By Steve Swain, Co-founder & CEO, Lendingblock – the securities lending exchange for digital assets
The lack of a clear and consistent regulatory framework is frequently cited as one of the major challenges facing participants in the emerging crypto ecosystem. However, this lack of regulatory certainty should not be seen as unusual. At this point in time, it would be naïve to expect anything else, and it is arguably unrealistic to believe that this issue will dissipate any time soon.
For crypto companies, there is an opportunity, and some would even argue, a responsibility, to proactively tackle the regulation dilemma head on in order to stay ahead of the game. What a company decides to do in this regard, could mean the difference between gaining competitive advantage or becoming non-existent.
In this article, we present three reasons that explain the current state of regulation, and three actions that market participants should take to protect the interests of investors and ultimately support the progression of regulatory frameworks in which the crypto marketplace can safely and securely operate.
Three reasons for the current state of regulation:
- Crypto is truly global, but regulation is not.
Regulatory alignment is an ongoing challenge for regulators in most markets and financial instruments proceeding crypto. The current stand-off between the US and Europe on derivatives regulation and, of course, Brexit, are two notable examples. So regulatory alignment for an entirely new and radically different financial market is inevitably going to take time, and significant inconsistencies remain. US regulators, for example, have given no clear guidance to date on whether specific cryptocurrency services would be a regulated activity. In Germany, however, cryptocurrency assets are regarded as units of account, and as such are considered regulated products. Further to this, in Singapore a cryptocurrency company can operate as long as it is registered under the Companies Act.
- Innovation always precedes regulation.
As markets develop and products evolve, regulation is often found to be playing catch up. The question for regulators, jurisdictions and the crypto industry overall is whether (and how) to fit cryptocurrency assets into existing regulatory frameworks or whether it’s more appropriate to create something new because it is so distinct and unlike anything the world has ever seen before. Whichever path adopted, crypto regulation is likely to hold true to the principles and standards that seek to drive good practice in existing financial services regulation. As such, firms can look to these existing principles if they seek to implement standards that will help them get ahead of the regulatory curve and achieve competitive advantage.
- Crypto originated from a libertarian ethos.
While some continue to argue that regulation has no place or part to play in crypto, it is also clear that appropriate controls and standards are critical to protect individual participants and encourage institutional investment into the market. Well-constructed regulation will benefit the crypto markets significantly and should be welcomed. Furthermore, regulation is inevitable and those adopting a proactive stance will ultimately prevail over those clinging to dogmatic libertarian ideals.
Three actions market participants should take:
Consider jurisdictions that are regulated and apply for regulatory status where feasibly possible. And, in jurisdictions where regulation is absent, approach and partner with the regulator to help shape their thinking.
Act as though you are regulated even when regulation is not possible yet. Understand what regulators expect and why. Do all that you can to act in a compliant way.
Adopt best practice and governance policies from traditional industries and markets. This fosters compliance with any laws that might be developed, future-proofs companies and demonstrates best practice as a way of creating barriers to entry.
Sitting front and centre between financial innovation and regulatory development in this nascent crypto industry is both challenging and uncertain, but ultimately a great opportunity and responsibility. At Lendingblock, we are working with regulators and policy makers to establish precedents and gain regulatory approval in key markets around the world.
We have drawn a comparison between the traditional securities lending market and the digital asset lending market to create an exchange to support what we believe will be the future of finance. This comparison and approach means we have been able to replicate and build a safe, secure and transparent lending exchange and healthy marketplace to meet the needs of institutions but also take the opportunity to reinvent parts of the traditional lending model that we feel can better meet client needs through the digital asset lending market.
If you are interested in borrowing and lending your firm’s digital assets, click here to create an institutional account.