Crypto-assets: Their Future and Regulation

Crypto-assets are evolving.

How will stronger regulation change user demand for crypto-assets? Authorities around the globe face challenging questions about crypto-assets and their regulation. While still in its early stages, the right approach will depend significantly on how crypto-assets evolve. Projecting this evolution, and drawing conclusions on appropriate regulation, requires: analysis of (1) the "users" and (2) the cryptoeconomy in which they operate.

Crypto-assets are currently relatively lightly regulated and not all of this regulation has been effectively applied to date, so it is reasonable to wonder whether the cryptoeconomy can survive extensive regulation and what changes in market structure or user demand would occur—from libertarians and techno-anarchists, economic pessimists and seekers of anonymity to technical users, investors and speculators.

Our paper discusses how the cryptoeconomy is unique, what user groups are likely to provide long-term support for crypto-assets, what factors may drive regulatory approaches, and how user groups may respond to regulation.

If crypto-assets are indeed here to stay, governments need to determine how best to regulate them and to govern their connections with the conventional financial system

Regulations and polices need to be developed to protect stakeholders regarding:

· Anti-Money Laundering, Know Your Customer regulation and Combating the Financing
of Terrorism

· Investor protection

· Consumer protection

· Stability of individual financial institutions

· Stability of the financial system

· Taxation

Our primer, “Cryptocurrencies and Public Policy: Key Questions and Answers” offers a longer explanation of the potential regulatory options in these areas and explores the topic from a public policy viewpoint.

1Regulation by activity will generally work better than by broad category

Some countries have written, or are thinking of writing, rules specifically for crypto-assets as a category. However, the wider trend is to regulate crypto-asset activities in the same way as fundamentally similar financial activities that already exist—especially for activities that exist at the intersection of the financial and cryptoeconomy.
2Some new regulatory frameworks may be required to ensure stakeholder protections

In the case of crypto-assets, decentralization means there are a multitude of stakeholders with co-responsibility for decisions, which may ultimately require a new regulatory framework to ensure user and investor protections, as well as the protection of new types of stakeholders (developers and consensus agents).
3Global standards are needed

Crypto-assets are inherently global in nature, especially given their electronic nature and their strong attempts to preserve anonymity. Although regulation and tax policy are always likely to remain at the national level, there is a clear need for standards that would apply across the globe or at least in the major economies.
4Policymakers should study and monitor network incentives to understand how crypto-powered systems will evolve

Crypto-economic networks are dynamic systems that evolve based on the design of their embedded incentives. While direct intervention and regulation may not be possible for some networks, it is nonetheless important to stay attuned to how the governance models and underlying incentives change.
5Consideration must be given to how to regulate a system driven by decentralized software

It will clearly be possible to regulate the interfaces between the cryptoeconomy and the wider conventional economy, such as applying Anti-Money Laundering regulations to digital wallets and crypto-exchanges. However, actions that take place entirely within the cryptoeconomy will represent a tougher challenge, especially when apparently driven by the automatic application of computer code.