Veriscope Regulatory Recap - 3rd April to 9th April
Welcome to another edition of the Veriscope Regulatory Recap.
This week, we focus on IOSCO’s upcoming crypto regulation consultation paper, the US Treasury’s report emphasizing AML compliance for DeFi, the Indian government’s update on crypto regulations and fraud prevention, and ECB’s Elizabeth McCaul calling for strengthening MiCA provisions.
Before we move forward, let's pledge to safeguard the ecosystem's true ethos amid increasing calls for regulating the nascent crypto sector. This applies to both the industry stakeholders and the regulators, as only by working together can we ensure a balanced, secure, and thriving future for the world of digital assets.
Let's collaborate and make crypto a force for good!
IOSCO to Launch Crypto Regulation Consultation in Q2 2023
The International Organization of Securities Commissions (IOSCO) plans to release a consultation report on regulating crypto assets in Q2 2023, with the final recommendations to be published by the end of the year.
IOSCO's Fintech Task Force has dedicated two major workflows to decentralized assets, covering digital assets and DeFi, focusing on investor protection.
The Commission has previously published reports on DeFi, stablecoins, and influencers, recommending national regulators acquire supervisory capacities such as regulatory channels for consumer complaints and evidence-tracking processes.
The organization also urged regulators to take a granular and holistic understanding of the DeFi market to create relevant legislation. IOSCO is an association of securities and futures regulators with a board of 35 regulators and top executives, including heads of the US CFTC, the US SEC, and the UK FCA.
This development will likely have significant implications for crypto users and the broader ecosystem. For instance, it can increase transparency, accountability, and investor protection, which may help mitigate risks associated with fraudulent activities, scams, and market manipulation, providing a more secure environment for investors.
However, some crypto enthusiasts fear that stringent regulations could stifle innovation and hinder the growth of the decentralized finance (DeFi) sector. Compliance with new rules may also impose additional costs and administrative burdens on projects and startups, potentially leading to market consolidation, with smaller players struggling to compete.
Ultimately, the impact of IOSCO's recommendations on the crypto ecosystem will depend on how national regulators implement and enforce these guidelines, with the potential to either strengthen investor confidence or inadvertently limit the industry's potential.
US Treasury Department Emphasizes AML Compliance for DeFi in Risk Assessment Report
The US Treasury Department has released a report on the risks associated with DeFi, calling for implementing AML compliance under the Bank Secrecy Act (BSA). While the report does not establish new supervisory expectations, it highlights that even truly decentralized services should implement AML controls under existing BSA obligations.
The Treasury underscores that all individuals or entities providing financial services are subject to the BSA and its AML regulations.
The report calls for industry input and engagement as regulators seek to build potential industry guidance on AML for DeFi. The Treasury also suggests using emerging technology solutions, such as blockchain intelligence tools, digital identity, and zero-knowledge proofs, to support compliance with AML/CFT obligations while maximizing user privacy.
However, this push for compliance may also have unintended consequences for the ecosystem.
For instance, smaller players in the DeFi space may face difficulties meeting the requirements, which could lead to consolidation and decreased innovation in the market. Moreover, the added compliance costs could deter new entrants and pressure existing projects.
With the Treasury seeking industry input and engagement, the extent of these challenges will depend on how flexible and accommodating the eventual guidance is and the effectiveness of emerging technology solutions in striking the right balance between AML/CFT obligations and user privacy.
Indian Government Provides Updates on Crypto Regulation and Fraud Prevention Efforts
India's Minister of State in the Ministry of Finance, Pankaj Chaudhary, addressed two sets of inquiries concerning crypto in the Lok Sabha, the country's lower house of parliament.
The first set asked whether the government planned to legalize crypto and what impact it would have on the common people, to which the minister responded that crypto is currently unregulated. Any legislation for regulation or banning would require significant international collaboration.
Regarding crypto-related fraud, the minister said they are dealt with under existing laws against fraud and cybercrime, and he added that the Ministry of Home Affairs had launched a portal for the same.
Moreover, the Enforcement Directorate has been investigating cases related to crypto assets under the Prevention of Money Laundering Act and the Foreign Exchange Management Act.
ECB Official Calls for Stronger Crypto Asset Safeguards
European Central Bank (ECB) supervisory board member Elizabeth McCaul has said that the European Union's proposed regulations for crypto assets are insufficient and that safeguards need to be strengthened to address the risks involved.
The Markets in Crypto-assets (MiCA) bill, set to be voted on by the European Parliament later this month, is an important milestone but is not enough on its own, McCaul said in a blog post.
She suggested that significant crypto-asset service providers should be subject to both stricter requirements and enhanced supervision and that new quantitative metrics are needed to consider the type of business.
McCaul also argued that thresholds needed to be measured at the group level rather than at the individual entity level to address the complexity of operations.
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