INTRODUCTION
As time changes there has been an evolution of the currency in the world it started with a barter system to a digital transfer and this present era has led to the introduction of a new form of currency that is cryptocurrency. Cryptocurrency works on another technology called blockchains which allows payments to be done without a financial institution and also stops the need to create a bank account as it is directly done from one user to another user operable from a smartphone.[1]. It is an amazing way of making payments, but it is highly unregulated causing many regulatory challenges. As the growing use of cryptocurrency and the market of cryptocurrency increasing challenges of proper governance, the need for addressing cybercrime, money laundering and need for consumer protection[2]. There is an increasing need to regulate it because it could also affect economic activity due to high energy consumption, market volatility, and the potential for market crashes.[3].
UNDERSTANDING CRYPTOCURRENCY REGULATION
What is Cryptocurrency Regulation?
Different countries have taken different definitions of defining cryptocurrencies for example countries like the USA, Canada, and the EU (European Union) have made cryptocurrencies legal, but they have very different laws on it. The USA treats cryptocurrencies as a form of commodity which is overseen by the Commodity Futures Trading Commission[4]. Canada has adopted a more inclusive framework requiring cryptocurrency exchanges to register as money service providers[5]. The European Union is in the process of creating a regulatory framework for crypto-asset markets that provide legal certainty for assets that are currently unregulated[6]. However, Eastern and Western countries are divided on how to regulate cryptocurrencies, influenced by factors like wealth, risk appetite, and government controls[7]. China, for example, has imposed a strict ban on cryptocurrency[8].
Key Compliance Issues
The comprehensive regulations have led to creating inconsistencies and uncertainty for cryptocurrency exchanges which has led to them facing many compliance challenges in requirements across different jurisdictions due to the ever-evolving nature industry. With the rise of regulatory requirements for customer verification and money laundering, prevention is one big challenge for cryptocurrency exchanges that need to follow the compliance standards which are very difficult to implement in the world of cryptocurrencies due to its nature which is decentralized and pseudonymous. It is the cross-border nature of crypto creates a potential for financial fraud for the exchanges which needs to be dealt with by exchange for the protection of the investors and the need to implement robust measures.[9]. One of the regulatory needs for investors’ protection is the valuation, which is a very important factor, but the cryptocurrency is very volatile making exchanges difficult for proper and accurate valuation[10]
Impact of Non-Compliance
“In November 2023, Changpeng Zhao, co-founder and CEO of Binance, faced conviction for neglecting to establish adequate Anti-Money Laundering measures, operating an unlicensed money transmission business, and violating sanctions. In particular, the US Treasury Department claims that “Binance failed to report to FinCEN transactions associated with terrorist groups including Al Qaeda, the Islamic State of Iraq and Syria (ISIS), Hamas’ Al-Qassam Brigades, and Palestinian Islamic Jihad (PIJ). The consequences of the lawsuit have been devastating. First, as Zhao pleaded guilty, he had to resign from his CEO position. Second, Binance had to pay a $3.4 billion penalty to the Financial Crimes Enforcement Network (FinCEN) and $968 million to the Office of Foreign Assets Control (OFAC). Additionally, regulatory authorities will have access to Binance’s financial records and documentation for oversight for a three-year monitoring period”[11]
TECHNOLOGICAL INNOVATIONS AND REGULATION
The Role of Technology in Compliance
The regulation of cryptocurrency is so complex making the invention of technology a much-needed solution that is helping assist businesses in compliance and helping to maintain transparency too.[12]. There is work going on with Central Bank digital currencies a government-controlled cryptocurrency an alternative to privately controlled cryptocurrencies. Even in the healthcare sector crypto pharmacy systems are being developed.[13]. These systems integrate mobile applications with blockchain technology to create a transparent and traceable medicine supply chain, potentially addressing regulatory concerns in pharmaceutical distribution.[14]
Future Trends in Regulatory Technology (RegTech)
As the technology advances introduction of new advancements has been done like RegTech which is significantly transforming the landscape of cryptocurrency compliance. RegTech solutions use advanced technologies such as artificial intelligence, machine learning, and blockchain to automate complex compliance tasks which helps in reducing manual intervention and minimizing human error[15] The usage of these technologies can help in facilitating monitoring concurrent transactions simultaneously analyzing them, enhancing regulations obedience and productivity and offers notable financial savings to both the financial sector and regulators also providing more than just digital process enabling a synchronous and balanced regulation that while distinguishes simultaneously tackles the risks doing a productive regulatory compliance[16]. However, it is important to note that the implementation of RegTech in this space may also present new challenges, such as cyber risks and algorithmic biases that will need to be carefully managed as the technology advances.[17]
INTERNATIONAL COOPERATION AND HARMONIZATION
Presently many global efforts are being put into making a unified global regulatory framework but facing many challenges due to different interpretations and different approaches in different jurisdictions. We can take the example of the EU working towards developing a comprehensive regulatory framework whereas the USA focuses on preserving existing cross-border financial mechanisms and maintaining innovation in the private sector.[18]. They are facing many obstacles like divergent regulatory treatments among different jurisdictions may hinder innovation and create regulatory arbitrage and the fast-paced evolution of blockchain technology and cryptocurrencies makes it difficult for regulators to keep up.
