WEF Navigating Cryptocurrency Regulation 2021

Global Future Council
on Cryptocurrencies
Navigating
Cryptocurrency Regulation:
An Industry Perspective
on the Insights and Tools
Needed to Shape Balanced
Crypto Regulation
COMMUNIT Y PAPER
SEPTEMBER 2021
Images: Getty images
Contents
Executive summary 3
1 Cryptocurrency basics 4
1.1 What is a cryptocurrency and a cryptocurrency network? 5
1.2 What are some characteristics of cryptocurrency networks? 5
2 Regulatory considerations 6
2.1 Macro-level and multi-jurisdictional risk 7
2.2 Consumer protection 9
2.3 Infrastructure-specific issues 10
2.4 Key takeaways and guiding principles 12
3 Regulatory opportunities for inclusion and innovation 13
3.1 De-risking and its global implications 14
3.2 Addressing financial inclusion and exclusion 14
3.3 Digital identity 16
4 Global regulatory approaches 17
4.1 Categories of regulatory approaches 18
4.2 Legal status of cryptocurrencies around the world 19
4.3 Guidance from international bodies 24
Conclusion 26
Contributors 27
Endnotes 29
Disclaimer
This document is published by the World Economic Forum
as a contribution to a project, insight area or interaction. The
findings, interpretations and conclusions expressed herein are a
result of a collaborative process facilitated and endorsed by the
World Economic Forum but whose results do not necessarily
represent the views of the World Economic Forum, nor the
entirety of its Members, Partners or other stakeholders.
Navigating Cryptocurrency Regulation: An Industry Perspective on the Insights and Tools Needed to Shape Balanced Crypto Regulation 2
Executive summary
The technological and economic
particularities of cryptocurrencies require
prudent regulation that accommodates the
characteristics and use cases of cryptocurrency.
Cryptocurrencies and the underlying blockchain Regulators around the world should develop
technology are becoming a pervasive force in the frameworks to responsibly monitor and guide
global economy, affecting everything from cross- cryptocurrency activity in their jurisdictions, ensuring,
border retail payments to interbank transfers. The among other things, fair market conduct, market
growing adoption and decentralized nature of competition, the application and enforcement of tax
cryptocurrencies pose unique and unprecedented rules, and consumer protection within the parameters
challenges for financial authorities, capital markets of the assets’ unique properties, while nurturing the
regulators, consumer protection and privacy growth of a lucrative cryptocurrency-based economy.
bureaus, and tax authorities around the world. At the same time, cryptocurrencies are cross-
However, cryptocurrencies also bring opportunities jurisdictional and, as such, regulatory challenges do
in terms of leveraging the internet to provide new not stop at national borders. Regulators should work
digital pathways for individuals and micro-, small- towards cross-jurisdictional regulatory standards in
and medium-sized enterprises (MSMEs) into the order to create regulatory clarity, close loopholes and
global financial system. Further, cryptocurrencies mitigate regulatory arbitrage, while ensuring inclusion
and underlying blockchains contribute a new of all users is maintained.
paradigm for secure data and value transmission,
storage and access. As such, the technological Well-designed cryptocurrency regulations have been
and economic particularities of cryptocurrencies implemented in many jurisdictions, encouraging
require prudent regulation that accommodates the crypto-based innovations and efficiencies in finance
characteristics and use cases of cryptocurrency. and commerce, particularly for cross-border
transactions. Regulators should look at examples
In simple terms, cryptocurrencies are digital elaborated upon in this guide to bolster their
“coins” or “tokens” secured using cryptography. understanding of the parameters and variables that
These assets are fully digital; using blockchain or are pertinent to the design of regulatory frameworks.
