Editorial | Bringing order to crypto’s wild west

The world of crypto faced massive turbulence over the past 12 months with the spectacular failure of FTX, a cryptocurrency exchange which became one of the largest in the world.

FTX declared bankruptcy and billions in deposits were lost, leaving investors high and dry. Eventually, FTX’s founder Sam Bankman-Fried was charged with fraud and earlier this year he was convicted.

Crypto prices have only partially recovered from the shock but the scene has anything but stabilised with this week’s developments concerning Binance chief executive, Changpeng Zhao.

He resigned his post after pleading guilty to money laundering violations after the company was charged in the US with helping users bypass sanctions across the world.

Binance, the largest crypto-exchange in the world, will now have to pay $4.3bn in penalties and forfeitures.

The company was charged with enabling nearly $900 million in transactions between US and Iranian users, and facilitated millions of dollars in transactions between US users and users in Syria, and in the Russian occupied Ukrainian regions of Crimea, Donetsk and Luhansk.

The two distinct cases have shocked the crypto world but also underscored the urgency of introducing controls on this new sector.

Crypto assets are here to stay but over the coming years we can expect greater interventions by the regulatory authorities to prevent the law of the jungle from prevailing.

Malta is currently in the process of transposing the EU regulation on markets in crypto assets, known as MiCA, into national legislation.

The transition is expected to be a smooth affair since much of MiCA is modelled on Malta’s very own Virtual Financial Assets Act that was introduced in 2018.

The law established a regulatory framework for ICOs, cryptocurrency exchanges and wallet providers. It is now being fine-tuned with recommendations from supranational authorities to ensure its effectiveness.

Malta had managed to attract some 180 participants at the time when there was no licensing regime in place. The moment licensing was introduced, only 30 showed interest and eventually only 11 companies were authorised. The focus today is one on quality rather than quantity.

Malta Financial Services Authority CEO Kenneth Farrugia told sister newspaper MaltaToday that regulators in Malta have learned a lot from the whole process.

There will always be significant risks associated with crypto investments not least those linked to cyber security, fraud and the lack of safeguards for clients. But the new regulatory regime intends to minimise these risks.

Within this context, it becomes imperative that regulatory authorities like the MFSA and the FIAU not only have trained personnel but also adequate technical resources and systems. In a virtual environment, technical resources are required to evaluate trends and typologies that allow the authorities to keep track and take action if need be.

But it remains imperative that national authorities and supranational bodies cooperate between themselves given the cross-border transactions facilitated by crypto platforms.

The International Monetary Fund has called for a global response that is coordinated, consistent and comprehensive. Coordination is necessary to fill the regulatory gaps that arise from cross-sector and cross-border issuance and ensure a level playing field. Consistency is needed to align crypto asset regulation with mainstream regulatory approaches. And regulation must be comprehensive so that it covers all actors and all aspects of the crypto ecosystem, including miners, validators and protocol developers that are not easily covered by traditional financial regulation.

Proper and effective crypto regulation will bring order to the markets, instil consumer confidence, determine what is permissible and provide a space for innovation to grow.