The hits just keep coming regarding US regulators vs. crypto exchanges. The latest charges were levelled at Kraken, the world’s third-largest cryptocurrency exchange. The US Securities and Exchange Commission (SEC), filing charges against Kraken, stated that the platform was not properly registered in its services as an exchange, broker, clearing agency, and dealer. While Kraken has issued a strong statement saying they do not have to register based on the services they provide, this will undoubtedly cause them a headache even in the best of circumstances.
The current world of crypto regulation, especially in the US but globally as well, has created a frustrating situation for the Web3 industry. Many excellent companies with innovative ideas are working to create value for their communities. While a strong, fair set of regulations is desired by crypto firms and regulators alike, the speed at which these regulatory bodies works is alarmingly slow. This creates a vast gulf between the lightning speeds of industry innovation vs. the crawling progress toward usable regulation. It’s like the tortoise and the hare, except the hare crossed the finish line long ago and now has to wait for the tortoise to catch up.
This raises a very important question: what are Web3 firms to do knowing they could, months or even years from now, face charges from regulators? Even if they are doing their best to follow what outdated regulations there are, they will face risks until regulations stabilize. But is this the case for all Web3 or just certain sub-industries? And how does this risk differ in the US vs. the global market? Let’s dive in and investigate.
When Will Regulation Stabilize?
It’s important to remember both recent history and context when looking at current regulations. While it seems that very little has happened to address the introduction of cryptocurrencies, that isn’t necessarily true. The landscape that governs Web3 and the cryptocurrencies within is both complex and varied. From the Web3 platform side, firms need to understand that until crypto-specific regulations are in place, they might be charged according to traditional financial rules, interpreted by regulators and applied to blockchain elements in ways the Web3 community might not agree with. From the regulators’ perspective, they feel the pressure to develop regulations that are fair to crypto firms but offer strong protections for the consumer. These regulations are broad, and cover everything from the digitalization of bonds for atomic settlement to the regulation of exchanges. To their credit, regulators have made progress in the form of MiCA and the Virtual Financial Assets Act, both of which will help to incrementally move toward a more robust regulatory environment.
Regulatory bodies globally need to consider the short term needs of the industry, as well as longer term trends such as the emergence of CBDC’s and their impact on traditional currencies. There is some hope that as the Web3 influence grows across the globe, regulators will see the need to develop an effective regulatory solution, knowing that it will continue to evolve as the industry itself moves ahead, and a stable set of regulations is still in the distant future. Thankfully, it seems clear that both Web3 platforms and regulators across the globe see that there is an urgent need to plug the gap and provide a workable system that doesn’t stifle the natural progress made by Web3 innovation.
What Do Non-Exchanges Need to Know?
While it might seem like non-exchange platforms in the Web3 space have little to worry about, that isn’t necessarily the case. Those platforms who want to truly protect their users must take a proactive approach to potential regulation, and anticipate those areas or use cases that might be affected. For example, UTIX founder Maxwell Mayhew had this to say about their approach to regulation:
“UTIX leverages blockchain technology for event ticketing, issuing NFT-based tickets and rewarding users with loyalty tokens redeemable for various benefits. The primary regulatory concern isn’t the blockchain application itself, but the use of loyalty tokens, which some countries might view as a form of currency. This raises issues around Anti-Money Laundering (AML) and Anti-Terrorist KYC, particularly with the potential misuse of the platform for transactions funding FATF high-risk countries. Despite these risks, regulations provide clear guidelines for managing them, such as stringent KYC/KYB processes and avoiding high-risk countries. While navigating these regulatory challenges is complex, UTIX is committed to collaborating with regulators to develop a secure and beneficial system for event organisers and ticket buyers.”
Web3 platforms must consider the areas where their platforms could be misused by bad actors, and anticipate the regulations that will be applied to prevent such behaviour.
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