other decentralized ledger technologies (DLTs),
they are stored and operate on a decentralized This regulatory guide from the Global Future Council
network, with which users can transact directly on Cryptocurrencies reflects the perspectives of a
without the need for a central authority. The assets broad cross-section of the cryptocurrency ecosystem
can be sent instantly at a peer-to-peer (P2P) and should be used as a tool to assist financial
level, without involving an intermediary such as regulators around the world in developing prudent
a bank or central bank. In principle, and in the policies, regulations and ideation to mitigate risks
absence of additional cryptography schemes or and enable opportunities related to cryptocurrencies.
failures in security, cryptocurrency transactions In this guide, we address important themes
Note: Stablecoins and are fully traceable and unalterable, and users and considerations for the financial regulation of
central bank digital may remain pseudonymous unless their assets cryptocurrencies, using insights from the leading
currencies (CBDCs) are are matched – for example, to a validated know authorities on blockchain technology and financial
outside the scope of your customer (KYC) file through an exchange. regulators navigating these transformations to
this document. the global financial and monetary system.
1 Cryptocurrency basics
This section establishes relevant definitions
and provides a framework to consider the many
issues presented by cryptocurrencies.
1.1 What is a cryptocurrency

and a cryptocurrency network?
For the purpose of this guide, a cryptocurrency1 transactions and protect against spam, distributed
is a digital non-governmental asset based on a denial of service (DDoS) and other attacks.3
combination of cryptographic algorithms, whose
existence and transfer is confirmed and recorded Cryptocurrencies constitute their own unit of
on a ledger that is distributed across a network account, although, in most cases, the price to
of independent computers (“validators”). Before acquire a unit is usually quoted in government-
the existence or transfer of a cryptocurrency based fiat currency. Additionally, most
can be recorded on the ledger, the network’s cryptocurrency projects allow for the issuance
validators must reach agreement according to the of account addresses and the transfer of the
network’s consensus protocol. The decentralized currency between sender and recipient, without a
architecture of the validator network is designed centralized party and without the need for personal
to create trust in the absence of a centralized identification typically required by such parties.4
authority, like a government or other central
entity. In a decentralized network, multiple entities There are two types of cryptocurrencies: (1)
operate independently under a network-wide traditional cryptocurrencies, which are created by
shared governance framework, eliminating the a standalone blockchain such as BTC (Bitcoin)
single point of failure or control. This architecture and ETH (Ethereum); and (2) cryptocurrencies
reduces the risk of double-spending,2 while that are digital representations of other
preserving pseudonymity in a transaction. The assets such as those backed by fiat currency
validators rely significantly (but not exclusively) on (sometimes referred to as stablecoins) such as
cryptography tools to ensure security. For example, USDC issued by Circle. This paper is focused
cryptocurrency is used as a utility on the network solely on traditional cryptocurrencies, which are
to incentivize (pay) node operators to validate considered to be mathematics-driven protocols.
1.2 What are some characteristics

of cryptocurrency networks?
There are currently thousands of different participating in transaction verification; or (2)

cryptocurrency projects and networks, many permissioned, where participation in these
with distinct design, architectures and features. activities is limited by a governance framework
While most cryptocurrency projects rely on a that restricts participation. The focus of this paper
distributed ledger system, there are two primary is the former, permissionless cryptocurrency.
