WEF Releases White Paper Acknowledges Urgency of Regulating Crypto Assets
In a recently published white paper, the World Economic Forum (WEF) has urged regulators, international organizations, and the crypto industry to harmonize legislation efforts. The publication acknowledges the essence of various stakeholders cooperating for the common good of nurturing the crypto industry.
WEF Considers Crypto Regulation as Urgent to Eliminate Ambiguity
The publication conveys a global approach to various pathways to crypto regulation as a joint project facilitated by the Digital Currency Governance Consortium. The white paper considers crypto regulation as urgent to eliminate ambiguity.
WEF considers global coordination essential to avoid inconsistent enforcement and regulatory arbitration. The authors outlined that crypto asset regulation is confronting several challenges. The paper alleges that the presumption of replicating regulation and activity hamper the process.
Crypto Assets Ecosystem Unable to Fit Squarely into Regulation
The paper demonstrates that the crypto assets ecosystem has constituent elements unable to fit squarely into the current regulation. Consequently, not all cryptos fit perfectly into the activity-based and intermediary-oriented regulation approaches. Such a challenge exists even if crypto-asset activities replicate products in the conventional financial sector.
The May 2023 white paper details that anonymity demonstrated by crypto mixers, decentralized exchanges, and self-hosted wallets increase the complexity of the regulation process. Also, the regulation is becoming challenging, considering that potential interconnectedness between crypto and traditional finance would aggravate the contagion risks.
Recently, the crypto industry exhibited contagion risks following the sudden implosion of FTX in November. It plunged the entire crypto industry into turmoil and prolonged winter characterized by widespread bankruptcy.
WEF Publication Identifies Several Classifications for Approaches in Regulatory Framework
The WEF publication formulated several classifications comparing various regulatory frameworks. Firstly, it considers the outcome-based approach that prioritizes the same risk classification to accomplish similar results. Also, risk-based regulation is an approach where the intervention is influenced relative to the risk in each activity.
The paper considers agile regulation as one integrating responsive and iterative approaches. This approach acknowledges that policy and regulatory development is not solely a government role. Instead, it prominently becomes a multistakeholder effort.
Adopting the agile regulation would involve applying regulatory sandboxes, no-objection letters, and guidance by regulators. The paper cites Switzerland’s Financial Market Supervisory Authority as an illustration of an agile regulator. Switzerland features alongside Japan as a jurisdiction deploying the self-and-co-regulation approaches.
Regulation by Enforcement Criticized as Unviable
The paper identifies the United States as the lone jurisdiction where the regulators are deploying regulation by enforcement. The publication rules out the US enforcement approach to formulate a framework as unviable. The approach excludes the opportunity to have any meaningful discussion on what to regulate.
The WEF paper issues three broad suggestions to regulators, the crypto industry, and internal organizations. However, it emphasized the adoption of best practices would be attainable through sharing and coordination.
The paper urged collaboration among policymakers and industry stakeholders drawn from various jurisdictions to guarantee consistency and clarity. The WEF petitions regulators and governments to embrace transparency starting position to overcome cross-border concerns.
The WEF publication constitutes the foundational paper to establish the Blockchain and Digital Assets team oriented towards evaluating outcomes in various regional approaches to regulation. WEF believes in the coordinated efforts of establishing public-private coordination to have meaningful discussions and first-hand learnings on the unintended consequence of various regulatory frameworks.
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