Best Practices for Crypto Asset Regulation in 2024

There are several undeniable reasons for consolidating data into a single location. Storing data in one area makes it easier to access, organize, and update the information. The keeping of data in one zone simplifies the process of retrieving, arranging, and refreshing the information. The insights derived from thoroughly integrated databases are more likely to be thorough and uniform. Those managing these centralized servers can more easily spot signs of data integrity problems and security threats. Moreover, bringing data together enables applications to function in a way that is both economical and effective.

However, there are also negative consequences to data centralization in the cryptocurrency landscape. This includes the concentration of power, the loss of privacy, diminished responsibility, and limited competition. This is evident as the internet has grown more centralized over the past quarter-century. This shift started when a few companies developed user-friendly platforms. These platforms and websites made the internet significantly more accessible. Presently, the bulk of online activity is stored in databases controlled by Google, Meta, Amazon, Microsoft, and other entities.

Blockchain the Backbone of Cryptocurrencies

Blockchain technology figures out the drawbacks of centralized data storage in crypto exchange. It offers an alternative channel to structure digital information. Blockchain technology allows data to be shared across multiple computers within a network. Because of the nature of blockchain, individual computers can verify the authenticity of information received from other "nodes" in a blockchain network. Every time data is shared on a blockchain, the transaction is recorded automatically in a distributed ledger (DL). The DL cannot be altered.

Hence, taking perspective all around, this article discusses crypto regulation and will navigate toward the best practices for crypto asset regulation in 2024.

Piloting the Crypto Securities Regulation Landscape

The Securities and Exchange Commission’s (SEC) increased oversight of the crypto industry has cast a long shadow. Investors now have to balance innovation with compliance, making sure their investments in crypto assets don’t violate securities laws. The scrutiny has sent shock waves through crypto exchanges and the wider crypto market, creating a need for increased awareness and comprehension.

As we navigate our way through this new landscape, let’s first take a look at the basic principles that determine whether a crypto asset is “good” or “bad” for the SEC.

Understand on the Howey Test and Digital Assets

The Howey Test, originating from a 1946 Supreme Court decision, serves as a guiding light for the Securities and Exchange Commission (SEC) in determining which cryptocurrency assets are subject to its regulatory authority. This test, characterized by four key criteria, requires an investment in a joint venture where the main expectation of returns is based on the work of others. Although its relevance to the realm of digital assets is a topic of significant discussion, the Howey Test stands as a fundamental principle in the regulation of cryptocurrencies, with interpretations and enforcement approaches differing among courts. For those involved in the cryptocurrency sector, grasping these subtleties is crucial.

SEC’s Stance on ICOs and Tokens

The SEC has been closely monitoring Initial Coin Offerings (ICOs) and digital tokens, aiming to safeguard investors and weed out deceptive activities. This attention serves as a wake-up call for the cryptocurrency sector to meet the standards of crypto regulation, as the SEC Chair and the organization as a whole view ICOs as a breeding ground for unethical behavior without strong regulations for crypto securities.

Therefore, the future of digital asset securities lies in being transparent and following the rules that protect the interests of investors.

Recent actions taken by the SEC in the cryptocurrency realm underscore its dedication to strengthening defenses against fraud, market manipulation, and unclear reporting. The growth of the SEC's division focused on digital assets and cyber threats, along with its focus on unregistered securities, marks a period of increased alertness.

Notable cases, like the 2023 legal action against Ripple Labs, show that determining whether a digital currency is a security or not is a legal challenge, and a risk that investors need to be aware of.

Global Principles for Crypto Regulations

The IOSCO has proposed 18 global guidelines for crypto and digital asset regulation.  The organization believes that global alignment on certain crypto rules is "not only desirable but necessary" as the markets are "cross-border" and create "considerable risk of harm" for investors.

According to the World Economic Forum, a global approach is necessary to "maximize the benefits of the underlying technology" and to "manage the risks".

