In its early years, the cryptocurrency market was largely unregulated. Unlike institutions in traditional finance, the platforms that facilitated the buying and selling of digital assets were not subjected to strict regulatory requirements.
Each subsequent bull run brought on a new wave of participants — some of which were driven by speculative behaviour as FOMO (fear of missing out) spread. Understanding the underlying technology and use case for each asset came second to hype from social and traditional media around market all-time highs. Going further into choice of quality trade and custody venues, the ability to perform due diligence presented a challenge because of the sheer number of options and lack of public information, especially for retail investors.
Over the years, we have witnessed the collapse of several high-profile exchanges. From Mt. Gox and BitConnect to FTX, it is unsurprising that investors are questioning the integrity of the entire ecosystem, while regulators are increasingly paying attention to the impact felt by the wider economy in negative and positive ways. Crypto exchanges in certain jurisdictions are now required to adhere to certain levels of KYC (know-your-customer) and anti-money laundering measures. Increasingly, regulators are also looking to recommend legislation around the protection of customer assets, market integrity and financial stability.
Here, the Monetary Authority of Singapore (MAS) has recently proposed what consumer protection in the trading of cryptocurrency could look like. The guidelines include requiring crypto service providers to properly segregate customers’ assets, mitigate any potential conflicts of interest arising from other business lines, as well as establish complaints-handling processes.
These measures are also designed to prevent many of the commercial failures we have seen in the market this year.
“Although it may limit the agility of many firms to comply, the imposition of clearer regulations provides validation and credibility in the cryptocurrency space, creating more trust among institutional and retail investors alike,” says Leonard Hoh, Asia Pacific general manager of Bitstamp.
More importantly, regulation also helps reduce negative public perception towards digital assets especially amid concerns of more operator fallouts. “The market events of 2022 will be a catalyst for more complete frameworks and it will be put into play in 2023. It’s a watershed moment for the crypto industry, similar to Japan’s regulatory progression that occurred in the years post Mt Gox.
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“As a firm, we have always advocated for clearer regulations because we believed that it would provide for larger interest among institutional players and drive adoption among their customers. At the end of the day, receiving and executing on investment advice, across all asset classes, is done through the parties you trust,” says Hoh.
Recognising the importance of regulatory scrutiny, Bitstamp has always been “compliance-forward”, says Hoh. As the longest-standing crypto exchange in the world, the company has worked hard on building its reputation as a trusted entity since its inception in 2011.
For one, in 2016, Bitstamp became the first crypto service provider that was granted a licence to be regulated in the EU as a payment institution. Across the continent, its expanding regulatory portfolio also covers countries such as Italy, the Netherlands and Spain. Since 2019, the company has also held a BitLicense from the New York State Department of Financial Services.
“It has been six years since we were granted an European licence and that is a really long time in crypto years. It essentially sets the operating rhythm of our business and says a lot about how we operate.
“Bitstamp is serious about meeting the high benchmarks set by different regulatory regimes around the world. 29 percent of our global workforce are allocated to internal control, audits, compliance, regulation, risk management and legal roles,” says Hoh. Bitstamp is currently in the process of obtaining a licence in Singapore.
Regulation drives long-term sustainability
Although policy developments around the world are expected to follow a stricter path, it is also going to be one that is more complete, Hoh believes. “Many jurisdictions are going to bolster their licencing frameworks for crypto service providers. We can also expect growing deployment and capacity to undertake regulatory enforcement and cross-border investigations.
“This means that crypto exchanges can either take the proactive approach to be compliant or operate outside of a jurisdiction wanting to regulate the space. If they chose to do the latter, the opportunity would continually narrow. This is not sustainable in the longer term,” says Hoh.
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While some may argue that such regulatory developments may hinder innovation, it could be a boon to the industry at large as it’s an enabler for mainstream participation, says Hoh.
“Aside from the MAS, the regulators in Hong Kong and Australia are also accelerating their regulatory processes for crypto service providers. This is a good thing for traditional institutional players, as it provides them with greater certainty and regional consistency, justifying their decision to invest and enter the space,” says Hoh.
Customers want regulation
Regulations are also important to retail investors, who may prefer to engage and transact with regulated entities for peace of mind. According to Bitstamp’s Crypto Pulse survey, 26% of 23,000 respondents polled worldwide cited “not enough regulation in the industry” as a reason for not investing in crypto.
This said, investors should also bear in mind that regulations do not provide a guaranteed safety net, says Hoh. Similar to any other investment, individuals have the onus to exercise due diligence on their digital assets.
Investors should research the teams behind every crypto project they invest in as well as understand the purposes of each token to make more informed investment decisions. This is also a role that crypto service providers can play, by offering resources and educational tools — something that Bitstamp is putting more focus on, adds Hoh.
Overall, there are definitely valid reasons for both institutional and retail investors to support the industry’s regulatory developments. Moving forward, operators can no longer skirt around regulatory requirements — instead, they should upskill their teams and engage with regulators to ensure that they can seamlessly operate in their respective jurisdictions.
As regulators, investors and other stakeholders become educated with a better understanding of cryptocurrency and blockchain technology, Hoh looks forward to a maturing market with an ecosystem of converging players from the full financial services sector to realise the multiple use cases enabled by the technology.
“What’s important to point out is that the optimism, objectives and vision of players in the existing ecosystem have not changed simply because of a few bad actors. The industry instead has galvanised together and are keen to work with regulators to set down clear regulatory frameworks that will help the market evolve into something stronger and more mature. The drumbeat will be just as fast and as confident amid the new tune being played,” Hoh concludes.