types of “access” permission: (1) permissionless, Additionally, the way networks reach “consensus”
where networks are open and any entity can between participant validators is varied; some
participate in terms of sending transactions, use proof of work (e.g. BTC), others proof of
reading the history (ledger) of transactions, or stake (e.g. ADA) and other mechanisms.5
2 Regulatory
considerations
A clear, Regulators and policy-makers around the globe communication protocols, the vast potential for
constructive and are continuously evaluating how best to address its uses and applications is difficult to predict and
adaptive regulatory the specific and sometimes novel issues posed the technological and economic particularities of
by cryptocurrencies. Cryptocurrencies have cryptocurrencies render it difficult to automatically
environment for
rapidly evolved from expressions of alternative apply existing legal frameworks and definitions. As
cryptocurrencies ideals and systems to well-known assets of such, a clear, constructive and adaptive regulatory
would lay a interest to investors, private firms and, to some environment for cryptocurrencies would lay a
foundation for extent, nation states. The regulatory landscape for foundation for sustainable innovation, competition
sustainable cryptocurrencies continues to evolve as there is and transparency, and allow customers and
innovation, increased interest in and usage of the asset class. businesses to safely realize the benefits they may
competition and Building on earlier eras of innovation in distributed offer. As would be expected, significant differences
transparency, and computing and cryptography, cryptocurrencies exist in the scope and breadth of regulatory
allow customers and the underlying blockchains contribute a new oversight and expectations, especially between
and businesses paradigm for many kinds of secure data and jurisdictions. These challenges could be addressed
to safely realize value transmission, storage and access more by a greater level of international cooperation and
broadly. Much like the development of internet information-sharing between regulatory bodies.
the benefits they
may offer.
This section explores some of the challenges and
concerns that regulators will need to consider
and in some cases address as they respond to
the growth of cryptocurrencies in their regions.
2.1 Macro-level and multi-jurisdictional risk
At a macro level, the intersection between the use examples of this taking place, central bankers are
of cryptocurrencies and the role of commercial concerned that this could potentially result in more
banks in delivering monetary services across the volatility of domestic prices as the central bank
globe warrants close attention. From a financial cannot employ monetary policy as effectively.
regulator’s perspective, current cryptocurrency
systems appear to lack features that are critical for At the international level, given the cross-border
sovereign monetary regimes in order to manage nature of cryptocurrency networks, a key
and control the financial stability of a country. question is who should oversee the markets for
As cryptocurrencies generally lack an adjustable cryptocurrencies and financial market infrastructure
monetary policy, they cannot respond in the same (FMI) that interact with crypto-assets6 in payment,
way to monetary and price stability risks due to settlement and other activities. These potential
shocks to demand for cryptocurrency by adjusting ecosystem risks lead to fragmentation of solutions
the supply. Similarly, shocks to the supply of and inconsistencies in interpretive guidance that
cryptocurrency are not mitigated by a monetary may eventually hurt consumers and investors in
authority that could otherwise affect demand to the long term. Already, certain cryptocurrency
stabilize the price. The capacity to access central market intermediaries have suffered disruptions
banks as the lender of last resort (LOLR) is also with some frequency, most notably the bankruptcy
not present, potentially increasing the possibility of notable exchange platforms (e.g. Mt. Gox7).
of runs in the absence of a central bank function. And, as the Federal Trade Commission (FTC) in
Lastly, another concern expressed by central the United States reported in May 2021, “Since
banks is that widely adopted cryptocurrency October 2020, reports [of cryptocurrency theft]
could potentially weaken a country’s monetary have [increased], with nearly 7,000 people
sovereignty if fewer people use the domestic reporting losses of more than $80 million.”8
unit of account. Though there are no current
Importantly, financial institutions must work to data use and privacy considerations. However,
understand local regulatory considerations when in many countries, third-party intermediaries
establishing operations or providing services that dealing with cryptocurrencies face an uncertain
support cryptocurrencies. These include issues regulatory environment, and the challenge
ranging from licensing requirements to know of global coordination on a future regulatory
your customer (KYC), anti-money laundering approach makes the operating environment
(AML) and combating the financing of terrorism ambiguous for traditional financial institutions.
