Make cryptocurrency mainstream with effective regulation

Industry players say cryptocurrency regulation is necessary, but only if designed and implemented effectively

by S BIRRUNTHA / graphic TMR

THE debate on introducing tighter regulatory scrutiny over cryptocurrencies has been ongoing for years.

Despite increasing scrutiny, digital assets continue to operate outside of centralised rules, at least for the most part.

Luno Malaysia country manager Aaron Tang said cryptocurrency regulation is necessary, but it can only be effective if it is designed and implemented effectively.

He added that globally and across the Asia-Pacific (Apac) region, local governments and authorities have been placing stronger emphasis on cryptocurrency platforms to be regulated.

“There are several factors that need to be addressed.

“Firstly, regulators have a challenging task where they have to familiarise themselves with a new technology that only very few fully understand. At the same time, the cryptocurrency landscape is still in a nascent stage of development.

“Secondly, regulation needs to be developed without stifling innovation, with a careful balance required between weighing the need to protect consumers with the benefits of a new technology with huge long-term potential,” he told The Malaysian Reserve (TMR).

Tang noted that open dialogue with regulators is crucial to ensure an ongoing bridging process. This includes seeking clarification, laying expectations or addressing any potential challenges, and ongoing collaboration between regulators and industry players, like Luno, is fundamental to the growth of the digital assets landscape.

Collective Effort

As for Luno, the digital asset exchange operator has been actively working with financial regulators such as the Securities Commission Malaysia (SC) in the areas of compliance and consumer protection.

“We believe that this translates into investor confidence and heightened transparency,” Tang said.

Elaborating further, Tang believes that regulation is a vital part of the cryptocurrency ecosystem, as it lifts global and local standards, sets barriers to entry for operators and provides consumer protection.

He emphasised that above all, regulation brings accountability to a space many are still unfamiliar with.

Tang said the existence of a licence to operate or other regulatory standards in a country is critical because it provides consumers with a good indication that they can trust that company with their funds.

“It shows that there are robust risk management frameworks and standards in relation to the control measures to mitigate risks and safeguard the landscape.

“Additionally, this also lays the groundwork for cryptocurrency companies to develop collaborative and cooperative relationships with key partners.”

Tang also highlighted that stronger regulatory provisions and higher standards allow for stringent actions to be taken against unregulated platforms or service providers with low regard and capability to safeguard customer information and funds.

He said if the public is aware that they are dealing with a regulated entity, they will know that the entity has met the standards that have been put in place for their protection, which thereby increases investor trust and confidence.

“This gets the ball rolling for mass adoption, allowing us to introduce cryptocurrency in a safe and secure manner.

“Ultimately, the growth of the industry is a collective effort between not just industry players but also customers and regulators,” he said.

On that note, Tang pointed out that Luno is prepared and committed to align itself with local regulators to ensure safe exposure of cryptocurrency to customers, such as by obtaining regulatory and licensed status in the markets it operates in.

Currently, Luno has presence in Malaysia, Singapore, Indonesia, the US, the UK, Australia, South Africa and Nigeria. The platform has over 10 million customers globally, indicating a strong testament towards Luno as a trusted cryptocurrency investment platform.

Pros and Cons of Regulations

Meanwhile, CoinGecko co-founder and COO Bobby Ong noted that the cryptocurrency regulatory landscape in Malaysia has evolved since it was first established in 2019.

He said as it was implemented early, it has allowed regulated players to operate and that has overall helped to broaden cryptocurrency awareness among the general public.

“That said, it will be important for regulators to remain agile and adapt as the industry evolves,” he told TMR.

Ong said in order to go mainstream, the cryptocurrency industr y will need to comply and cooperate with regulators.

He added that greater regulatory clarity, along with an appropriate regulatory regime, can instil greater confidence in users who are new to crypto and ultimately, improve crypto adoption rates.

Nevertheless, Ong said there are pros and cons to having regulations in place.

He pointed out that stricter regulations meant projects, exchanges and cryptocurrency-related businesses are held to a higher standard, and this is overall beneficial to investors.

“Investors’ interests are protected, allowing for legal recourse against scams and projects that breach these regulations.

“On the other hand, some investors may be put off by the policing and become unable to access certain investments that are deemed to be too risky by regulators.

