Lessons from global leaders on cryptocurrency regulation

As digital assets like cryptocurrencies and blockchains, the technology that records and secures transactional information, continue to gain prominence, the United States finds itself at a regulatory crossroads. With a market cap of over $2.21 trillion (according to CoinMarketCap.com as of September 21, 2024) and growing mainstream adoption, digital assets are no longer a fringe issue: they are an integral part of the future of finance. Yet the United States lags behind in creating a coherent and comprehensive regulatory framework for this burgeoning sector.

Other countries aren’t waiting. Switzerland, Japan, the European Union, and emerging markets like Nigeria have taken decisive steps to regulate digital assets in ways that encourage innovation while protecting consumers. In contrast, the U.S. regulatory landscape remains fragmented, with crypto-focused voters in limbo ahead of the presidential election, trying to gauge any signs of policy change from Vice President Kamala Harris or the true motives and credibility of former President Donald Trump.

The U.S. Cryptocurrency Regulation Conundrum

Senator Sherrod Brown, chairman of the Senate Banking, Housing, and Urban Affairs Committee, and Senator Elizabeth Warren (D-MA), a member of the committee, have joined forces to lead an anti-cryptocurrency movement. Their efforts have manifested themselves in a variety of ways, including through the actions of SEC Chairman Gary Gensler and prudential regulators such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), all of which are playing key roles in enforcing their regulatory crackdown on the cryptocurrency industry.

However, a growing number of Brown and Warren’s fellow Democrats in Congress are saying it’s time to turn the page and shift toward crypto-friendly policies that balance protecting consumers and investors with supporting innovation in the Web3 economy. Even Rep. Maxine Waters, a ranking member and vocal critic of cryptocurrency, recently signaled a potential change in stance. In an interview with the website Podcast on the native land At the Democratic National Convention, she suggested a pro-crypto approach in the next session of Congress, should she regain the chairmanship of the House Financial Services Committee.

If the United States continues to delay taking decisive action, it risks losing its competitive advantage. Innovation and investment could soon flow to jurisdictions that have already established clear regulations, leaving the United States behind in the global race for digital assets. While the United States grapples with internal debates, several countries have already taken steps by adopting robust and forward-thinking regulatory frameworks. By examining their strategies, the United States can gain valuable insights into how to navigate this rapidly evolving space.

Learning from world leaders: Switzerland, EU, Japan and Nigeria

Switzerland: a clear and flexible framework

Switzerland has become a global leader in cryptocurrency regulation thanks to its early efforts to establish clear guidelines. The country’s Financial Market Supervisory Authority (FINMA) began developing its regulatory framework for cryptocurrencies in 2013. Switzerland classifies digital assets into three groups: payment tokens (e.g., Bitcoin), utility tokens, and security tokens. This clear taxonomy has allowed businesses and investors to navigate the regulatory landscape with confidence.

Crypto Valley in Zug, Switzerland has attracted many blockchain startups due to its regulatory clarity and favorable tax policies. However, traditional banks have been hesitant to provide services to crypto businesses due to money laundering risks, prompting some companies to relocate. Despite these challenges, Switzerland remains a hub for innovation, with the successful launch of Ethereum’s initial coin offering (ICO) in 2014 serving as a key example of how regulatory clarity can foster growth in the sector.

European Union: MiCA and regulatory harmonization

The European Union is pursuing a unified approach to regulating digital assets through its Markets in Crypto-Assets (MiCA) Regulation, proposed in 2020 and expected to be fully implemented by 2025. MiCA aims to harmonise regulation across the 27 EU Member States, providing consistent rules on consumer protection and market integrity.

One of MiCA’s main goals is to regulate stablecoins, cryptocurrencies pegged to traditional assets like the U.S. dollar. MiCA requires stablecoin issuers to maintain adequate reserves and adhere to transparency standards, addressing concerns raised by the collapse of TerraUSD in 2022. While some feel that MiCA’s implementation has been slow, the legal certainty it will provide could make Europe one of the most attractive markets for cryptocurrency innovation.

