (FATF) has made the travel rule of of the key pillars of its recommendations for global crypto regulation, arguing that it is crucial for the enforcement of AML/CFT rules.
One major consequence of the travel rule is that privacy coins become extremely difficult to process in a compliant manner.
Strict interpretations of the travel rule have seen countries like Japan ban privacy coins outright. Meanwhile, regulations that require businesses to record the destination of transactions originating from their platform. This means exchanges are increasingly delisting privacy coins like Monero (XMR).
As stablecoin regulation evolves, a general pattern emerged in 2023. The new regulatory standard favors stablecoins backed by fiat-based assets. Meanwhile, it imposes strict restrictions on crypto-backed and undercollateralized, algorithmic stablecoins.
Through MiCA and similar regulatory initiatives, the concept of “systemic” stablecoins has been developed. This refers to those coins deemed important enough to warrant additional scrutiny by regulators. In 2024, a growing focus on systemic stablecoins could force the largest stablecoin issuers to be more transparent about their reserve holdings.
In the UK, the Bank of England and the Treasury have been exploring the topic in preparation for what could be some of the most detailed stablecoin regulations to date.
While new regulations don’t ban algorithmic or decentralized stablecoins per se, they create a new category of regulated stablecoins that stand on an equal legal footing to more traditional payment methods.
Ultimately, the decentralized finance (DeFi) space is unlikely to abandon its preference for Dai or USDT in favor of a stablecoin issued by Societe Generale , for example. Nevertheless, a new breed of regulator-endorsed stablecoins would certainly appeal to businesses. In turn, this could boost their adoption as a tool for moving large amounts of money across borders and between institutions.