As FTX founder is convicted, can regulation revive crypto’s reputation?
They called him the “Crypto King” but after a month-long trial, a New York jury took less than five hours of deliberations to find Sam Bankman-Fried guilty of charges including fraud and money laundering.
The 31-year-old crypto billionaire now faces decades in prison following his arrest last year after his exchange, FTX, went bankrupt. He had pleaded not guilty to all seven charges.
Bankman-Fried’s stunning fall from grace coincided with a difficult 2022 for the crypto sector. Stablecoin Terra – touted as one of the most reliable digital currencies – dropped 96% in value in a single day.
Bitcoin – possibly the best known of all cryptocurrencies — lost over 60% of its value last year. It was the second worst year in the digital currency’s history (it fell 73% in 2018).
But the biggest negative news story for crypto was FTX — which was promoted by prominent stars such as supermodel Gisele Bundchen, comedian Larry David and NFL star Tom Brady, lending an ‘acceptable’ face to what is still considered by many to be a risky investment.
Michael Lewis — author of books such as Moneyball and The Big Short, both of which later went on to be adapted into Oscar — nominated films, has recently written a book on Bankman-Fried. Speaking to The News Agents podcast, he said “Cryptoland is the Wild West” and speculated that other exchanges are also structured like FTX, but are out of the reach of US prosecutors.
The challenges of 2022 led to an increase in calls to introduce regulations — or even specific regulators — for cryptocurrency and digital assets, but what will that look like, and can it work?
“Unfortunately, scandals in this space, and lack of clarity on regulation, have resulted in crypto almost becoming a dirty word in the financial services world,” explains Sasha Skoryk, head of banking at Clear Junction.
“The word ‘crypto’ is used in such a generic way without really understanding all the components of digital assets and blockchain technology.
“What is a blocker to this mass adoption of digital ledger technology is the fact that some of these crypto assets are so volatile and the price can change very rapidly. That makes it risky and not something that can be easily adopted by businesses as an example. But there are so many elements of crypto that have the ability to transform the way we make payments.”
Effective regulation can “provide the foundational trust that both institutions and individual investors need to confidently enter or re-enter a market,” adds Spectrum Search founder and CTO Peter Wood.
“The crypto space is nascent and therefore highly susceptible to volatility, misinformation, and fraudulent activities. Introducing a dedicated regulator, can indeed act as a stabilising force by setting clear standards, enforcing compliance, and ensuring consumer protection.
“Such oversight not only adds credibility but also streamlines processes, making it easier for new entrants to adopt and innovate. On the flip side, the challenge is to strike the right balance.”
However, he warns that there’s a fine balance to be struck.
“Overly restrictive regulations can stifle innovation and push potential investors and tech leaders away, which is counterproductive to restoring the reputation of the crypto world.”
For the United Arab Emirates, cryptocurrency and digital assets are seen as a huge opportunity. In fact, at the recent GITEX conference in Dubai, one senior from the local government told TechInformed that the aim is to make the Emirate the “Switzerland of Cryptocurrency” by acting as a neutral and welcoming home for digital asset firms.
To achieve this, Dubai became the first region to launch its own independent regulator for virtual assets — after several years of development, Virtual Assets Regulatory Authority (VARA) went live in March 2022.
VARA’s mission statement includes the aim to make Dubai a “regional and international hub for virtual assets and related services” but also to “promote a shared responsibility in developing efficient and bespoke regulations for the protection of customers and to curb illegal practices in coordination with the concerned entities.”
TechInformed asks VARA vice chairperson Deepa Raja Carbon to outline why Dubai opted to create a sector-specific regulator for virtual assets.
She explains: “When we were set up, crypto wasn’t seen in the same way it has been the last six months. It was one that every jurisdiction globally wanted to foster and nurture to help grow.
“Part of the Dubai 2033 plan, which was set out last year, included targeting new economy sectors, and everything from blockchain and metaverse to AI and virtual assets fell under that remit.”
The 2033 plan was set out by ruler Sheikh Mohammed bin Rashid Al Maktoum to pivot Dubai’s economy to new areas and opportunities, which include turning the city into one of the leading smart cities in the world.
New economy sectors make up around $100 billion of that goal, according to these plans.
