The potential for regulatory arbitrage and the decentralized nature of certain cryptocurrencies underscore the need for some harmonization of regulation across key jurisdictions, argues a new report from the European Parliamentary Research Service (EPRS).
The report’s recommendations include increased oversight by regulators outside the European Union (EU) to ensure greater stability and development in the global cryptocurrency market.
The report also highlights concerns about various channels through which the EU’s financial system and autonomy may continue to be at risk, particularly as it continues to be affected by policies from non-EU countries in the area of Markets in Crypto Assets Regulation (MiCA). Markets in Crypto Assets Regulation – EU-wide regulatory framework for digital assets, which will be implemented in December 2024, remains dependent.
“Current regulation in non-EU countries raises questions about financial stability, as global financial institutions may not be able to cope with large price fluctuations – volatility – and losses from stock market shocks. Cryptoassets,” the report said.
The authors also pointed to the “interconnectedness of global financial markets,” which, along with the potential for regulatory arbitrage and the decentralized characteristics of certain cryptocurrencies, “create the need for some degree of convergence in regulation across major jurisdictions.”
Divergence in cryptocurrency regulation
One of the report’s main focuses is the regulatory landscape in the United States, which is described as “fragmented” due to the lack of a cryptocurrency regime at the federal level.
The latter “allowed for significant differences between states that have adopted different regulatory approaches,” the document says.
An example of this is the state of New York, which introduced the so-called “BitLicense” in 2015, which required cryptocurrency exchanges to share detailed information about their operations with the state Department of Revenue and comply with the requirements of “Know to Your Customer” (KYC ).
As a result, several major cryptocurrency companies, including ShapeShift and Kraken, decided to suspend services to New York residents and restrict their activities within the state.
“At the other end of the regulatory spectrum, the state of Wyoming stands out as a ‘crypto-friendly’ state, opting for favorable legal status for blockchain technology companies in the form of ‘decentralized autonomous organizations,’ a type of corporation.” based services,” the report continues.
UK, EU and cryptocurrencies
Other jurisdictions mentioned in the report include the United Kingdom, which has expressed its intention to become a global cryptocurrency hub. The UK has chosen to initially regulate some specific cryptocurrencies, mainly stablecoins, rather than following a tailored regime for a broad group of digital assets, as set out in the EU by the MiCA framework.
The report also refers to a study commissioned by the European Parliament that predicts a significant divergence between the UK and the EU in the identification and regulation of cryptocurrencies in the coming years.
Meanwhile, Japan has introduced a new regulatory framework for cryptocurrencies that, like the UK’s approach, builds on existing legislation. This framework ensures investor protection by holding stablecoin intermediaries accountable for meeting their obligation to redeem at par and complying with anti-money laundering and user data protection laws.
While the authors acknowledge that stricter regulation in the EU compared to that in non-EU countries “may have an adverse impact on the development of cryptocurrency markets,” they also claim that “there is evidence that a stricter regulatory framework limited but positive impact.”
“EU regulatory action should therefore deliver overall benefits, while third-party policy action is still needed to complement and strengthen financial stability,” the report says.