Legislators and regulators will be watching for instances where consumers are defrauded or misled and suffer significant financial harm by using crypto-assets.
Building better consumer awareness efforts and adhering to applicable compliance requirements could lead to improvement in this area. Legislators and regulators will be watching for instances where consumers are defrauded or misled and suffer significant financial harm by using crypto-assets. We can expect that certain elements of suitability and appropriateness will become important.
Investor protection
The issues associated with crypto-assets and investor protection are exacerbated by price volatility in certain currencies. For example, in terms of market manipulation and exchange risk management mechanisms, there is varying maturity in the market and additional risks posed via high leverage offered.
Pricing variations for the same asset on global exchanges are due primarily to differences in liquidity, jurisdictional onboarding restrictions, and bank limits of exchanges on wire transfers and capital controls. These tend to limit arbitrage opportunities to parties actively trading on multiple exchanges.
Asset illiquidity as a business is also an area where scam projects are seen and garner media attention.
Stability of the financial system, sovereignty and monetary policy
The financial system may be subject to risks from crypto-assets to the extent that both are interconnected; spill-over effects may also be transmitted to the real economy. Crypto-assets may have implications for financial stability and interfere with how payments and market infrastructures function, as well as implications for monetary policy.
The concept of a global digital currency can have both political and economic implications, and be a risk to national sovereignty. There are concerns about virtual dollarization of developing economies, as well as the loss of monetary policy tools in developed nations if there was widespread adoption of digital assets as payment tokens.
Globally, the tax policy and tax evasion implications have been largely unexplored in relation to crypto-assets, although they form an important aspect of the overall regulatory framework. Jurisdictional differences create a tension where regulatory arbitrage may take place – highlighting the need to develop tax guidance.
Other regulatory implications
In a world where financial services and products can be customized and finely targeted to fit the specific needs of customers, money could be facing its unbundling moment with the emergence of crypto-assets.
Money could be facing its unbundling moment with the emergence of crypto-assets.
Money serves three key functions: as a medium of exchange (for example, a currency), a store of value in the form of a security or asset, and as a unit of account, such as credits and debits. Supporters of crypto-assets argue that they can fulfill these functions in time, as they become more popular and are more widely used. But a number of economic, usage and regulatory challenges could stand in the way of crypto-assets becoming realistic alternatives or complements to a viable currency or a method of payment to purchase goods or services.
Concerns voiced by many in using crypto-assets as payment tokens are their volatility in value, intrinsic value, limited supply and accessibility, slower payment processing infrastructure, current high transaction fees, and lack of regulation in most jurisdictions. Solutions to some of these problems have been found by businesses, such as PayPal, which now offer crypto-asset payment products to merchants and retail businesses.
For traditional financial services firms, the emergence of crypto-assets as a medium of exchange could also have important implications. A number of large traditional banks and payment institutions have sought to provide solutions to their customers by offering products and services, such as their own crypto-assets, instant payments using crypto-assets, custody services and debit or credit card solutions to pay for goods and services using crypto balances.
Many regulators recognize that crypto-assets may be here to stay and that they can have uses to support financial inclusion, provide secure payments or improve controls and efficiencies. The rapid growth scale of potential benefits of crypto-assets has driven regulators to consider how best to mitigate the risks and enable meaningful innovation to thrive. As the Basel Committee on Banking Supervision recently stated: the need for adequate regulation, for authorities to have the tools, skills and technology to identify the evolution or creation of crypto-assets and to build appropriate regulatory and supervisory frameworks is key.
Summary
Banks need to demonstrate that they can identify, measure, monitor, control and report on crypto-asset activities and associated risks. Economic, usage and regulatory challenges could stand in the way of crypto-assets becoming realistic alternatives or complements to fiat money. For now, the market is relevant and presents an opportunity to harness the benefits of new technology.
