US and European crypto regulation efforts accelerate in the wake of market shakeup

The news: The crypto market shakeup has sparked increasing conversation around how to regulate digital assets. Regulators across Europe and the US held meetings and announced proposals last week. Here are the outcomes.

The US: On Thursday, the President’s Working Group (PWG), which includes the heads of the Treasury, the Federal Reserve, and the Securities and Exchange Commission (SEC), met to discuss stablecoins.

• According to the administration, talks on Capitol Hill regarding stablecoin regulation are heated, and there’s a push to finalize regulation this year.
• Last year, the PWG recommended that only banks be allowed to issue stablecoins since they are subject to more rigorous oversight.
• In this meeting, the PWG opened up to the idea of allowing non-bank entities to issue the USD-pegged coins.

The EU: The Basel Committee set forth proposals last week that modify the two categories in which digital assets are classified.

• The first category of digital assets are those that already fall under the existing Basel Framework. This category had only slight modifications.
• The second category, which are unbacked cryptos and stablecoins, are now subject to a much more conservative framework, especially when it comes to setting aside capital to cover their risks.

EU policymakers also made headway on new anti-money laundering (AML) regulations and the Markets in Crypto-Assets (MiCA) proposal last week.

• On Wednesday, policymakers announced a new AML rule stating that parties to any transaction between digital wallet providers will need to identify customer identities, even for the smallest transactions.
• Regulators also agreed on components of the MiCA proposal, which will require crypto-asset providers to become authorized to operate in the EU. The proposal also states stablecoin issuers will be supervised by the European Banking Authority (EBA).

The UK: The Financial Conduct Authority (FCA) released new data last week regarding the approval of crypto firms for operation in the UK.

• As of January 2021, crypto firms are required to apply for approval by the FCA to operate in the country.
• One year later, data from the FCA revealed that 88% of applications had been rejected. Out of 250 applications, only 30 were approved.
• Most of the rejections resulted from the tight AML guidelines required by the FCA. Crypto firms struggle to gain credibility and prove the effectiveness of their security measures. One area that crypto firms are advised to focus on is customer identification.

The big takeaway: Regulators have been hemming and hawing on reining in the crypto “wild west”. But the recent rout in the crypto markets has spurred policymakers into action. As they finally make moves toward regulation, they should consider working together globally to strengthen the safeguards around vulnerable aspects, like AML and customer verification.