How regulation is dividing the digital asset ecosystem, and why that’s a good thing

By BC Group CEO Hugh Madden

The much discussed June 17 2019 Financial Action Task Force (FATF) travel rule recommendation for its 39 members, including China and the United States, obliges licensing and compliance for Virtual Asset Service Providers (VASPs).

On June 24, the FATF met virtually in Paris for its third and final Plenary meeting under current president Xiangmin Liu. The meeting included the publication of a report on the 12-month review of the implementation of its “travel rule” requirements on VASPs as well as the publication of a report to the G20 on stablecoins (which will be made publicly available in early July).

The travel rule review report’s findings cite progress in the past year by the public and private sectors in developing the FATF’s standards well as headway in the creation of technological solutions to implement the travel rule for VASPs. 

Also on June 24, the New York State Department of Financial Services (NYDFS) proposed new licensing rules that would make it easier for companies to operate digital asset businesses across the state. The proposed framework would allow companies that want to engage in digital asset businesses to obtain a conditional license that allows them to work with existing licensed companies. 

The ongoing actions by the FATF and NYDFS, coupled with the fast developing regulatory frameworks in major Asian markets such as Hong Kong, Japan and Singapore, will soon divide the global digital asset ecosystem into two major camps: regulated and unregulated. 

In this “new world,” regulated players will be the only entities able to accept and transmit transfers to other VASP who also comply with licensing and the travel rule and other regulations.

Major VASPs will move towards regulation, changing the competitive landscape and moving market share. High costs of compliance are likely to result in consolidation. Larger, traditionally regulated institutions entering the space, as well as existing players that are preparing for regulation, will have a clear competitive advantage.

According to a report by PwC [1], there are already about 150 digital asset hedge funds, and as more digital asset and traditional asset fund managers enter, they are likely to participate within the regulated camp.

Truly ‘decentralized’ finance (DeFi) platforms largely fall outside existing regulations - and this will in the medium term create impetus for the growth of this unregulated market. 

Aside from these ‘truly decentralised’ platforms, enforcements, similar to the action taken by MAS against unlicensed Bitcoin sellers in Singapore last week, will force unregulated VASPs and DeFi operators to exit markets, with the vacated market taken up by compliant and regulated players. This will also cause a surge in innovation towards DeFi in parallel to the increase of regulated market places

Regulation continues to be a boon for the digital asset industry, and over the next decade it will ensure that the market continues to be heterogeneous and competitive, with a myriad of opportunities for players in both the regulated and unregulated camps.

 

[1]: https://www.pwc.com/gx/en/financial-services/fintech/assets/pwc-elwood-2019-annual-crypto-hedge-fund-report.pdf

 


 

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