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WEF calls for global coordination on crypto asset regulation

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(Kitco News) - The World Economic Forum (WEF) is the latest international body to put forth recommendations for regulating digital assets with the release of its “Pathways to the Regulation of Crypto-Assets” white paper, which warned that the current measures are too disjointed to properly protect markets and investors.

“At their current level, crypto-assets represent a small portion of the overall global financial system, but even so the lack of regulation in some jurisdictions and the absence of a harmonized regulatory framework is raising concerns as to whether this market could pose a threat to global financial stability,” the WEF said.

The paper went on to argue that global coordination is necessary for crypto asset regulation to prevent ambiguity, regulatory arbitration and inconsistent enforcement. The authors noted that blockchain technology presents “unique technical and structural challenges to regulation due to the decentralized, transparent and open-source nature of the ecosystem.”

“Without a common minimum understanding it is difficult to regulate the ecosystem from a global perspective, considering the cross-border nature of crypto-asset activities,” they wrote. “Crypto-assets and their ecosystem do not always fit squarely into the existing activity-based, intermediary-focused approach of regulation, even where crypto-asset activities mirror those of the traditional financial sector.”

The WEF said these complications lead to things like the inability to develop ecosystem consensus, an increase in cost for compliance and setting up legitimate global businesses, and a lack of consumer protection and empowerment.

“As the Leaders of the Group of Seven (G7) in the May 2023 summit have acknowledged, effective monitoring, regulation and oversight are critical to addressing financial stability and integrity risks posed by cryptoasset activities and markets and to avoid regulatory arbitrage, while supporting responsible innovation,” said John Ho, Head of Legal and Financial Markets for Standard Chartered Singapore. “This timely World Economic Forum publication sets out the need for a global and harmonized approach to the regulation of crypto-assets.”

The anonymity offered by services like crypto mixers, self-hosted wallets, and decentralized exchanges also complicate regulation, they said, while the growing level of interconnectedness with traditional finance increases potential contagion risks from the crypto industry.

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“A global approach is needed to maximize the advantages from the underlying technology and to manage the risks arising from regulatory arbitrage and the interconnectedness within the crypto-asset ecosystem, as well as the potential of spillover into the traditional financial systems,” the WEF said. “It is prudent to holistically focus also on the important role that international organizations and national/regional regulators, as well as industry actors, can play in ensuring responsible regulatory evolution.”

To help address the issues identified in the white paper, the WEF proposed recommendations that were separated into three major stakeholder categories: international organizations, regional or national regulators, and the industry as a whole.

The recommendations include establishing best practices for crypto; harmonizing terminology and definitions; fostering cross-sector coordination among regulators; coordinating efforts to establish interoperable technical standards; sharing best practices for addressing operational and cybersecurity risks; and innovating “responsibly” and engaging with policymakers and regulators.

“The advent of crypto-assets and blockchain-based financial services is proving to be more about convergence than disruption of the traditional economy, banking and finance,” said Dante Disparte, Chief Strategy Officer and Head of Global Policy for Circle. “This should be encouraged, and the vital work carried out by the World Economy Forum and the Digital Currency Governance Consortium provides an accessible blueprint for jurisdictions to catalyze growth and investments in the digital assets economy, while ending the perilous era of race-to-the-bottom regulatory arbitrage.”

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