Introduction The emergence of cryptocurrencies in the early 21st century sparked a debate about their classification as money. Traditionally, money is defined by its five functions: unit of account, medium of exchange, means of payment, standard for deferred payments, and store of value. While cryptocurrencies can satisfy the first three functions, their inherent volatility limits […]
The emergence of cryptocurrencies in the early 21st century sparked a debate about their classification as money. Traditionally, money is defined by its five functions: unit of account, medium of exchange, means of payment, standard for deferred payments, and store of value. While cryptocurrencies can satisfy the first three functions, their inherent volatility limits their effectiveness as a standard for deferred payments and a store of value. Consequently, except for El Salvador, cryptocurrencies are not recognized as money or legal tender across most jurisdictions. Nevertheless, there is a growing consensus that they can be categorized as an asset class.
The crypto industry has posed significant challenges for regulators and central banks. The rapid cross-border reach and swift trading capabilities of cryptocurrencies make them susceptible to illicit activities such as money laundering, terrorism financing, tax evasion, and financial scams. In decentralized peer-to-peer transactions, customer identities are often obscured, complicating the tracing of illicit activities. Even on centralized platforms, crypto-service providers may not be required to disclose customer identities or perform Know Your Customer (KYC) checks.
This issue is compounded when illicit transactions cross international borders, making coordinated international regulatory collaboration essential. As noted in a December 2023 Economist article, the crypto industry is akin to cockroaches—resilient and difficult to eradicate, even under intense scrutiny. Despite regulatory attempts to stifle it, cryptocurrencies continue to thrive, largely due to the innovative blockchain technology underpinning them.
The volatility of cryptocurrencies was starkly illustrated when Bitcoin, the largest cryptocurrency, peaked at nearly $69,000 in November 2021 but plummeted to around $16,600 by early 2023. This decline was influenced by rising interest rates and a series of scandals involving major crypto exchanges like Binance and FTX, whose founders faced legal consequences for anti-money laundering violations and fraud—issues not exclusive to the crypto sector.
However, 2023 marked a turning point as crypto assets began to solidify their status as a legitimate asset class. A pivotal moment came when a U.S. court mandated the Securities and Exchange Commission (SEC) to reconsider Grayscale’s application to convert its $17 billion Bitcoin trust into an exchange-traded fund (ETF). Major asset managers like BlackRock and Fidelity also sought to launch crypto asset ETFs, enhancing optimism about regulatory approval.
By the last quarter of 2023, Bitcoin’s price surged to nearly $45,000, a remarkable 150% increase over the year. On January 10, 2024, the SEC approved the trading of spot Bitcoin ETFs, although it was made clear that this approval did not extend to endorsing Bitcoin itself. Emphasizing this point, the SEC Chair, Gary Gensler, stated: “While we approved the listing of certain bitcoin ETF shares today, we did not approve or endorse bitcoin. ”Following this development, Bitcoin’s value rose above $46,000 and surpassed $60,000 by October 2024. According to a report from The Daily Hodl on October 28, 2024, BlackRock had amassed over 403,725 BTC, valued at more than $26 billion, in its iShares Bitcoin Trust ETF.
On 5 November 2024, the USA held presidential elections. The victorious president who will be inaugurated on 20 January 2025, Ronald Trump, is pro-crypto. Following his victory, the crypto market responded positively with the price of bitcoin hovering near the $100 000 at the end of November 2024. To cap it all, the present Chair of SEC, Gary Gensler, will be succeeded by a pro-crypto chair in 2025.
([1] See https://www.coindesk.com/learn/china-crypto-bans-a-complete-history/
[1] See the Policy Statement on Development of Virtual Assets in Hong Kong by the Financial Services and the Treasury Bureau of Hong Kong: https://www.info.gov.hk/gia/general/202210/31/P2022103000454.htm.)
Countries have adopted various regulatory stances toward cryptocurrencies. For instance, China prohibited cryptocurrency trading and mining in 2021, while Hong Kong embraced a more supportive regulatory environment aimed at promoting sustainable crypto sector growth. Similarly, U.S. President Joe Biden issued an executive order in March 2022 addressing the potential benefits and risks of digital assets.
Globally, the OECD introduced the Common Reporting Standard (CRS) in 2014 to enhance tax transparency, expanding its scope to include electronic money and Central Bank Digital Currencies (CBDCs). Recognizing the rise of crypto assets and their unique characteristics—namely, their capacity to be transferred without traditional financial intermediaries—the OECD, in collaboration with G20 countries, adopted the Crypto-Asset Reporting Framework (CARF) in August 2022. This framework aims to standardize the automatic exchange of tax information related to crypto asset transactions.
The CARF encompasses crypto assets that can be held and transferred using decentralized technologies without relying on traditional financial intermediaries. This includes stablecoins, derivatives issued as crypto assets, and certain non-fungible tokens (NFTs). Moreover, the CARF aligns with the Financial Action Task Force (FATF) recommendations to ensure compliance with anti-money laundering and KYC regulations.
Under the CARF, reporting crypto-asset service providers—entities facilitating transactions in relevant crypto assets—are required to collect and report specific data. These providers typically fall under FATF regulations, allowing them to ensure compliance with existing AML/KYC obligations.
The CARF outlines three categories of reportable transactions:
[1] See https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.
[1] See https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-framework-for-responsible-development-of-digital-assets/.
[1] See more details in: FATF (2021). Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. Paris: Financial Action Task Force (FATF): https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html; Basel Committee on Banking Supervision (2021). Prudential Treatment of Crypto-asset Exposures. Basel: Bank for International Settlements (BIS): https:// www.bis.org/bcbs/publ/d519.htm; FSB (2020). Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements. Basel: Financial Stability Board (FSB): https://www.fsb.org/2020/10/regulation-supervision-and-oversight-of-global-stablecoin-arrangements/; and FSB (2022). Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets: Consultative Report. https://www.fsb.org/2022/10/regulation-supervision-and-oversight-of-crypto-asset-activities-and-markets-consultative-report/.
While cryptocurrencies may resemble an unwelcome pest in the regulatory landscape, akin to cockroaches, they also present unique opportunities for diversification within asset management. Portfolio theory suggests constructing portfolios with negatively correlated or uncorrelated assets, and cryptocurrencies may fulfill this role, as they generally do not correlate with other asset classes. As crypto assets evolve, countries must prioritize implementing international regulatory standards tailored to their specific contexts. Collaborative mechanisms should be established to adapt swiftly to new developments in cryptocurrencies and their associated risks, drawing upon frameworks developed by organizations like the FATF, the Bank for International Settlements, and the Financial Stability Board.
Regulatory Clarity: Understanding the evolving landscape of crypto regulation is critical for making informed investment decisions.
Asset Classification: Cryptocurrencies are increasingly viewed as a distinct asset class, which can enhance portfolio diversification.
International Cooperation: The CARF demonstrates the importance of coordinated regulatory efforts to address the cross-border challenges posed by cryptocurrencies.
Compliance and Risk Management: Organizations need to be aware of compliance obligations related to AML and KYC to mitigate risks associated with crypto transactions.
[1] See IMF (2021). Global Financial Stability Report—COVID-19, Crypto, and Climate: Navigating Challenging Transitions. Washington, DC, October. https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financial-stability-report-october-2021; and He, D., Habermeier, K.F., Leckow, R.B., et al. (2016). Virtual Currencies and Beyond: Initial Considerations. IMF Staff Discussion Notes No. 16/3. https://www.imf.org/en/Publications/ Staff-Discussion-Notes/Issues/2016/12/31/Virtual-Currencies-and-Beyond-Initial-Considerations-43618.
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