“One of the obvious elements missed by that formulation is any regulation around virtual assets,” adds Raja Carbon. “So, if you stopped thinking about virtual assets as a vertical, and started to see this as a horizontal, almost a transversal, none of the others would be able to be attractable or grow as a consequence. For that scalability, we needed to build a foundation – and that is VARA.”
In February this year VARA issued the much-anticipated Virtual Assets and Related Activities Regulations 2023, setting out the regulatory framework governing Virtual Assets and all related activities in the emirate, with several updates announced since. Its remit is only for the Emirate of Dubai.
Now, more than 800 companies operate in Dubai within the space covered by VARA without licences, although Raja Carbon has set a goal that by the end of the year, all of these entities will either have the correct registration, or will be in the process of registering, for a VARA licence to operate.
“So, by the end of the first quarter of next year, you’re either going to have them formally applying for our licence, or winding down completely,” she adds.
To deal with the wider market and those companies who may be related to virtual assets but not directly in that remit, VARA has launched the Dubai legacy programme, which should impact around 850 companies. This will allow them to go through a transition period to align activities with VARA regulations through a temporary licence.
VARA only covers the Emirate of Dubai – the rest of the UAE has its own crypto rules under the Emirates Securities and Commodities Authority (ESCA) while payments are still regulated by the UAE Central Bank.
So how does VARA balance Dubai’s goal to become the leader in this sector, with the need to protect from bad actors through regulation?
“We set ourselves up to be a very agile regulator,” explains Raja Carbon. “I don’t mean agile just in terms of the response to market but also the regulations having to be tweaked, knowing that this is not a static industry. It’s dynamic, it’s going to change, and regulators are only as good as their awareness of what the market can do.
“Our regulations are going to constantly evolve, but we need to protect those that need most protecting, and that means not being completely loose so that a person isn’t sure where they are going to land.”
Around the world
Now, there is little sign that other countries are going to follow Dubai’s route with a dedicated regulator, but several are making moves.
Spectrum Search’s Wood points to Switzerland and Singapore as two nations who stand out as having embraced a “proactive, yet balanced, approach” to cryptocurrency.
He explains: “Singapore’s Monetary Authority provides clear guidelines and fosters innovation while ensuring investor protection. Switzerland’s ‘Crypto Valley’ in Zug has become a global hub thanks to its forward-thinking regulatory framework that is both business and investor friendly.
“It’s the synergy of clear rules, accessibility to regulators, and an overall progressive mindset that makes these countries stand out in the crypto legislative landscape.”
TI breaks down the latest regulatory moves in the biggest markets
US: The nation announced a new framework in 2022 that opened the door to further regulation. The new directive has handed power to existing market regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The SEC has already moved toward regulating the sector with its widely publicised lawsuit against Ripple, alleging that it raised more than $1.3 billion by selling its native token, XRP, in unregistered securities transactions. More recently, the SEC has been targeting exchanges and companies such as Coinbase (COIN) and Binance (BNB) over their crypto products. SEC Chairman Gary Gensler has been vocal about cryptocurrency and has referred to it as “a Wild West.”
China: China classifies cryptocurrencies as property for the purposes of determining inheritances.
The People’s Bank of China (PBOC) bans crypto exchanges from operating in the country, stating that they facilitate public financing without approval.
Furthermore, China placed a ban on Bitcoin mining in May 2021, forcing many engaging in the activity to close operations entirely or relocate to jurisdictions with a more favourable regulatory environment.
And in September 2021, cryptocurrencies were banned outright.
However, the country has been working on developing the digital yuan (e-CNY). In August 2022, it officially began rolling out the next round of its central bank digital currency (CBDC) pilot test program.
European Union: Cryptocurrency is legal throughout most of the European Union (EU), although exchange governance depends on individual member states.
Recently, the EU’s Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) have come into effect, tightening KYC/CFT obligations and standard reporting requirements.
In September 2020, the European Commission proposed the Markets in Crypto-Assets Regulation (MiCA)—a framework that increases consumer protections, establishes clear crypto industry conduct, and introduces new licensing requirements. It was provisionally agreed on in 2022.
In April 2023, Parliament approved measures that allow legislation requiring certain crypto service providers to seek an operating license. This legislation is intended to give regulators the tools they need to track crypto being used for money laundering and terrorism funding.
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