Author: Michael Silberberg
Over the last few quarters, there has been constant news and discussion of how to regulate digital assets and who is doing it right or wrong. I’ve heard this referred to as unprecedented several times, but I would have to disagree. Regulatory history doesn’t repeat itself, but it certainly rhymes. I’d like to look to the recent past to better understand the situation we are seeing and to discuss the path to regulation that has worked before and can work for digital assets.
The United States witnessed a pivotal moment in financial history when its regulatory policies diverged from those of the United Kingdom in the 1980s & 90s. During this period, the UK seized the opportunity to become a global financial centre, while the US opted for a more cautious approach to deregulation.
In the 1980s, the US implemented stricter regulations and more rigorous requirements for companies seeking to go public. This included the implementation of extensive disclosure rules and the process of filing a registration statement with the Securities and Exchange Commission (SEC).
Meanwhile, in the UK, regulatory reforms such as the Big Bang in 1986, when the LSE was deregulated and became a private company, aimed to liberalise the financial industry and attract international investment. These reforms introduced more flexible listing requirements, streamlined the IPO process, and reduced regulatory burdens on companies. As a result, London's financial markets gained a competitive edge and became an increasingly attractive destination for companies looking to raise capital and go public.
The more relaxed regulatory environment in the UK allowed for faster and more efficient capital formation, making London a preferred choice for international companies and investors. This regulatory divergence played a significant role in the rise of the UK as a global financial centre, with the London Stock Exchange becoming a hub for initial public offerings and capital market activities in the late 80s & early 90s.
This example illustrates how differences in regulatory approaches can profoundly affect a country's financial landscape. The UK's willingness to embrace regulatory reforms and create a more business-friendly environment gave it a competitive advantage over the US, attracting significant investment and solidifying its position as a global financial powerhouse.
The historian Josh Rosenthal, Ph.D., said recently on Blockworks Podcast Empire that this is the regular playbook in the US. The innovation of encryption, Rosenthal says, is a more recent example. “Despite creating the internet, we tried to ban a major use of it.”
“We tried to ban the tech that became the basis for privacy for your iPhone, for credit card payment, for online payments. We tried to ban what would become e-commerce — $5.2 trillion in the US alone each year.”
Ultimately, the strategy failed, Rosenthal says. “If the US was going to ban online payment and encryption,” he says, “other countries were doing it.”
The regulation was “walked back through Congress,” Rosenthal explains, because other countries were using the technology effectively, resulting in generative economic creation. “It created more (value) than they otherwise thought was possible.”
These regulatory missteps underscore the challenge of comprehending the scale and significance of emerging technologies and their subsequent impact on economic growth. They also highlight the need for a nimbler regulatory framework that can adapt to new realities, allowing for the dynamic and responsible development of groundbreaking innovations. Not just in the United States, but worldwide, the struggle with regulatory frameworks for digital assets creates winners and losers, accumulating jobs, intellectual capital, and innovation hubs as leaders in this emerging technology play regulatory arbitrage with jurisdictions.
So what regulation makes sense? Many of the earliest countries to issue digital asset regulations, such as Singapore, and China, had to take steps back and rethink their rules in the last crypto cycle and are just now re-entering the market, with Hong Kong approving crypto exchanges and Singapore’s MAS issuing a call for feedback on their proposed exchange regulations.
Meanwhile, Dubai has set itself the ambitious goal of becoming the blockchain hub. You can’t attend a crypto conference anywhere in the world without their recruiters pulling you aside to discuss the benefits of relocating there.
Europe recently passed a sweeping regulatory framework, MiCA, which aims to increase transparency and place a comprehensive framework for issuers and service providers. Less than a month later, the EU issued a follow-on report titled “Remaining regulatory challenges in digital finance and crypto assets after MiCA.” Despite the remaining challenges, we have already seen an inflow of companies opening new headquarters and committing to headcount in the EU.
I won’t comment on each of these regulations in themselves as that would be a very long read, but instead, I take a note from our partners at the Global Digital Asset & Cryptocurrency Association (a self-regulatory and advocacy organisation) and point back at the US’s past as the right way forward structuring a framework of overarching goals, granting power and self-regulating systems that have worked.
Before the establishment of the National Futures Association (NFA) in the United States, the derivatives market faced several challenges in terms of regulation and oversight. The derivatives market was relatively unregulated, which raised concerns about market integrity, investor protection, and the potential for fraudulent practices.
The absence of a dedicated regulatory body for the derivatives market meant that oversight and enforcement were fragmented. The Commodity Futures Trading Commission (CFTC), the federal regulatory agency responsible for overseeing futures trading, needed more resources and faced challenges in effectively regulating the rapidly growing derivatives market. The lack of specialised expertise and dedicated focus on derivatives posed challenges in addressing emerging issues and ensuring market stability.
Does this sound familiar to you?
Just as the NFA brought structure, oversight, and integrity to the derivatives market, a similar approach can effectively address the regulatory challenges facing the crypto industry. Governments around the world could create and empower specialised self-regulatory organisations tailored to the unique characteristics of the crypto space that foster investor protection, market transparency, and ethical conduct. Drawing lessons from the NFA's success, we have the opportunity to establish a regulatory framework that balances innovation with responsible oversight, enabling the crypto industry to mature and thrive. Embracing this approach moves us toward a fair and regulated environment that instills confidence among market participants, safeguards investors, and contributes to the long-term sustainability of the crypto ecosystem.
For more information about the structures of self-regulatory frameworks, I’d highly recommend https://global-dca.org/
Michael Silberberg is Head of Investor Relations at the digital asset hedge fund AltTab Capital.