A recent blog post on Lexology noted the rapidly evolving crypto and blockchain ecosystem in “multiple jurisdictions” has resulted in the emergence of various different regulatory frameworks for digital assets.

While most of these guidelines have not been finalized as governments throughout the world struggle to keep up with the fast pace of innovative financial technology, the author of the blog, Morgan Lewis & Bockius LLP, noted that emerging crypto regulations “warrant continual review and monitoring.”

Not A Good Store Of Value Due To “Low Liquidity” 

Morgan Lewis & Bockius, a global law firm that employs over 2,200 attorneys in 30 different offices in North America, wrote that the international Financial Stability Board (FSB) said earlier this month that crypto assets may not yet be a “material risk” to the traditional financial markets.

As covered, the FSB also noted that the global cryptocurrency market and industry was evolving rapidly and that regulators must closely monitor its developments. The FSB, which makes recommendations about the global financial system, cited “low liquidity” and the “use of leverage” in crypto trading as factors currently preventing digital currencies from becoming a stable store of value.

Authorities in the European Union (EU), UK, and the US have all had a different approach to regulating crypto assets. Additionally, most lawmakers around the world have mainly focused on the criminal or fraudulent activities that have been carried out with cryptocurrencies.

Use Of DLT In Illicit Activities

In early October, the European Parliament approved a non-legislative resolution regarding distributed ledger technology (DLT), and asked the European Commission to work on drafting legal guidelines that would help prevent the use of DLT in carrying out illicit activities.

The European Parliament acknowledged the potential benefits of blockchain technology, specifically in its ability to reduce costs associated with financial transactions while also allowing for greater transparency. However, the parliament also cautioned against the risks associated with trading DLT-based crypto assets.

Despite these concerns, the parliament has called on the European Commission to look into the possibility of adopting cryptocurrencies as a legitimate payment method.

Establishing Blockchain Observatory Group

In February of 2018, the commission had recommended the formation of a Blockchain Observatory group to explore various use cases for DLT, and had suggested that proper “licensing requirements” and “regulatory sandboxes” be developed in order to provide more regulatory oversight over the crypto industry.

Both the European Commission and Parliament agree there needs to be stricter enforcement of anti-money laundering (AML) rules. They also recommend that the EU’s Fifth Money Laundering Directive – which requires preventive measures against fraudulent activities – should be extended to cover cryptocurrencies.

On October 19, the European Securities and Markets Authority (ESMA) released a report in which it asked for more clarity regarding whether crypto assets are “commodities” or “transferable securities.” As an emerging asset class, investors are unsure, or still remain fairly undecided, regarding how exactly to classify cryptos.

Crypto Assets Are Not “Funds Or E-Money”

Earlier in September, the UK Parliament’s Treasury Select Committee had recommended that the UK Financial Conduct Authority (FCA) extend its regulatory oversight to include cryptocurrencies and initial coin offerings (ICOs).

As explained by Morgan Lewis & Bockius, the FCA “has clarified that crypto-assets are in themselves neither specified investments under the Regulated Activities Order nor funds or e-money under the Payments Services Directive and E-money Regulation.”

However, crypto derivatives such as those provided on BitMEX may be classified as proper “financial instruments.”

In the US, the regulatory approach to crypto assets varies from one state to another. The US Securities and Exchange Commission (SEC), which is a federal level regulator, considers certain cryptos to be securities. These mainly include crypto tokens launched through ICOs.

Consumer Protection, “Increased Governmental Involvement”

Recently, a US district court supported the Commodity Futures Trading Commission’s (CFTC) recommendation that certain crypto assets are commodities, and must therefore be regulated as such.

US state attorneys are also examining crypto assets more carefully, “particularly from the standpoint of consumer protection”, Morgan Lewis & Bockius wrote. Meanwhile, the US Congress has increasingly started to address, and look more closely into how cryptos should be regulated.

According to Morgan Lewis & Bockius, there now appears to be “increased governmental involvement in crypto-asset activities … [as they may be concerned about] … the potential financial stability risks presented by crypto-assets.”