What do former Chancellor Philip Hammond and former U.S. Securities and Exchange Commission (SEC) chairman Jay Clayton have in common?

They have both recently joined crypto businesses; Copper in the case of Phillip Hammond and Fireblocks in the case of Jay Clayton.

What can we read into these high-profile appointments?

It certainly seems that the respect afforded to traditional finance (‘trad-fi’) is being appropriated by the upstarts in crypto. But why? One answer is that farsighted crypto businesses are preparing for regulation.

At the heart of the regulatory issue is how national governments choose to deal with crypto where the attraction is transparent decentralised finance (‘de-fi’) using blockchain with the added benefit of making ultimate ownership anonymous. The risks of money laundering and terrorist financing are obvious, and the danger of a wild west puts consumers at risk.

The trend of financial regulation in all forms of banking has been to tighten and as more trad-fi individuals and organisations enter the crypto world, it seems inevitable that regulation will follow, however much of this defies the crypto ethos.

What will regulation will look like, at least in the early stages?

We do have some clues:

  • Developed countries already impose some rules on crypto exchanges such as KYC, or ‘know your customer’ checks. However, most of the popular exchanges are located outside of these jurisdictions with billions being exchanged daily without knowing who is involved or the source of wealth. Even if identification is required for converting fiat currency into crypto, its transfer to virtual wallets makes further tracking virtually impossible
  • The Financial Action Task Force (FATF), the international money laundering body, recently recommended that, ‘only competent authorities …… can act as …. Supervisory or monitoring bodies’ with power to conduct inspections and impose sanctions.

This trend is already at work; the UK banned Binance from offering its services to UK consumers and China has, of course, banned crypto transactions altogether. Recently the SEC instructed Coinbase (and others) that certain of its lending products were in fact ‘securities’ and so subject to securities laws. Others have asserted that the whole of crypto should be categorised as securities.

So, it looks that at the very least the regulation is to ensure KYC and money laundering applies to crypto, but the likelihood is that the regulation will go much further and treat crypto as a security to be regulated as any other.

The crypto world would do well to prepare for the forthcoming tightening of regulation by demonstrating the same foresight as the early adopters of Bitcoin.

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