Cryptocurrency has emerged as an innovative means of payment, currency transfer, financial investment, and censorship-resistant store of wealth, leading to its rapid expansion and an estimated international valuation of over $3 trillion in late 2021. Although the crypto market has seen largely consistent growth, particularly over the last five-year period, the recent crypto market crash has highlighted vulnerabilities that need to be addressed in order to avoid a repeat of similar financial disasters, like the dot com crash, according to the Bank of England. The need to combat such vulnerabilities is of the upmost importance internationally and particularly for the Astana International Financial Centre (AIFC), with its multiple registered crypto exchanges.
In early 2022, the cryptocurrency market felt an unprecedented drop in value by over $2 trillion, with many crypto companies having to cut their losses, resulting in mass employee layoffs and decreases in crypto business valuations. It has been argued that the fall in the market can be explained by the volatility of cryptocurrency and the lack of regulation and accountability for cryptocurrency that are backed by physical assets like gold or national currency, known as stablecoins, which are supposedly a safer investment. This can be seen in the collapse of the stablecoin ‘Terra’, which imploded, resulting in over $18 billion disappearing and no repercussions for the coin’s creators.
According to the Bank of England, the effects of this ‘crash’ are not limited to direct players in the cryptocurrency market and may in the future have implications for the wider financial world. As cryptocurrency becomes further intertwined with everyday transactions, tougher financial regulations on cryptocurrency need be introduced.
The calls for greater crypto regulations stem from a need to treat cryptocurrency in the same manner as national currencies, and in so doing, regulate them according to the same conventions. It was suggested by the Bank of England governor Andrew Bailey in June 2021 that the regulation of stablecoins that are used as payments is the best way forward, as a cryptocurrency backed by tangible assets or currency would prove more reliable for the market. Following this, the Bank of England announced its intention to intervene in the event of “systemic scale failure” of collapsing stablecoins, just as it would intervene in similar instances with payments by banks.
The United Kingdom is not alone in its bid regulate the crypto market. The European Union has signed a provisional agreement for crypto regulations for 27 member states to combat what was referred to as the crypto world’s “Wild West”. This Markets in Crypto Asset Regulation (MiCA) is set to become law once it has complied with the necessary formalities, with an estimated implementation in early 2024. Until this time, European countries will be individually responsible for the regulation, or lack thereof, of cryptocurrency in their countries. Banks, FinTechs and investors in the pursuit of greater clarity in this area will in the meanwhile be unable to find any. The only exception to this lack of tangible progress can be seen in the European Investment Bank’s (EIB) use and issuance of notes of cryptocurrency. In April of 2021, the EIB issued $121 million of digital Ethereum two-year notes in hopes of bridging the gap between conventional transaction regulation and the freedoms of cryptocurrency trade.
The AIFC is in a unique space in the world of crypto currency. The financial centre is positioned to not only recognise the use of cryptocurrency but has also created an environment for its circulation and the functioning of crypto exchanges. The AIFC has recognised crypto as an independent item of circulation known as a digital asset but has recognised that cryptocurrency is not guaranteed to be accepted by the government of any jurisdiction. The use of cryptocurrency in the AIFC is monitored using control mechanisms like licenses to give structure and legitimacy to crypto transactions. This places the AIFC in a position like no other, in which it is one of the few institutions with recognised regulations for cryptocurrency. While the AIFC is advantaged in this respect, the lack of international regulation makes it difficult to expand the influence of AIFC recognised crypto exchanges, as countries like Kazakhstan are yet to implement sufficient regulations to warrant risk free cryptocurrency exchange.
With the rise in anti-money laundering and anti-terrorist funding efforts internationally, the need for regulating cryptocurrency is even more apparent. Its ability to instantly move money around the globe without the same risk-mitigation mechanisms in place for everyday banking transactions means cryptocurrency is at high-risk of being exploited for criminal activity. Institutions like the AIFC, despite its pioneering cryptocurrency risk-mitigation regime will still welcome international regulation of cryptocurrency in line with aims to create a prosperous, but less volatile and exploitable, cryptocurrency market.
Author – Matt Davies
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