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Norway's central bank calls for national crypto regulations

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(Kitco News) - Norges Bank, the central bank of Norway, has released a new report recommending that the country consider adopting a national strategy on crypto regulation as the asset class gains wider adoption around the world.

The report highlighted that despite the fact that there are no large institutional investors or financial institutions in Norway or internationally that have substantial exposures to crypto assets, the evolution of the industry and sectors such as decentralized finance necessitate the establishment of regulations to protect users and “address societal considerations.” This includes combating crime and promoting financial stability.

Norges Bank highlighted the development of “specially adapted crypto-asset regulations” in other regions, including the rules proposed by the Basel Committee regarding capital requirements relating to banks’ crypto-asset exposures and the recently passed Markets in Crypto Assets (MiCA) bill in the EU.

“The MiCA regulation targets a number of risk-generating activities related to crypto-assets, although coverage is not exhaustive,” Norges Bank said. “Such targeted regulation often fails to capture risk related to the newest technological developments and activities and can therefore be insufficiently resilient to developments and circumvention made possible by technological innovation.”

The bank cited the fact that MiCA does not address the developments in decentralized finance due to its focus on centralized market participants. “It is therefore important to take advantage of the potential of robust general regulations to reduce risk related to new developments.”

The cryptocurrency ecosystem has generated multiple new types of activity that the bank said “may fall within the scope of general fraud regulations,” and the unfamiliarity of regulators with these activities results in enforcement coming after the infringement has occurred.

“For these to have an ex-ante disciplinary effect, it is necessary that participants perceive the likelihood of being detected as sufficiently high and that the sanctions provide sufficient deterrence,” the bank said. “Enforcement will increase the disciplinary effect.”

Norges Bank called for the development of specific regulations that can be adapted to different risks associated with an activity, such as systemic risk, and can contribute to a more efficient allocation of responsibility for risks. “Specific regulation can also facilitate more effective enforcement and increase the likelihood of infringement detection through follow-up by dedicated supervisory authorities.”

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The central bank concluded that “An international regulatory framework is crucial,” but said that “Norwegian authorities should assess whether to proceed more quickly rather than wait for international regulatory solutions.”

The need for a homegrown regulatory strategy is due to “national needs, gaps in international regulation, and the fact that international standardization takes time,” they said. “The absence of such a strategy may provide more scope for private entities to influence Norwegian regulatory developments in an undesirable manner.”

And the scope of regulatory coverage extends beyond buying and selling cryptocurrencies. Other considerations include regulations related to data center operation, electricity taxes and other tax rules.

“A national strategy requires cooperation among national authorities – not only financial authorities – but also consumer protection and judicial authorities,” the bank said. “The Norwegian authorities should consider: whether initiatives for further national regulations are needed; and the scope for national rules provided by the EU legislation.”

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