The crypto asset industry witnessed a series of major upheavals in 2022, with the bankruptcy of the FTX exchange having the most significant and enduring impact. However, many may still not fully grasp a critical point: to prevent malpractice such as the misappropriation of client assets or excessive leverage by cryptocurrency exchanges and other centralized operators, targeted legislation from the jurisdiction where these entities are based is essential. This legislation should mandate that operators meet specific qualifications and adhere to robust governance standards. Relying solely on traditional regulations like anti-money laundering or securities laws is insufficient for protecting consumers and investors, making the amendment of existing laws or the creation of new ones necessary.
On the other hand, the distributed ledger technology (DLT) that underpins crypto assets offers advantages such as disintermediation, censorship resistance, and enhanced privacy. It finds applications in payments, decentralized finance (DeFi), non-fungible tokens (NFTs), identity verification, communications, and social networking. The development and operation of related decentralized applications are often closely linked to the issuance and trading of crypto assets. For instance, crypto assets may serve as development funding, rewards, or the foundation for an application ecosystem. Even proof-of-stake (PoS) public blockchains like Ethereum rely on token staking and rewards for their ongoing operation. Therefore, while the issuance and trading of crypto assets involve many centralized participants, leading to issues like information asymmetry and agent risk that require regulation, various decentralized applications are also developing rapidly. If these applications exhibit decentralized characteristics such as transparency, non-custodial features, and distributed decision-making, they may not require regulation—or at least not the same type of regulation—to avoid stifling innovation.
The initial coin offering (ICO) bubble of 2017 brought crypto assets into the mainstream media and public awareness. Since then, aside from amending anti-money laundering mechanisms for virtual currency platform and trading businesses and the Financial Supervisory Commission issuing guidelines on determining whether virtual currencies constitute securities, no specific regulatory法案 targeting crypto asset exchanges or other centralized crypto asset service providers has been introduced. Reports indicate that after the FTX incident, the chairman of the Financial Supervisory Commission reiterated that the government is in inter-ministerial consultations, referencing international regulatory trends and seeking to understand the nature of crypto assets to research supervisory frameworks and directions.
In terms of international regulatory developments, the European Union’s recently proposed Markets in Crypto-Assets (MiCA) draft is currently highly regarded. The MiCA draft, after at least three years of consultation and negotiation among members of the European Council, European Commission, and European Parliament, was finalized in October 2022. It is expected to pass in the first quarter of 2023 and be implemented gradually in the second half of 2024 and beyond. MiCA categorizes crypto assets primarily into asset-referenced tokens, fiat-referenced tokens, utility tokens, and others. Its regulatory scope mainly targets issuers of centralized crypto assets and centralized crypto asset service providers.
In the preamble of the法案, MiCA explicitly states that if crypto asset services are provided in a fully decentralized manner without any intermediaries, they fall outside MiCA’s regulatory scope. Additionally, if no issuer can be identified for a crypto asset, the issuance-related regulations of the法案 do not apply. For these temporarily excluded decentralized crypto assets and services, along with other contentious emerging applications like NFTs, MiCA mandates that the European Commission submit an assessment report and legislative recommendations within a specified timeframe.
The most commendable aspect of the EU’s MiCA法案 is not necessarily its perfection or sophistication, but the regulators’ candid admission that they do not fully understand all aspects of crypto asset technology and its potential. Therefore, they avoid rash and broad-reaching measures. Even though decentralized protocols and related applications still face controversies—such as code security concerns, imperfect token economic models, and concentrated development decision-making—the EU has chosen a gradual approach. It first regulates centralized crypto asset issuers and service providers, which have the greatest impact on users, to avoid hindering the application and development of decentralized technology.
In contrast, across the Atlantic, the U.S. Securities and Exchange Commission (SEC), under the leadership of Chairman Gary Gensler, has adopted a regulation-by-enforcement approach toward the crypto industry. Frequently invoking the Howey test—a standard for determining securities established by the U.S. Supreme Court in 1946—the SEC broadly applies it to various cryptocurrency applications and services, issuing warnings or lawsuits against individual operators. This forces businesses to capitulate, settle, and pay fines in individual cases. However, after the fact, the general standards the industry should follow remain unclear, with guidelines seemingly existing only in Chairman Gensler’s discretion.
Recently, under Chairman Gensler’s direction, the SEC compelled the U.S. cryptocurrency exchange Kraken to settle and cease offering Ethereum token staking services to its users. Post-settlement, it remains uncertain whether the SEC intends to prohibit only custodial, centralized staking services (staking as a service, SaaS) or if it might also extend to non-custodial, relatively decentralized staking protocols like Lido. Due to the lack of general standards, the industry is left speculating and struggling to comply. SEC Commissioner Hester M. Peirce dissented from this decision, arguing that using enforcement actions to dictate norms for an emerging industry is neither fair nor efficient. She bluntly criticized the regulator’s inertia in forcing businesses to shut down rather than proposing feasible solutions for compliance. Her remarks are indeed impactful and resonate strongly!
The Financial Supervisory Commission in our jurisdiction is the primary regulator for fintech and the crypto asset industry. It has repeatedly stated publicly that it will reference foreign legal developments and gradually introduce appropriate regulatory frameworks for crypto assets. The author hopes that the Commission will follow the EU’s example by prioritizing regulatory measures for centralized crypto asset service providers and issuers to mitigate the information asymmetry and agent risks associated with such entities. Simultaneously, it should actively seek to understand the developments in decentralized blockchain applications, considering the necessity and appropriate methods of regulation while balancing user rights and the growth of innovative technologies.
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Frequently Asked Questions
What are the main risks associated with centralized crypto asset services?
Centralized services pose risks such as mismanagement of client funds, excessive leverage, and lack of transparency. These issues can lead to significant financial losses for users, as seen in cases like the FTX collapse. Regulatory oversight is crucial to enforce governance standards and protect investors.
How does decentralized technology differ from centralized services in terms of regulation?
Decentralized technology operates without intermediaries, offering features like non-custodial asset control and distributed decision-making. This often reduces the need for traditional regulation, as transparency and code-based rules mitigate some risks. However, emerging challenges like code security may still require tailored oversight.
What is the EU's MiCA regulation, and why is it significant?
The Markets in Crypto-Assets (MiCA) framework is a comprehensive regulatory approach focusing primarily on centralized issuers and service providers. Its significance lies in its gradual implementation, exclusion of fully decentralized services, and emphasis on protecting consumers without stifling innovation.
How does the US SEC's approach to crypto regulation compare to the EU's?
The SEC often uses enforcement actions based on existing securities laws, creating uncertainty for the industry. In contrast, the EU’s MiCA provides clearer, forward-looking guidelines. This difference highlights the importance of predictable regulatory frameworks for sustainable growth.
What role should regulators play in balancing innovation and consumer protection?
Regulators should prioritize understanding technological advancements while implementing focused rules for high-risk areas like centralized services. This involves engaging with stakeholders, adapting to new developments, and avoiding overly broad measures that could hinder progress.
Why is stakeholder engagement important in shaping crypto asset policy?
Engaging with industry experts, developers, and users helps regulators create informed and effective policies. This collaborative approach ensures that regulations address real-world risks while supporting the innovative potential of crypto assets and blockchain technology.