CONCLUSION
Regulating of cryptocurrencies is the regulation of cryptocurrencies is presenting a complex global challenge due to the decentralized and borderless nature of the technology. Many nations are putting efforts into developing their own regulatory approaches but there is a huge need for international cooperation to create a harmonized framework. Technological innovations like RegTech offer promising solutions for compliance but lead to new challenges such as cybersecurity risks and algorithmic biases. As the cryptocurrency market continues to evolve, making harmonious advancements, Investor security, and regulatory compliance are important for sustainable balanced sector growth.
Stakeholders also take regulatory practice as they play the biggest part, they can adopt proactive and adaptive approaches, and organizations as shareholders should continuously monitor regulatory changes.[19] And keep themselves adapted to maintain the compliance requirements which will help in the development of risk management frameworks and compliance.[20] And government needs to do an interdisciplinary collaboration to address societal challenges and invest in knowledge and skills enhancement which are indispensable in creating a skilled team ready to navigate future shifts. By doing this stakeholders can better position themselves to address regulatory challenges. The ongoing efforts to develop comprehensive and adaptable regulatory frameworks will play an important part in guiding the future of digital currencies and their assimilation into the global economic system.
Author(s) Name: Lakshay Sharma (University of Petroleum and Energy Studies)
References:
[1] Elcelina Carvalho Silva and Miguel Mira da Silva, ‘Research Contributions and Challenges in DLT-Based Cryptocurrency Regulation: A Systematic Mapping Study’ (2022) 6 63 <https://doi.org/10.1007/s42786-021-00037-2> accessed 2 February 2025.
[2] Muhammad Ashraf Fauzi et al., ‘Bitcoin and Cryptocurrency: Challenges, Opportunities and Future Works’ (2020) 7 The Journal of Asian Finance, Economics and Business 695 <https://discovery.researcher.life/article/bitcoin-and-cryptocurrency-challenges-opportunities-and-future-works/bb19992b951e39ad8b5cf23866231902> accessed 2 February 2025.
[3] Ibid.
[4] Mohsin Dhali et al., ‘Cryptocurrency in the Darknet: Sustainability of the Current National Legislation’ (2023) 65 International Journal of Law and Management 261 <https://discovery.researcher.life/article/cryptocurrency-in-the-darknet-sustainability-of-the-current-national-legislation/ac64314a5a1c3b63a619879ae06271f3> accessed 2 February 2025.
[5] Ibid.
[6] Tina van der Linden and Tina Shirazi, ‘Markets in Crypto-Assets Regulation: Does It Provide Legal Certainty and Increase Adoption of Crypto-Assets?’ (2023) 9 Financial innovation <https://discovery.researcher.life/article/markets-in-crypto-assets-regulation-does-it-provide-legal-certainty-and-increase-adoption-of-crypto-assets/61ba02cfdac43cb6bdadc85a61267fd1> accessed 3 February 2025.
[7] Murugappan Murugappan, et al., ‘Global Market Perceptions of Cryptocurrency and the Use of Cryptocurrency by Consumers: A Pilot Study’ (2023) 18 Journal of Theoretical and Applied Electronic Commerce Research 1955 <https://discovery.researcher.life/article/global-market-perceptions-of-cryptocurrency-and-the-use-of-cryptocurrency-by-consumers-a-pilot-study/d08d9942a1893752bbdec025de2367cf> accessed 3 February 2025.
[8] Dhali (n 4).
[9] Fatih Ecer et al., ‘A Fuzzy BWM and MARCOS Integrated Framework with Heronian Function for Evaluating Cryptocurrency Exchanges: A Case Study of Türkiye’ (2024) 10 Financial Innovation <https://discovery.researcher.life/article/a-fuzzy-bwm-and-marcos-integrated-framework-with-heronian-function-for-evaluating-cryptocurrency-exchanges-a-case-study-of-trkiye/b3406d4b2c4735c980648aeaeeeec6a7> accessed 5 February 2025.