However, due to the varying stages of maturity of the market, the emergence of regional hubs, and the varying capacities of regulatory bodies, it is wise to look at the role of international organizations, national /regional regulators, and industry actors in ensuring responsible regulation evolution.

EU's Rules on Digital Currencies

Let’s explore ‘Best Practices for Crypto Asset Regulation’ in Europe. In May 2023, the European Union became the first to implement global comprehensive rules for digital currencies, called the Markets in Cryptocurrencies-Assets Regulation (MiCA).

The European Security and Markets Authority is currently seeking feedback from the public on various aspects of these regulations.

Any entity that issues or deals in digital currencies is required to have a license, and starting in January 2026, all providers of services will be obligated to record the details of both the sender and the recipient of any transaction, regardless of the transaction's value. Additionally, any digital wallet that stores more than 1,000 euros must verify the ownership of the wallet before processing any transactions.

The fall of FTX highlighted the "critical need for establishing regulations that will safeguard Europeans who have invested in these digital assets, and prevent the exploitation of the crypto sector for illegal activities such as money laundering and supporting terrorism," according to Elisabeth Svantesson, Finance Minister of Sweden, who is currently leading the EU.

Asian Digital Currency Laws

Asia is one of the world's leading adopters of cryptocurrencies, but regulations vary greatly from country to country. Coming to the ‘Best Practices for Crypto Asset Regulation’, Japan is one of the most accepting countries for crypto use, as it recognizes it as a form of money and as a legal asset. Crypto and yen transactions are managed by the Financial Services Agency in Japan, and Japanese citizens can own or invest in digital currencies. However, the country has recently tightened up rules on sharing customer data between crypto exchanges to combat money laundering.

South Korea is moving ahead with regulating cryptocurrencies and other virtual assets, following the passage of the "Virtual Asset Users Protection Act" in 2023. This law strengthens the protection of users by adding record-keeping and transparency requirements. The financial authorities are expected to publish guidelines for the listing of virtual assets by April 2024 or May 2024, News reported.

Brazil Digital Currency Rules

‘Best Practices for Crypto Asset Regulation’ in Brazil have been in place since June 2023 when the central bank became the supervisor of crypto assets. Under the Cryptoassets Act, companies providing services related to virtual assets are subject to rules and regulations designed to prevent fraud and money laundering related to cryptocurrencies.

The central bank governor of Brazil has said that he intends to impose stricter regulations on cryptocurrency. This comes after Brazil's cryptocurrency imports increased by nearly 45% between January and August 2023, reaching a total of US$7.4 billion. According to the governor, the demand for Brazilian cryptocurrencies has shifted towards stablecoins, as people are increasingly using them as payment rather than as investments.

China has been one of the most stringent countries in the world when it comes to regulating cryptocurrencies, prohibiting exchanges, trading and crypto mining. In 2020, the Supreme Court lifted the ban on crypto.

In India, the "Cryptocurrency and Regulation Of Official Digital Currency Bill" has been scheduled to be passed through parliament in 2020, but has faced delays. The bill aims to allow the Reserve Bank of India to create an official digital currency.

Regulating Cryptocurrencies and Stablecoins in Britain

The British government is in the process of establishing regulations for the cryptocurrency industry. Notably, it has enforced a rule that any entity providing a digital currency must be approved by the Financial Conduct Authority (FCA).

"The government believes that companies interacting directly with consumers in the UK must be approved, regardless of their geographical location," the finance department has stated.

Additionally, the Financial Conduct Authority and the Bank of England have suggested rules for stablecoins. Stablecoins are created to maintain a more consistent value compared to traditional cryptocurrencies by linking their worth to another asset. For further details on the distinctions between cryptocurrencies and stablecoins, please refer to our detailed explanation.

Conclusion

In conclusion, the best practices for crypto asset regulation are being developed by governments around the world. The World Economic Forum (WEF) has arisen with its 18 recommendations on global regulations for crypto and digital asset management. This report plans the key regulatory developments that have taken place in recent years. The WEF is also working on a Digital Assets Regulatory Initiative (DAR), which looks at the results of various national approaches to regulating digital assets.