(CFT) obligations, as well as restrictions on
Compliance risks
The Data evidence shows that illicit activity comprises detecting and deterring instances of money
pseudonymous just 0.34% of all cryptocurrency transactions, laundering and creating the evidence needed for
and borderless which is lower than the incidence of illicit activity prosecuting offences.
nature of in the traditional financial system.9 However,
the pseudonymous and borderless nature of Lastly, tax record-keeping requirements for
cryptocurrency
cryptocurrency systems10 (and the fact that cryptocurrencies vary across countries and may
systems (and
virtually anyone can create a new cryptocurrency reduce the attractiveness of cryptocurrencies as
the fact that and send it to other addresses) raises potential a payment system in the medium term. In many
virtually anyone financial integrity risks. In addition, the decentralized countries, such as the United States and the
can create a new nature of cryptocurrency transactions is not Netherlands, it is necessary to calculate and report
cryptocurrency dependent on entities on which financial gains and losses on the use, mining and disposition
and send it to other sanctions and embargoes can be imposed via of tokenized assets, including cryptocurrencies.
addresses) raises traditional means. As a result, it is difficult for Wallet providers and custodians can facilitate this
potential financial governments and international organizations record-keeping, but the taxpayer is still responsible
integrity risks. to enforce financial sanctions or embargoes, for accurate reporting and paying any tax owed.
but there are several practical ways to address Having multiple exchanges with different prices
these issues through international cooperation. further complicates the problems in regards to
record-keeping.
In determining who to regulate, national authorities
have mainly focused on cryptocurrency market As referenced above, more could be done at the
participants and the financial institutions that interact international level to facilitate the development of
with them. Potential risks to the status and integrity appropriate policy responses that align integrity
of financial institutions result from their position as with innovation and inclusivity. Importantly, such
the custodian of other people’s money. While the global dialogues should encompass a wider diversity
issuance and transfer of cryptocurrencies between of economies and jurisdictional perspectives,
users are less likely to pass through an intermediary, particularly smaller countries as well as countries
the interface between cryptocurrencies and the from regions including Africa and the Caribbean,
broader economy (as referenced above) will often which presently are not part of institutions such as
go through a cryptocurrency exchange or other the Financial Action Task Force (FATF) and have
virtual asset service provider (VASP). In this context, minimal representation in the Bank for International
preventive measures, including enhanced customer Settlement (BIS). As experience is gained,
due diligence (CDD), transaction monitoring and developing international standards supported by
record-keeping, as well as obligations to report best practices from small and larger jurisdictions
suspicious transactions for higher threshold in different regions could inform more relevant
amounts, are already an important component guidance on the most appropriate regulatory
of many national AML frameworks. If applied responses to the differing risks confronting financial
proportionately in the crypto-ecosystem, alongside institutions, thereby promoting parity across regions.
new monitoring platforms,11 they can assist in
Operational risks
The broader acceptance of cryptocurrencies the charges if something goes wrong. The finality of
also presents new risks of an operational nature transactions is, in many ways, an advantage, but it may
such as the irreversibility of transactions, which create a dependency on the governance and oversight
is an inherent part of the design of many popular of cryptocurrency systems to ensure that errors
cryptocurrencies.12 While some networks have or mistakes are addressable in a timely, equitable
developed features to claw back transactions in and auditable manner. Like almost all IT systems,
certain circumstances,13 the general design of cryptocurrencies are vulnerable to security breaches,
cryptocurrency networks does not allow reversing and cryptocurrency users face payment system-like
transactions, as this is a feature to avoid the risks such as credit risk, liquidity risk and legal risk, just
“double-spend” problem. In these instances, errors as they do now. Lastly, as with most systems relying
in transactions cannot be reversed and, unlike on encrypted technology, including many traditional
credit cards, customers have no right to reverse banking systems, cryptocurrencies are vulnerable
to cryptographic risks, the most obvious of which is by the central bank in that country or by the
probably the irrecoverable loss of a private key. local regulator overseeing payments. A more
detailed definition may be required to validate
Another important aspect to consider is the processes and identify the roles and functions
definitions of settlement finality and what of participants in the network, particularly
would legally constitute finality for the variety where those networks are unrestricted.
of cryptocurrency systems (i.e. how that state
is determined in a decentralized environment). Further work will be needed to define these
For example, payment systems in the European standards, particularly with respect to how
Union (EU) need to meet the standards set finality would apply to cryptographic assets
out in the Settlement Finality Directive (SFD),14 that rely on consensus mechanisms while
which guarantees that transfer of assets understanding that the finality of settlement
are irrevocable and final. There are similar is a design feature and not a flaw.