[10] Hilda Hadan et al., ‘Comprehending the Crypto-Curious: How Investors and Inexperienced Potential Investors Perceive and Practice Cryptocurrency Trading’ (2023) 40 International Journal of Human-Computer Interaction <https://discovery.researcher.life/article/comprehending-the-crypto-curious-how-investors-and-inexperienced-potential-investors-perceive-and-practice-cryptocurrency-trading/f5694a0ffb1e3f08b390571b4a664c78> accessed 5 February 2025.
[11] Valeria Serebryantseva,‘Crypto Regulation Essentials and Impact of Non-Compliance’ <https://pixelplex.io/blog/crypto-regulation-and-compliance/> accessed 6 February 2025.
[12] Sonia Chawla and Kriti Mehta, ‘Cryptocurrency Adoption in the Era of Industry 5.0’ (2023) Opportunities and Challenges of Business 5.0 in Emerging Markets 240 <https://discovery.researcher.life/article/cryptocurrency-adoption-in-the-era-of-industry-5-0/2b2aa35189073e74bdaa8f8343f1faf9> accessed 6 February 2025.
[13] Ganesan Subramanian et al., ‘Crypto Pharmacy – Digital Medicine: A Mobile Application Integrated With Hybrid Blockchain to Tackle the Issues in Pharma Supply Chain’ (2021) 2 IEEE Open Journal of the Computer Society 26 <https://discovery.researcher.life/article/crypto-pharmacy-digital-medicine-a-mobile-application-integrated-with-hybrid-blockchain-to-tackle-the-issues-in-pharma-supply-chain/45f8d3ead52c354bb3f18432b37324b4> accessed 6 February 2025.
[14] Ibid.
[15] Olufunke Olawale et al., ‘RegTech Innovations Streamlining Compliance, Reducing Costs in the Financial Sector’ (2024) 19 GSC Advanced Research and Reviews 114 <https://discovery.researcher.life/article/regtech-innovations-streamlining-compliance-reducing-costs-in-the-financial-sector/29656e571fd33460a757b056e8b2a9ca> accessed 6 February 2025.
[16] Douglas W Arner et al., ‘The Emergence of Regtech 2.0: From Know Your Customer to Know Your Data’ (2017) 44 SSRN Electronic Journal <https://discovery.researcher.life/article/the-emergence-of-regtech-2-0-from-know-your-customer-to-know-your-data/43ebae1a5ad43b59bcf38f9dc2c2d70a> accessed 6 February 2025.
[17] Laura Grassi and Davide Lanfranchi, ‘RegTech in Public and Private Sectors: The Nexus between Data, Technology and Regulation’ (2022) 49 Journal of Industrial and Business Economics 441 <https://discovery.researcher.life/article/regtech-in-public-and-private-sectors-the-nexus-between-data-technology-and-regulation/9618cb4803003e0f9e0acb2922e9a3b7> accessed 6 February 2025.
[18] Ying Huang and Maximilian Mayer, ‘Digital Currencies, Monetary Sovereignty, and U.S.–China Power Competition’ (2022) 14 Policy & Internet 324 <https://discovery.researcher.life/article/digital-currencies-monetary-sovereignty-and-u-s-china-power-competition/089a6d2c7278320f8e31112aa284cdf2> accessed 6 February 2025.
[19] Temitayo Oluwaseun Abrahams et al., ‘MASTERING COMPLIANCE: A COMPREHENSIVE REVIEW OF REGULATORY FRAMEWORKS IN ACCOUNTING AND CYBERSECURITY’ (2024) 5 Computer Science & IT Research Journal 120 <https://discovery.researcher.life/article/mastering-compliance-a-comprehensive-review-of-regulatory-frameworks-in-accounting-and-cybersecurity/903f8cd9eae93b188e65eab5f4ef415e> accessed 6 February 2025.
[20] Ibrahim Adedeji Adeniran et al., ‘Strategic Risk Management in Financial Institutions: Ensuring Robust Regulatory Compliance’ (2024) 6 Finance & Accounting Research Journal 1582 <https://discovery.researcher.life/article/strategic-risk-management-in-financial-institutions-ensuring-robust-regulatory-compliance/7ba6a904df8f394694104cff5d6113ba> accessed 6 February 2025.
