Our new report on crypto-assets and their place in the global regulatory system shows a complex and changing landscape.

The incredible growth of crypto-assets and their intersection with the regulated financial system globally has created complex regulatory and legal challenges, according to a new report, Cryptos on the Rise 2022from Thomson Reuters Regulatory Intelligence (TRRI), which examines some of the risks and benefits of this next iteration of digital transformation.

The report explores new areas of global regulatory focus, such as central bank digital currencies (CBDCs), non-fungible tokens (NFTs), stablecoins, decentralized autonomous organizations (DAOs), crypto -advertising and financial crime.

The report also contains an updated compendium and map, which provides a country-by-country overview of the rapidly developing regulatory and legal framework for cryptos. The compendium includes about 70 important countries, their regulatory approach or stance on cryptos, their general tax status as well as links to valuable information such as relevant regulatory bodies or applicable regulations.

“Crypto-assets are potentially profoundly changing the international monetary and financial system.” — International Monetary Fund Blog, December 2021

The tremendous growth of cryptos, now estimated at nearly $3 trillion in total market capitalization, is also examined. Such growth in popularity and size means that crypto-assets now present new risks, such as disruption to traditional financial services and growing concerns about potential threats to global financial stability. Other lesser macro risks include the need to protect vulnerable customers, market manipulation, fraud, anti-money laundering and cybersecurity issues, all of which will also need to be addressed. Growing regulatory challenges are exacerbated by growing public awareness, acceptance and use of cryptos.

Indeed, this perceived threat to financial stability is being considered by supranational policymakers, with the identification, monitoring and management of risks continuing to preoccupy and sometimes confuse regulators and businesses. Challenges include operational and financial integrity risks related to crypto-asset exchanges and wallets, investor protection, inadequate reserves, and inaccurate disclosure of some stablecoins. Additionally, in emerging markets and developing economies, the advent of crypto can accelerate what the International Monetary Fund has called encryption — which occurs when these crypto-assets replace the national currency and circumvent foreign exchange restrictions and capital account management measures. In other words, creating a situation that could have a potentially profound impact on financial stability.

Although outright bans on cryptos around the world are somewhat rare and dwindling, some jurisdictions are emerging as strong advocates. However, many regions fall somewhere in the middle as regulations are slow to keep pace with the immense popularity of cryptos – a risk in itself.

In many countries, cryptos appear to be at a legal and regulatory tipping point, the report says. Concerns about financial stability and vulnerable customers, along with seemingly persistent misperceptions about financial crime, are prompting policymakers to consider significant action. Policymakers, however, need to balance these considerations with the benefits that could come from more widespread adoption of cryptos.

Some countries, meanwhile, welcome cryptos with seemingly few regulatory issues. The borderless nature of Cryptos makes this even more difficult, as evidenced by the almost overnight relocation of miners and crypto companies out of China after that country clamped down on crypto activity. Most jurisdictions are reluctant to stifle innovation, but it would be politically unacceptable to deliberately risk either global financial stability or widespread harm to retail customers.

The clear message of the report is that there is an urgent need for a consistent, comprehensive and holistic approach to crypto regulation and oversight. The need for preemption and cooperation in policymaking is seen as increasingly urgent as crypto-assets – which currently represent only a small portion of assets in the global financial system – continue to grow rapidly. Furthermore, the direct connections between crypto-assets and systemically important financial institutions and major financial markets are changing rapidly, opening the door to the possibility of regulatory loopholes, market fragmentation, or arbitrage.

Without a cohesive international approach to cryptos, there is a danger that they will fail to realize their potential, and the world will lose out on the tremendous benefits they could bring.

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