standards in most jurisdictions, normally set
2.2 Consumer protection
Consumer Consumer protection regulations are paramount identifiers, thereby compromising the identity
protections should to safeguard consumer interests and ensure of users and their privacy.
be directed at transparent and fair service levels. Regulators can
the prevention of identify which of their consumer protection laws The different ways in which customers may hold
for existing financial products and services are crypto-assets also give rise to different consumer
unfair, deceptive or
applicable to cryptocurrency products and services. concerns. Particularly, self-hosted wallets and allied
abusive practices,
For instance, the responsibilities of a custodian (e.g. services, such as decentralized finance (DeFi),15
and the reduction in VASP) of cryptocurrencies are no different from which are distinct from custody-based services,
harm to end users, its responsibilities for other financial instruments: require a different approach. With self-hosted
including the loss of safeguarding customer assets. wallets, there is no firm holding assets on behalf
assets, fraudulent of a client or “consumer”, and consumers are
behaviour and Consumer protections should be directed at the in full control of the asset class. Unlike custody-
cybersecurity risks. prevention of unfair, deceptive or abusive practices, based services, self-custody wallets are generated
and the reduction in harm to end users, including the by computer protocols and are available to the
loss of assets, fraudulent behaviour and cybersecurity public directly via the internet. It is incumbent on
risks. Broadly speaking, the types of concerns and individual users to understand the interface, security
risks to consumers of cryptocurrency products and mechanisms, private key management and storage,
services will typically be the same as for existing and the fact that there is no centralized firm involved
financial services. and there may be no structure to resort to in cases
where access to the wallet is lost, for instance.
Challenges and risks specific to cryptocurrencies and Regulators can make it a point to collect complaints
their nature include: and concerns from the public as well as to provide
information publicly about the benefits, best
1. The price volatility of cryptocurrency, which practices and risks of such technology as a matter
constitutes a significant risk to users, as well as of public education and resources. Educating the
merchants accepting cryptocurrencies as public may be a key aspect in helping address
a method of payment. many of the concerns of self-hosted environments.
However, consumer protection laws and
2. The absence of depositor protection. Users enforcement actions are unlikely to apply directly
can lose savings from many sources such as given the unique nature of self-hosted technologies.
cryptocurrency price drops, exchange fraud, A more detailed explanation of the key aspects of
lost private keys and more. these technologies is provided in the next section.
3. The lack of payment protections due to the In conclusion, regulations can help ensure
irreversibility of transactions. that adequate information is provided to
consumers of such financial products, both
4. Difficulty establishing accountability towards where firms custody assets on behalf of
users due to the decentralized management clients and with platforms that enable self-
of cryptocurrencies. custody. In countries where cryptocurrencies
are not regulated, the government’s ability to
5. Privacy risks stemming from the pseudonymous investigate cases of crypto-related financial
nature of cryptocurrencies. While pseudonymity crimes would be, in effect, limited due to the fact
hides personally identifiable information, the strings that the government does not legally recognize
of data representing holders’ public key addresses cryptocurrencies – the consequence of which
can, with significant effort, be linked back to might be the loss or theft of such assets.
2.3 Infrastructure-specific issues
This section will unpack concerns surrounding the

methods of custody and the importance of interoperability.