Japan: Leading the Way

Japan was one of the first major economies to regulate cryptocurrencies after the collapse of Mt. Gox, a Tokyo-based exchange, in 2014. Japan amended its Payment Services Act (PSA) in 2017 to recognize Bitcoin and other cryptocurrencies as legal forms of payment. The country has a dual regulatory system: payment tokens are regulated by the PSA, while security tokens fall under the Financial Instruments and Exchange Act (FIEA).

Japan’s clear distinction between different types of digital assets has allowed the country to foster a thriving cryptocurrency market while maintaining strong consumer protections. However, smaller exchanges have struggled to meet the strict requirements imposed by the Financial Services Agency (FSA), leading to closures and market consolidation. Despite these challenges, Japan’s focus on investor protection has helped restore confidence in the cryptocurrency market after several high-profile security breaches.

Nigeria: Financial inclusion through cryptocurrencies

Nigeria offers a unique perspective on cryptocurrency regulation. Although the Central Bank of Nigeria (CBN) has banned financial institutions facilitating Cryptocurrency Transactions in 2021, Crypto is not illegal. Nigerians have turned to peer-to-peer (P2P) bitcoin trading, making Nigeria one of the largest bitcoin markets in the world.

Cryptocurrencies have gained popularity in Nigeria as a hedge against inflation and currency devaluation. Bitcoin, in particular, is widely used for remittances, reducing the fees associated with international money transfers. Despite government restrictions, cryptocurrencies have become a means of financial inclusion for Nigeria’s unbanked population, providing stability in an unstable economic environment.

Nigeria’s experience highlights the potential of digital assets to empower individuals in developing economies. As the United States considers its regulatory framework for digital assets, Nigeria’s example shows how cryptocurrencies can improve access to financial services for underserved communities.

The Bipartisan Path Forward for America

The next U.S. Congress has a unique opportunity to learn from these global regulatory approaches and develop a bipartisan framework that provides clarity, fosters innovation, and protects consumers.

• Establish a clear taxonomy:A classification system like Switzerland’s could help resolve ongoing jurisdictional disputes between regulators and provide much-needed certainty to businesses.
• Create regulatory sandboxes:Establishing a federal regulatory sandbox, similar to those used in Switzerland and Japan, would allow crypto companies to experiment under the supervision of regulators, thereby fostering innovation while ensuring compliance.
• Strengthening consumer protection:Like MiCA and Japan’s FSA framework, the US should adopt clearer investor protection measures to avoid high-profile collapses like the FTX scandal.
• Leveraging Cryptocurrencies for Financial Inclusion:Drawing on Nigeria’s experience, Congress could explore how digital assets can improve access to the financial economy and innovation for underserved communities.

America’s Lag Could Be the World’s Lever

If the United States fails to act quickly and in a bipartisan manner in the next session of Congress, it risks losing its competitive advantage to countries that have already established clear, cryptocurrency-specific regulations. Innovation and investment could flow to jurisdictions like Switzerland, the EU, Japan, and even emerging markets like Nigeria, India, and Indonesia, leaving the United States behind in the global race for digital asset leadership.

For example, according to Chainalysis’s 2024 Global Adoption Index released on September 11, 2024, India and Nigeria already hold the top two spots globally in popular cryptocurrency adoption, with Indonesia being the fastest-growing market. Indonesia’s nearly 200% year-over-year growth and a cryptocurrency market cap of $157.1 billion demonstrate the shift in trend. These emerging markets, particularly in regions like Central and South Asia, are embracing alternative investments, decentralized finance (DeFi), and decentralized exchanges (DEX) while bypassing traditional regulatory barriers. Their rapid adoption signals a global shift as these countries seize the opportunity to capitalize on the potential of cryptocurrencies.

The United States remains in fourth place on the Chainalysis index, but continued partisan gridlock could lead to further decline. Emerging markets, often considered financially underserved, are increasingly embracing cryptocurrencies as a tool for financial inclusion and economic innovation. Countries like India, Nigeria, and Indonesia are showing significant growth, reflecting a global shift in digital asset adoption.

For the United States to remain competitive, a proactive, bipartisan approach is essential. By fostering innovation and protecting consumers through clear regulation, the United States can ensure that it continues to play a leading role in the evolving digital economy. With global progress moving rapidly, the need to act quickly is clear.