“Overregulation of the industry may also deter innovation.”

Cryptocurrency exchanger Tokenize Technology (M) Sdn Bhd founder and CEO Hong Qi Yu concurred that the regulatory landscape in Malaysia is currently very positive.

He said the regulation is more open to coin listing and industry players are pushing hard to list more coins as well as other cryptocurrency services soon.

Hong also stressed that regulation is indeed good for the cryptocurrency industry and it is a necessary step towards helping cryptocurrency achieve widespread adoption.

“This is especially after the Luna saga and the downfall of giant companies like Celcius.

“Therefore, regulation is needed for the industry to attract serious and smart money,” TMR was told.

Luna was a non-inflationary stablecoin minted by Terraform Labs and used as a native asset on the Terra blockchain. In May 2022, the Luna cryptocurrency network collapsed in what is considered the largest cryptocurrency crash ever with an estimated US$60 billion (RM267.39 billion) wipeout, shaking the global digital currency market.

It was reported that the crash happened due to the UST stablecoin (also developed by Terra and closely connected to Luna) depegging and losing value in May this year. In a panic, more people sold off the UST, which led to the minting of more Luna and an increase in the circulating supply of Luna.

Following the crash, cryptocurrency exchanges started to delist Luna and UST pairings, and in short, Luna was abandoned as it became worthless.

Cryptocurrency exchanges, also known as Digital Asset Exchanges (DAX) are platforms where people can trade their ringgit into cryptocurrencies. Cryptocurrency exchanges in Malaysia are licensed and regulated by the SC, when the country began regulating DAX in 2019.

By June 2019, SC granted approval to three cryptocurrency exchanges to operate in Malaysia, namely Luno, Sinegy and Tokenize. Before the licences were issued by SC, there were 56 cryptocurrency exchanges registered as reporting organisations with Bank Negara Malaysia (BNM).

IMF Calls for Global Regulatory Framework

In September this year, the International Monetary Fund (IMF) called for a global regulatory framework for cryptocurrency, as this will bring order to the markets, help instil consumer confidence, lay out the limits of what is permissible and provide a safe space for useful innovation to continue.

A recent report by IMF Monetary and Capital Markets Department deputy director Aditya Narain and IMF Monetary and Capital Markets Department assistant director Marina Moretti highlighted that the regulatory fabric is being woven and a pattern is expected to emerge.

However, the IMF said the worry is that the longer this takes, the more national authorities will get locked into differing regulatory frameworks.

“This is why the IMF is calling for a global response that is coordinated, so it can fill the regulatory gaps that arise from inherently cross-sector and cross-border issuance and ensure a level playing field; consistent, so it aligns with mainstream regulatory approaches across the activity and risk spectrum; and comprehensive, so it covers all actors and all aspects of the cryptocurrency ecosystem,” they said.

According to Aditya and Moretti, cryptocurrency assets have been around for more than a decade, but it is only now that efforts to regulate them have moved to the top of the policy agenda.

They noted that this is partly because it is only in the past few years that cryptocurrency assets have moved from being niche products in search of a purpose to having a more mainstream presence as speculative investments, hedges against weak currencies, and potential payment instruments.

“The spectacular, if volatile, growth in the market capitalisation of cryptocurrency assets and their creep into the regulated financial system have led to increased efforts to regulate them.

“So, too, has the expansion of cryptocurrency’s many different products and offerings and the evolving innovations that have facilitated issuance and transactions.

“The failures of cryptocurrency issuers, exchanges and hedge funds, as well as a recent slide in cryptocurrency valuations, have added impetus to the push to regulate,” they added.

Nevertheless, Aditya and Moretti pointed out that applying existing regulatory frameworks to cryptocurrency assets, or developing new ones, is challenging for several reasons.

For a start, they said the cryptocurrency world is evolving rapidly, and regulators are struggling to acquire the talent and learn the skills to keep pace, given stretched resources and many other priorities.

They noted that monitoring cryptocurrency markets is also difficult because data is patchy, and regulators find it tricky to keep tabs on thousands of actors who may not be subject to typical disclosure or reporting requirements.

  • This article first appeared in The Malaysian Reserve weekly print edition

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