Custody and safekeeping of cryptocurrencies
Complex As mentioned above, the responsibilities of a assets. While this provides customers with the
issues such as custodian of cryptocurrencies are similar to its maximum ability to express their agency and
cybersecurity responsibilities for other financial instruments: to choice without intermediation, it also introduces
procedures, safeguard customer assets. However, cryptocurrency significant risk. For example, if a customer loses
operational is unique in requiring the safeguarding of a private their private key, they irreversibly lose access to
key; this is an additional responsibility that financial the crypto-assets secured by that private key. As
resilience, storage
services providers in other asset classes do not hold. such, most customers opt for custody providers,
solutions for
Ownership of a crypto-asset is reflected in a string of which act as a fiduciary for the customer and
underlying assets, numbers on a distributed ledger, which is accessible manage or recover a user’s keys if they are lost.
and sufficient by both a public key and a private key. The holder
redundancy of the private key maintains the agency to perform a Another important difference compared to
are central to transaction involving the crypto-asset. A custodian traditional custody models is the concept of hot
most regulatory must implement proper key management practices and cold wallets (custodial accounts). Hot wallets
approaches to in order to safeguard the customer’s ability to directly are connected to the internet, while cold wallets
cryptocurrency dispose of the crypto-asset. are kept in an offline environment. As hot wallets
custody regulation. are connected to the internet, it is faster and easier
Cryptocurrencies provide the opportunity for to trade or spend cryptocurrency – but they may
self-custody, where customers do not need to be more vulnerable to online attacks that could
use a custodian to hold or manage their crypto- increase the risk of stolen funds. Cold wallets are
typically not connected to the internet. sufficient redundancy are central to most regulatory
So, while these may be more secure, they are also approaches to cryptocurrency custody regulation.
less convenient as additional steps are needed to Regular verification and certification of compliance
transact. Custody providers should implement a typically evaluates the operational, security and
responsible mix of cold and hot wallet strategies to technology practices of custody providers. Other
ensure the best user experience and protection. considerations include whether custodians: (1)
provide custody insurance coverage; (2) have
Given the nascent level of development of the completed either System and Organization Controls
cryptocurrency industry, and especially the (SOC) 1 or SOC 2 audits;16 and (3) have processes
custodian arrangements therein, many regulators in place to identify and implement technology
are assessing which types of custodial solutions are upgrades when needed.
appropriate for the market. Complex issues such
as cybersecurity procedures, operational resilience, The concept of private keys is not new in financial
storage solutions for underlying assets, and services, but in the context of cryptocurrencies they
are synonymous with how custody and clearing infrastructure perspective, this could mean that a
services will be supported. For the purposes of cryptocurrency custodian does not hold a client’s
this paper, it is assumed that private keys are a private keys to the underlying assets but instead
technical feature to produce digital signatures. safekeeps a private key that operates the client’s
The keys themselves do not constitute the means account on their behalf.
of safekeeping nor are they essential to legally
demonstrating proof of ownership. Furthermore, as cryptocurrencies continue to
gain traction, the existing tools used for custody
As the crypto industry develops, it will be necessary today will require new technical solutions that
to delve into the difference between more traditional incorporate the necessary risk management and
custody models (e.g. the existence of bilateral controls to prevent the misappropriation of funds.
relationships between the account holder and The same can be said regarding aspects such as
intermediaries in the custody chain) and the new account structure and asset servicing and their
business models and services that are referenced differing functions in a DLT environment.
in the previous paragraphs. For example, from an
Mitigating the risks of self-custody
Regardless Self-hosted technologies raise several considerations self-hosted wallets. However, such approaches
of how new for companies operating cryptocurrency services. have been met with criticism by some who say that
technologies such In general terms, cryptocurrency holders using such data collection erodes existing thresholds
as distributed self-hosted technologies have the unilateral ability of privacy, is practically difficult to enforce and
ledgers and self- to access, manage and transfer their holdings establishes a stricter set of rules than those that
and therefore do not need to rely on any financial apply to cash transactions today.
hosted wallets
institution to act on their behalf.
are deployed,
Regardless of how new technologies such
the messaging Financial regulators have raised concerns about as distributed ledgers and self-hosted wallets
and reporting of the prospect of self-hosting due to the nascent are deployed, the messaging and reporting of
regulated services development of true non-intermediated transactions regulated services should adhere, wherever
should adhere, and their potential for money laundering (ML) and possible and practical, to existing standards.
