BDO’s Privacy & Data Protection Practice Leader, Javier Alvarez, was interviewed by Financier Worldwide about Global Crypto Regulation. His high-level insights are shared below. A link to the full article, published in the Risk and Compliance Magazine January – March 2025 Issue, is available at the bottom of this page.
In the past few years, the digital asset landscape has evolved with increased regulatory scrutiny and greater integration into mainstream financial services. Innovations like layer 2 solutions and DeFi have improved usability. Despite a downturn in 2022, the market showed signs of recovery in late 2023, driven by renewed interest from investors. Major cryptocurrencies remain resilient, though regulatory and market factors continue to influence the sector.
The collapse of a major cryptocurrency exchange exposed issues like mismanagement and lack of transparency, while the failure of protocols highlighted risks with algorithmic stablecoins. Bankruptcies of crypto lending platforms underscored problematic practices and the need for customer fund protection. In response, global regulatory bodies have taken action. The U.S. SEC increased scrutiny on unregistered securities, and the EU advanced its MiCA regulation for a comprehensive framework. Countries like South Korea and Japan have revised regulations to enhance customer protection. These failures have driven regulatory responses and intensified calls for greater oversight and transparency in the crypto market.
Crypto regulations have shifted from a passive to a proactive stance due to fraud. Key challenges include unclear definitions, jurisdictional enforcement issues, and rapid tech advancements outpacing regulations. Consumer protection is vital, as many investors are at risk of fraud. The decentralized nature of crypto complicates security enforcement. International cooperation is needed for effective regulation, but differing priorities and legal frameworks pose obstacles.
Regulatory bodies, especially the U.S. SEC, have increased enforcement on ICOs, unregistered trading platforms, and securities fraud, leading to numerous investigations of Virtual Asset Service Providers (VASPs) and individuals. A key approach is classifying certain cryptocurrencies as securities, sparking debate over definitions and regulatory clarity. International coordination is crucial due to crypto's global nature, with initiatives like FATF guidelines aiming to standardize regulations and combat financial crimes. These efforts focus on enhancing market integrity, consumer protection, and transparency.
To manage risk and compliance challenges effectively, companies should implement several key strategies:
- Develop a Comprehensive Compliance Framework: Align with existing financial laws and evolving digital asset regulations, incorporating robust KYC, AML, sanctions compliance, and transaction monitoring policies.
- Conduct Regular Risk Assessments: Identify operational vulnerabilities and implement strong internal controls to mitigate risks related to fraud, misconduct, and data security.
- Stay Informed and Train Staff: Keep up with regulatory developments, provide ongoing staff training, and periodically refine compliance systems.
- Engage with Professionals: Work with legal and compliance experts in digital assets to navigate complex regulations and identify compliance risks.
- Leverage Technology Solutions: Use blockchain analytics tools and case management systems to enhance monitoring capabilities.
- Implement a Whistleblower Policy: Promote transparency and encourage reporting of suspicious activities to strengthen the culture of compliance.
Cryptocurrency regulations vary globally, with the U.S. treating some as securities, while Switzerland views them as assets. Companies exploit these differences by operating in less regulated jurisdictions like Seychelles or Malta. The decentralized nature of cryptocurrencies complicates enforcement, as fraudulent activities can affect global investors. This underscores the need for international cooperation and standardized frameworks like MiCA to protect investors effectively.
Under the new U.S. administration, there may be a shift away from regulation by enforcement, especially at the SEC. Instead, investigations could focus on market manipulation, DeFi protocols, NFTs, algorithmic stablecoins, staked assets, and cybersecurity issues. This reduced regulatory pressure might encourage investors to explore startup opportunities, fostering growth in the crypto sector. As enforcement fears diminish, regulators will prioritize identifying actual fraud and enhancing asset security, particularly concerning smart contract vulnerabilities. Companies and individuals may gain more influence in shaping regulations or supporting favorable candidates.
Globally, there is an expectation for comprehensive, harmonized regulatory frameworks through international cooperation to address cross-border activities. The MiCA regulation in the E.U. exemplifies efforts to standardize cryptocurrency regulation across member states. Additionally, increasing institutional adoption of compliance efforts with AML and KYC regulations will enhance oversight of VASPs.