A committee of the European Parliament calls for the end of crypto-related regulatory arbitrage – a way to use loopholes in regulatory systems to avoid unfavorable regulations – proposing that crypto regulation should be made at the international level.
Though various countries have tackled the regulatory challenges posed by the global, easily accessible crypto assets, the national actions aren’t necessarily aligned with each other, opening the door to regulatory arbitrage, finds a study on developments of crypto assets and related regulatory concerns and responses, requested by the Committee on Economic and Monetary Affairs (ECON) – which, among other things, is responsible for oversight of the European Central Bank.
“To avoid regulatory arbitrage,” argues the study, “rulemaking on cryptoassets should take place at the European level, preferably in the execution of international standards.”
If money laundering and terrorist financing (AML/CFT) are taken as an example, it says, which are also global phenomena, the criminals will base their activities in the country that offers the most favorable regulations, where the gaps in the regulatory systems are more exploitable. “This undoubtedly also holds true for ML/TF activities involving crypto-assets.” The study goes on to explain that the US toughening its AML/CFT measures regarding crypto, the criminal activity will likely move to the EU. But if the standards are set on the international level, “the chances of effectively rooting out such activities are a lot bigger.”
While the study finds the continuation of the cooperation between the Financial Action Task Force (FATF) and the EU necessary, and that the EU must incorporate the FATF’s international standards, it also says “the EU could do better” and that it’s “clearly lagging behind on international AML/CFT laws,” adding that AMLD5 rules for crypto “were already outdated well before EU Member States were supposed to transpose them into their national AML/CFT laws.” Therefore, action by individual Member States may be beneficial, though not sufficient.
The study also laid out key concerns and responses, among which it finds:
- As global private stablecoins are a threat to financial stability and monetary policy. The G20′ approach is that none should be issued before a sufficient regulatory regime is in place. Stablecoins require a coordinated global response that includes international regulatory standards.
- Given crypto’s volatility, “most cryptoassets simply do not constitute a credible contribution to a financial institution’s own funds.” The institution may suffer large losses, while a balance sheet with crypto-assets on it could paint a distorted picture of the institution’s financial situation. The best way to deal with the uncertainty surrounding crypto-assets is to deduct them from a financial institution’s own funds.
- Crypto assets have a widespread use, but no adequate regime, with high risk for money laundering and terrorist activities. Among a number of responses, the study says that AMLD5’s scope should be broadened, as should the definition of virtual currencies by the EU to encompass investment and utility tokens, in-game currencies, and possibly central bank digital currencies (CBDCs), and the “blind spot” of crypto-to-crypto exchanges should be addressed.
Meanwhile, the European Commission launched a public consultation on the regulation of cryptoassets in December, awanting to strengthen its positions in the global payments market.
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