wherever possible terrorism financing (TF).17 For example, the Financial In the current fragmented ecosystem, with
and practical, to Crimes Enforcement Network (FinCEN) made initiatives making use of different protocols and
existing standards. self-hosted wallets the focal point of its Notice differing technologies, a commonality of rules and
of Proposed Rulemaking released in December standards could significantly help with the adoption
2020.18 With the stated objective of closing gaps and use of cryptocurrency services. However, it
in regulatory obligations to better address the should not do so at the expense of innovation and
risks associated with virtual currency transactions the improper use of data as it relates to privacy.
involving unknown participants, the Proposed The public and private sectors should work
Rule requires that service providers collect KYC together to find solutions that could give rise to a
information when performing transactions involving successful approach.
The importance of technical and jurisdictional interoperability
In addition to the advantages already mentioned, and market gateways) will encourage interaction
standardized rules can also encourage a higher between participants that use these systems.
level of interoperability across the cryptocurrency
ecosystem and with legacy systems that will The interoperation of cryptocurrency ecosystems
improve competition, drive up levels of participation, with legacy systems also entails jurisdictional
and increase inclusion, market liquidity and overlap among multiple authorities. This overlap of
the development of new services and financial jurisdictions and authorities increases the regulatory
products. For example, industry standards and complexity, further underscoring the need for
protocols will help ensure smooth interactions domestic and international cooperation, not only in
between market participants and their service achieving technical interoperability but in attaining
providers. Similarly, recognized standards for jurisdictional interoperability in the treatment of
interfaces (e.g. application programming interfaces cryptocurrencies across systems and borders.
2.4 Key takeaways and guiding principles
A lack of clarity on both the definitions of It is likely that, over time, access methods
safekeeping (custody) and settlement finality will will change. Clients may choose to connect
have ramifications for market participants and their directly to systems via new applications, and
providers. A standardized approach with a shared the custody function itself will evolve. The role
understanding of equivalence and recognition of the financial institution in a DLT network will
between jurisdictions will be highly desirable need to ensure customer asset protection,
for the long-term adoption and development position management and record-keeping in
of the market. The messaging and reporting of the same way that they do for fiat currencies
regulated services should also adhere, wherever and the myriad financial products that are
possible, to existing standards. In the current based on them. It will also need to facilitate
fragmented ecosystem, commonality of rules and dispute mechanisms in relation to transactions,
industry standards could help significantly with the provide asset-protection insurance and deal
adoption and use of cryptocurrency services. with network outages, just as it does today.
3 Regulatory
opportunities
for inclusion
and innovation
While there are potential regulatory
risks that should be addressed when
considering cryptocurrencies, there
are also potential benefits, including
increased payment efficiencies, broader
financial inclusion, and innovation in
digital identification and programmability.19
This section elaborates upon them.
3.1 De-risking and its global implications
Over the past decade, despite the widespread Unfortunately, the process of de-risking
availability of mobile and other technologies to paradoxically generates new risks as more people
increase financial access, de-risking20 decisions are forced to use informal and other means to
have increased in the financial sector and have access basic financial services such as payments
consequently reduced the number of financial and savings. Globally, it is estimated that more than
services available to populations in the affected 1.7 billion adults are counted as “unbanked” and
jurisdictions, often smaller countries with lack access to even a basic savings account.23 More
younger financial markets. According to the than a billion people would not be able to satisfy
World Bank, cost and benefit considerations prevailing KYC requirements for opening a bank
and concerns about AML/CFT risk are one of account or accessing the formal economy because
the main drivers of de-risking. Bank de-risking of a global identity gap. In the same vein, de-risking
refers to the decision by financial institutions to could have widespread effects on access to crypto-
terminate or restrict business relationships with assets globally.
other financial institutions in another jurisdiction
to avoid, rather than manage, risk.21 At stake Though financial inclusion and exclusion are driven
are the potential risks of money laundering and by a wide range of factors that vary by jurisdiction, it’s
terrorist financing that stem from relatively weaker clear that certain regulatory requirements can create
AML/CFT controls as reported in particular new barriers to financial inclusion. Therefore, as
jurisdictions. This has especially affected remittance regulators design frameworks for cryptocurrencies,
companies and local banks in certain regions they should explore opportunities to limit de-risking
of the world, particularly emerging markets.22 and align compliance with inclusion.
