Regulating cryptocurrencies in times of war

The case for digital assets in extreme circumstances

• The dramatic unfolding of events in Ukraine brought up into the mainstream what might have been for many an unexpected topic in such circumstances: the place and role of blockchain and cryptocurrencies in the world of today and tomorrow.
• On one hand, concerns are voiced over the possibility to use cryptocurrencies for avoiding the international sanctions. On the other hand, regular people suddenly faced with limited or no access to their bank accounts turned to cryptocurrencies as value transfer instrument and medium of exchange while others, faced with the extreme volatility of the markets, embraced the perspective of asymmetric risk return observed over previous years in cryptocurrency markets or as a hedge against fluctuating fiat currencies.
• To add more perspective on the topic, it has been reported that Ukraine government raised over USD50 mln in cryptocurrencies donations (BTC, ETH, DOT).

"In retrospect, it was inevitable"

• All in all, in such extreme times, suddenly the use cases for cryptocurrencies and blockchain appeared more clear to everybody and the world is waking up to the fact that the genie is out of the bottle. As crypto-enthusiasts would say, "in retrospect, it was inevitable".

The regulatory risk and opportunity dilema

• In 2021, Ray Dalio said about Bitcoin that it "[...] still faces meaningful regulatory tail risks and lacks any of the underlying government backing or deep history that would provide a more fundamental baseline of future demand. While greater regulation might help Bitcoin gain broader institutional acceptance, it could also trigger selling by some of its largest existing owners who prioritize a lack of public oversight around the asset." Similar considerations could also apply to other digital assets.
• While regulators around the world were already in various stages of issuing specific regulations around digital assets, the current context is accelerating the regulatory process. This is likely to further accelerate the adoption of digital assets and lead, faster and with higher impact than expected by many, into a world in which the so called "legacy financial system" will learn how to live with and in the digital assets ecosystem.

Emerging EU and UK regulatory approaches to cryptoasset markets and products

• Back in 2018, European Parliament adopted a resolution on distributed ledger technologies (DLT), recommending that "any regulatory approach toward DLT should be innovation-friendly, should enable passporting, and should be guided by the principles of technology neutrality and business-model neutrality". It was also said that "the Union should not regulate DLT per se, but should try to remove existing barriers to implementing blockchains."
• The resolution also stated that "the feasibility of alternative methods of payment and transfer of value using cryptocurrencies can be examined further" and asked the Commission and ECB to "explore the possibilities of incorporating cryptocurrencies in the European payment system"
• Since 2020, we have a proposal for a European Regulation on Markets in Crypto-assets (known as "MiCA")
• EU and UK policymakers are currently focused on making sure that crypto markets deliver to their regulatory objectives – maintaining consumer protection, market integrity and financial stability.
• While the discussions on the final form of MiCA are still on going, Deloitte UK latest blog explores emerging EU and UK regulatory approaches to cryptoasset markets and products, taking stock of the key types of cryptoassets that have captured policymakers’ attention and highlighting key areas of alignment and differences between the EU’s and UK’s approaches. The blog is the first in a series of three on cryptoassets regulation. The next two will focus on what emerging EU and UK crypto assets regulation means for banks building their digital assets strategy and crypto natives seeking their first regulatory authorisations.
• In the last decade, the cryptoassets market has been growing exponentially – currently at an estimated $1.5 – 2 trillion. There is an ecosystem of firms specialising in the issuance, exchange and safeguarding of these assets, while traditional financial services firms are exploring how to grow their crypto business. Whereas the said growth was registered in a context where initially it was ignored by many, regulators included, it will be very interesting to see the further evolution of this ecosystem in the context of the emerging regulatory approaches at international and local level.

Click here to read the full blog authored by Ben Thornhill, Suchitra Nair, Ed Moorby and Mustafa Kanchwala.

A previous related article here.

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