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Risk Fraud & Compliance

Crypto moves in 2021 from regulatory wilderness to “bedrock” of emerging financial system

Susannah Hammond  Senior Regulatory Intelligence Expert

Todd Ehret  Senior Regulatory Intelligence Expert

Susannah Hammond  Senior Regulatory Intelligence Expert

Todd Ehret  Senior Regulatory Intelligence Expert

As the new year approaches, a look back at how the regulation of digital assets has evolved offers insight into what lies ahead for a sector poised to emerge from its "Wild West" days and become an integral element of the global financial system

By anyone’s estimation, the total value of the crypto market has exploded from around $16 billion five years ago to approximately $2.6 trillion in value of all cryptocurrencies today. While that is a small share of the $250 trillion global financial system, the crypto sector also boasts an average annual growth rate of more than 150%.

That growth, fueled by digital transformation and the rapidly spreading deployment of crypto-assets, has drawn increasing regulatory attention around the world. There is little doubt of the enormous potential of cryptos to make payments and transfers more efficient; however, the speed and reach of transactions, together with the potential for anonymous activity, and for transactions without financial intermediaries, also make crypto-assets vulnerable to misuse and raise the risk of money laundering.

Financial services firms, regulators, and policymakers are coming to terms with crypto’s fast moving, innovative marketplace and the novel challenges it presents, not the least of which is a growing gap between how borderless cryptos are being treated differently by different jurisdictions.

Differing reactions to cryptocurrency

While some jurisdictions and international organizations are moving to build a framework for a crypto financial system, for example, others, including the United States, are in a relatively early, cautious stage.

The Basel Committee on Banking Supervision, the global standard-setting body for prudential regulation, has proposed that banks back crypto positions one-to-one with capital, which sends a strong signal that the Committee considers unbacked crypto exposures to be high risk.


Look for an update of our special report, Cryptos on the Rise in 2022.


El Salvador became the first country in the world to adopt bitcoin as legal tender, and since that adoption in September, the country’s central bank has purchased more than $25 million bitcoin. Also, the El Salvadorian government has announced plans to create a “bitcoin city” funded by bitcoin-backed bonds and powered by cheap and clean geothermal electricity generated by a nearby volcano. Although no other countries have followed in making bitcoin legal tender, several countries are believed to be watching the El Salvador experiment closely and considering similar moves.

In a November speech titled Under the western sky: the crypto frontier, Carolyn A. Wilkins, external member of the Financial Policy Committee at The Bank of England shared her views on three features of the crypto-ecosystem that are relevant to those who depend on efficient, stable, and trustworthy financial services:

      • Crypto-assets are the bedrock of the emerging financial ecosystem, so supporting consumer protection and financial soundness is the first order of business for regulators. In this regard, there are important differences between crypto-assets that are backed by other assets or securities and those that are not.
      • Opportunities and risks extend well past the crypto-assets themselves to encompass a rapidly expanding range of financial services, from lending to insurance. These crypto-based services are increasingly being enabled by decentralized protocols, commonly called DeFi.
      • The future of this new frontier depends critically on the regulatory response to these new activities and how fast the traditional financial system modernizes. This will take major investments in domestic and cross-border payments, as well as in enhanced digital governance.

In Singapore, largely seen as a crypto-friendly jurisdiction, definitions matter. In a November speech titled The Future of Money, Finance and the Internet by Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS), the question was posed “Are cryptocurrencies money?” Menon’s answer was “no.”

“MAS frowns on cryptocurrencies or tokens as an investment asset for retail investors,” he said. “The prices of crypto tokens are not anchored on any economic fundamentals and are subject to sharp speculative swings. Investors in these tokens are at risk of suffering significant losses.” Meanwhile, in India, the government has plans for a new bill that would, if passed, effectively ban citizens there from transacting in most cryptocurrencies.

In the U.S., some states and federal agencies have begun to piece together regulations, with policymakers still mostly discussing the possible groundwork for the massive regulatory task ahead. Like much of the rest of the world, the difficult task of defining cryptos, determining their place in existing frameworks, and figuring out which jurisdiction prevails in a central challenge is daunting, because, like much of U.S. financial services regulation, there is significant jurisdictional overlap.

Although the U.S. Securities and Exchange Commission (SEC) will play a central role in the regulation of digital assets, other authorities have also made a mark with rules, guidance, and enforcement actions. Indeed, several states and other federal regulators were trailblazers in crypto regulation and enforcement. The Commodity Futures Trading Commission (CFTC) and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), and the Office of the Comptroller of the Currency (OCC) all have taken steps to regulate cryptos in their respective areas of authority while some U.S. states enacted licensing requirements for money-services or transmitter businesses involved in digital assets or amended their securities and banking laws to include crypto-related activities.

Looking ahead

Cryptos have enormous potential and could indeed become the bedrock of the financial system of the future, but if that potential is to be harnessed and that value realized, legal and regulatory frameworks need to be coherently reformed and moved into the digital age.

“This will take major investments in domestic and cross-border payments, as well as digital governance,” said the Bank of England’s Wilkins. “If we do that, we will realize the promise of reinvention and expansion for those who rely on efficient and trustworthy financial services.”

Certainly, it’s in everyone’s interest that cryptos are subject to a regulatory regime with a clear perimeter, coherent definitions, and an agreed, well-informed stance on risk and risk management. Unfortunately, that objective gets further away as the industry speeds ahead while regulators drag their feet.

Despite the positive signs of regulatory progress in 2021, there is still significant work ahead as all signs point to a complex challenge.


For more on cryptocurrency and its regulation, tune into Thomson Reuters Regulatory Intelligence’s podcast series Compliance Clarified, which covers a wide range of compliance and regulatory issues.

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