The evolution of cryptocurrency from a little-known, insignificant technology to a global financial behemoth has been nothing short of astounding. Let’s take a look at the numbers: the global cryptocurrency market cap today is approximately USD$2.43 trillion, with a little over half of this number being attributed to Bitcoin alone. To put this in perspective, that number is larger than the GDP of countries such as Brazil, Italy, Canada and Australia and is ten times what is was just four years ago. Needless to say, the rapid rise in cryptocurrency’s popularity combined with its decentralized nature have made it a difficult beast to deal with for government authorities in various fields, including law enforcement, financial regulation, tax law and cybersecurity. Countries have taken various regulatory approaches to crypto, ranging from crypto-friendly (El Salvador even made Bitcoin a legal tender in 2021!), to a tolerant but regulated approach (including introducing anti-money laundering and Know Your Customer requirements for crypto firms), to the strong crackdown approach taken by countries such as China. For its part the Financial Action Task Force (FATF), which is the global organization that develops policies and recommendations to combat money laundering and terrorist financing, has noted the benefits of cryptocurrency while also warning of the dangers its unregulated nature can pose. FATF recommends that countries institute measures such as customer due diligence, record keeping and suspicious transaction reporting in order to treat crypto exchanges with the same standards as other financial institutions and reduce the likelihood of crypto being used for nefarious purposes.
The 2022 fraud-related collapse of crypto exchange FTX (once the darling of the crypto world) and the subsequent 25 year prison sentence given to its founder Sam Bankman-Fried generated headlines all over the world and is the poster child for how leaving the crypto industry to its own devices can result in disaster. The Securities and Exchange Commission in the U.S. has taken notice and increased its enforcement of securities regulations as they relate to cryptocurrency. The SEC took 31 enforcement actions related to cryptocurrency in 2023. The most high profile of these is the lawsuit filed by the SEC against Coinbase in June 2023. The SEC alleged that Coinbase, the largest cryptocurrency exchange in the United States, operated its crypto asset trading platform as an unregistered broker and exchange. In defining cryptocurrencies as securities, the SEC is making the argument that, in providing a marketplace for buyers and sellers to trade in crypto and in serving as an intermediary in settling crypto transactions, Coinbase is required to register as a broker and has failed to do so, thus depriving those investing in crypto with significant protections. In a ruling last month, a federal judge denied a motion by Coinbase to have the case dismissed, and it will proceed to a jury trial. Many of the SEC’s other recent enforcement actions were of a similar nature and involved allegations of crypto exchanges operating as unlicensed securities exchanges.
The United Kingdom has made no secret of its goal to become a global leader in cryptocurrency, and as part of this it plans to introduce a cryptocurrency regulatory framework by July 2024. The U.K. plans to promote innovation in cryptocurrency and the blockchain technology associated with it while also developing consumer protections and regulations which will prevent crypto from being a tool for bad actors to use. These regulations include giving U.K. authorities the ability to directly seize crypto assets that it suspects are the result of illegal activities from crypto exchanges without lengthy legal procedures.
Despite the FTX debacle and other crypto-related crashes, it’s clear that many cryptocurrency investors are in it for the long haul. The value of Bitcoin surged to an all-time high in March 2024, breaking its previous record from 2021 and shaking off the downturn it experienced in 2022 and 2023. This surge shows that many still have confidence in the cryptocurrency market and see it as a valuable long term investment despite its volatile and shaky past. What remains to be seen is whether governments across the world will align in setting standards as to how to regulate cryptocurrency (as many countries have done with money laundering regulations), or whether regulation will continue to be a mishmash of different approaches taken by various countries. The International Monetary Fund is advocating that global standards be implemented to protect crypto investors and prevent more FTX-like disasters, and also to prevent criminals from utilizing crypto in conducting illicit schemes. A worrying trend is for cybercriminals to hack into and shut down computer networks, and then demand ransom payments to be made in cryptocurrency. Terrorists and rogue states such as Iran and North Korea are using cryptocurrency to evade sanctions. Various financial crimes, such as fraud and tax evasion, can be perpetuated more easily with cryptocurrency due to its largely unregulated nature. However, it remains to be seen whether international regulatory authorities will come together with uniform standards to deal with these challenges as cryptocurrency’s popularity continues to grow.
