Nazar Kovalenko
Public Management and Administration student at Taras Shevchenko National University of Kyiv
In an era of rapid technological and financial development, cryptocurrency has become a dynamic force that is rewriting the rules in the world of finance and technology. Cryptocurrencies can be defined as a ‘digital currency produced by a public network, rather than any government, that uses cryptography to make sure payments are sent and received safely’.[1]
Existing solely in the digital space, cryptocurrency has no traditional physical counterpart, and its value is usually independent of any currency or country. However, its significance is not limited to technological aspects alone; cryptocurrency brings many attractive features to the financial landscape, such as decentralisation (ensuring that there is no unified supervision), increasing levels of privacy, greater security, and minimal fees for cross-border transactions. These benefits contribute significantly to the global expansion of cryptocurrencies.
However, new challenges arise with the development of cryptocurrencies, mainly due to the lack of legislation on this novel subject, leading to potential money laundering and other illegal activities. However, over-regulation can also be a problem, hindering the development of revolutionary technology and preventing some people from accessing the financial services they need. Regulators are therefore faced with the delicate task of ‘fostering industry growth while safeguarding the interests of investors and consumers’.[2] This article will therefore discuss the flexibility offered by cryptocurrencies (1) and the regulations put in place across Europe (2) in order to conclude on the balance between flexibility and security needed for the proper development of cryptocurrencies (3).
- Flexibility offered by Cryptocurrencies globally
Cryptocurrencies offer significant opportunities to increase financial inclusion. They provide access to financial services for people in remote or underbanked areas where traditional financial services may not be available. For example, they often allow users to transact without the need to verify identity or credit history, making them accessible to a wide range of people especially given the efficiency of cashless transactions.
In Latin American countries such as Argentina, cryptocurrencies have become a means of preserving the value of assets amid high inflation rates [3]; in the last 5 years, the Argentine peso has lost about 90% of its value against the US dollar the value.[4] Simultaneously, the value of bitcoin has increased by 1730% over the same period.[5] As a result, Argentinians have been using cryptocurrencies to protect their savings from the devaluation of their national currency. As such, these currencies can help improve access to financial services in different regions of the world by providing an alternative way to transact despite being excluded from the traditional financial system.
However, this alternative poses a high risk to financial security: a key example is Iran, where cryptocurrencies have been used to circumvent US sanctions. Iranian companies, including some affiliated with the Islamic Revolutionary Guard Corps, have reportedly conducted $8 billion worth of transactions since 2018 through an exchange called Binance. This was part of a wider strategy to trade outside the traditional US dollar-dominated global financial system, which also facilitated trade with other countries under US and international sanctions.[6]
This is an even bigger problem in the context of the significant differences in cryptocurrency regulation around the world. According to the Atlantic Council study, half of the G20 countries, representing 50% of the world’s GDP, have legalised crypto-asset licensing and trading, whilst the other half is considering regulation.[7] On the other hand, only 16% of emerging market economies have regulations in place to tax and license cryptocurrencies. This disparity in regulation has led to confusion over the appropriate rules, resulting in different definitions of terms, different transparency requirements and different sanctions for fraudsters and money launderers.[8] This in turn would slow down global trade and can lead to complex cases in courts. Therefore, the risk posed by cryptocurrencies needs to be mitigated through safe and secure control measures.
- The need for financial security in Crypto regulations
The recovery of fraudulently obtained crypto assets has been a major driver of crypto litigation, particularly in the English courts.[9] The value of these disputes is increasing and involves complex parties such as lenders and crypto exchanges rather than just individuals.[10] It is then important to highlight some of the regulations that are helping to secure crypto transactions across Europe.
In an effort to address this problem, the European Commission voted and ratified its crypto-assets legislation in May 2023, known as the ‘Markets in Crypto-Assets Regulation’ or MiCA, which applies to individuals who want to issue crypto-assets in Europe, as well as individuals established in the UK who have customers in the European Economic Area (EEA).[11] This legislation seeks to address the issue raised in the first paragraph by harmonizing laws across the EU:
- It provides common definitions of key terms related to crypto-assets, which encourages the sale of crypto-assets across the EU.
- It allows for the protection of individuals by setting out rules on transparency and disclosure requirements for the issuance and admission to trading crypto assets, making it a key tool for trade and business, as cryptocurrencies can serve as an alternative to traditional loans and capital.
- With regards to the issuance of crypto assets in the EU, it sets common requirements such as marketing, the obligation to act honestly, fairly, and professionally, and imposes liability on crypto issuers.
While these laws will help foster a healthy environment for cryptocurrencies, regulators should always be careful not to over-regulate the crypto market. The obvious reason for this is not to hinder the market, but there are larger issues at play. Firstly, several jurisdictions such as China, Saudi Arabia and Egypt have banned cryptocurrencies due to their dislike of the decentralised technology on which the major cryptocurrencies operate (e.g.: Bitcoin, Ethereum).[12] Seeing this as risky for their market and as a challenge to their sovereignty, it can lead to people being excluded from financial opportunities that can be life-changing such as moving assets in times of economic crisis. Secondly, over-regulation of existing crypto laws can lead to these tools being used in other jurisdictions with fewer laws on security and transparency, leading to an increase in illicit activities and economic abuse.[13] For example, North Korea has become a hub for cybercrime in East Asia due to the region’s hostility towards cryptocurrencies, with studies estimating that $3 billion worth of cryptocurrency has been stolen since 2017.[14] A balance must therefore be struck between flexibility and security.
- Harmonising the two main approaches: flexibility and security
It is important to remember that cryptocurrencies do not abuse customers, people do.[15] Take, for example, the crash of FTX, once the third largest cryptocurrency exchange in the world. Its crash was due to mismanagement of funds, lack of liquidity and lack of trust.[16] In general, the existence of multiple licences at the time, such as FTX, raises concerns about the limitations of some traditional regulatory methods and whether they are sufficient to prevent the abuse of crypto in society.
The main issue here is the lack of transparency that leads to instances of malpractice, as they often operate under a veil of secrecy. This is why policies like Anti-money laundering (AML) and Know Your Client (KYC) are helpful. AML and KYC protocols are the cornerstones of cryptocurrency regulation worldwide. They aim to prevent digital assets from being used for illegal activities such as money laundering and terrorist financing. For example, the EU’s KYC procedures under the MiCA regulations include verifying the identity of users and monitoring transactions to detect suspicious activity, even if a crypto company is not established in the EU, as long as it provides services on its territory.[17] These measures help to create a safer and more transparent environment for cryptocurrency trading and increase the attractiveness of the European market compared to global competition.
On the other hand, crypto regulation needs to incorporate the lessons of case law (binding or not) courts to manoeuvre properly in these uncharted waters. In this respect, the UK (London) has established itself as a FinTech hub over the last decade, mainly due to the ‘geographical coincidence’ of a strong legal and banking sector, complemented by high-tech developments.[18] Consequently, UK courts are endeavouring to elucidate the legal landscape in crypto litigations. For example, in the ongoing Tulip trading case (Tulip v van der Laan), the Court of Appeal mentioned that cryptocurrency developers may owe a fiduciary duty to certain crypto holders, not just those who are trading.[19] This duty could include a duty ‘not to introduce software that would be advantageous to the developers but not the users, as well as transferring back stolen bitcoin’.[20] Another case is Jahangir Piroozzadeh v Persons Unknown et al, where the court investigated how crypto deposits are held and resulted in a freezing injunction against a crypto exchange being lifted.[21] Judges are at the forefront of these legal issues and their experience and insight will be useful for drafting legislation that balances security and flexibility in cryptocurrency-related matters.
In conclusion, effective regulation of cryptocurrencies requires a balanced approach that both addresses security and legitimacy risks and promotes digital accessibility and innovation. Striking this balance is only possible through a thorough understanding of the unique characteristics of the digital economy, adaptation regulatory frameworks, and continued international dialogue and cooperation. The way forward involves not only developing and implementing flexible regulatory mechanisms, but also actively engaging with all relevant stakeholders to foster innovation, protect users and ensure the sustainable development of the cryptocurrency sector globally.
[1] Cambridge Dictionary
[2] ‘The Challenges of Regulating Crypto Assets’ (Sanction Scanner (2023-2024)
[3] David Montager, ‘Stablecoins gain momentum in Argentina as peso plummets’ The Banker (31 October 2023)
[4] Paul Wiseman, ‘Why Argentina’s shock measures may be the best hope for its ailing economy’ (APnews, 14 December 2023)
[5] John Edwards, ‘Bitcoin’s Price History’ (Investopedia, March 14 2024)
[6] Eric Lob, ‘Iran and cryptocurrency: Opportunities and obstacles for the regime’ (Middle East Institute, 27 December 2022)
[7] Ananya Kumar et al, ‘Cryptocurrency Regulation Tracker’ (Atlantic council – Geography of cryptocurrency, 2023)
[8] Francis Bigneli, ‘Industry divided over FSB crypto approach: ‘same activity, same risk, same regulation’’ The Fintech Times (19 July 2023)
[9] Harriet Jones-Fenleigh et al ‘2024 fintech outlook | crypto litigation’ (Norton Rose Fulbright – publications, January 2024)
[10] Nell Perks, ‘Crypto disputes on the rise- a 2024 look at litigation, arbitration and regulation’ (FinExtra, 31 January 2024)
[11] Jonathan Herbst et al, ‘Regulating crypto-assets in Europe: Practical guide to MiCA’ (Norton Rose Fulbright publications, September 2022)
[12] Andy Patrizio, ‘Blockchain decentralization’ (Tech target- definition, 2023)
[13] Nicole Willing, ‘Cryptocurrency bans explained: which countries have restricted crypto and why?’ (Techopedia, 4 March 2024)
[14] Insikt Group, ‘Crypto country: North Korea’s targeting of cryptocurrency’ (Recorded Future, 30 November 2023)
[15] Ibid
[16] Amanda Hetler, ‘FTX scam explained: everything you need to know’ (TechTarget what is, 1 February 2024)
[17] Ibid
[18] Angus McLean, ‘The continued success of the UK as a FinTech hub’ (Simmons and Simmons, July 2016)
[19] [2023] EWCA Civ 83
[20] Ibid [10]
[21] [2023] EWHC 1024 (Ch)