3.2 Addressing financial inclusion and exclusion
The impact of regulation on those who are already having a more inclusive and innovative approach to
financially excluded should be an important KYC (e.g. “tiered-KYC”24) and proportionate AML/
consideration in the development of new policies CFT compliance requirements based on transaction
and rules on cryptocurrencies. The challenge facing sizes are at the root of the success for mobile
regulators is that many of the most widespread money platforms, such as M-Pesa in Kenya.25
financial rules, such as the Bank Secrecy Act, were
created before the current range of technologies The open-source software code that underpins
– such as public blockchains, digital currencies cryptocurrencies, self-hosted wallets and distributed
and ﬁnancial integrity capabilities – that exist ledger technologies creates new opportunities as
today. Regulators have an opportunity to carefully well as potential barriers for financial inclusion.
decide how to approach the risks, novelties and Although it is too early to know if cryptocurrencies
advantages of new financial technologies such can meaningfully address financial inclusion in a
as cryptocurrencies and avoid reinforcing the manner that is unique or superior to pre-existing
precedent of systematically excluding vulnerable solutions or centralized technology infrastructure,
populations that are “unbanked” in the first place. some examples of the unique potential of
As an example, in East Africa, it was found that cryptocurrencies for financial access include:
Self-hosted wallets
These have the potential to provide a pathway to financial inclusion,
reducing reliance on informal cash transfer networks and providing much
greater transparency on value flows into and around high-risk environments
in which untraceable cash-based transactions are widespread.
Public blockchain-based payments

Cryptocurrencies and related tokens can be used by public institutions and
international organizations for aid, relief and remittance corridors. They can be
targeted to specific geographies and jurisdictions as well as to white-labelled
addresses to help ensure taxpayer and donor proceeds do not inadvertently
contribute to unintended consequences such as corruption, bribery and fraud,
especially in complex environments.
Universal access to financial services

While global transaction fees average 6.38% for remittances,26
the UN Sustainable Development Goals (SDGs) call for universal
access to ﬁnancial services, and lowering of the average cost of
sending remittances to less than 3% by 2030.27 In some cases where
remittance corridors remain very expensive and innovative fintech
solutions have not entered, cryptocurrency (including stablecoins28)
could offer a means of rapid and lower-cost remittances.
Cryptocurrency-based P2P payments

Although mobile money networks offer P2P payments by drawing on
the expansive user base and assets of telecom networks to issue mobile
minutes that are redeemable for actual cash, cryptocurrency-based P2P
payments do not require a business or firm as an intermediary. Especially
in contexts with limited or no financial institution presence, self-custody
wallets and internet-native financial contracts such as those provided by
DeFi can allow for the transaction of value without banking institutions.
There are also critical risks associated with – As cryptocurrencies are not held at regulated
cryptocurrencies for the financially underserved. financial institutions and are not subject to
As with any technology, there are trade-offs and depositor insurance protection, funds held in
limitations. The major risks are as follows: these assets are at greater risk of loss.
– Users, especially those with low levels of – The pseudonymity of cryptocurrencies

financial and technological literacy, may creates privacy risks for consumers due
not fully understand the risks associated to the visibility of transactions on a public
with cryptocurrency and may consequently ledger and the potential of linking this
be exposed to adverse circumstances. information to a personal identifier.
Cryptocurrencies and their derivative
technologies take a variety of forms and need – Cryptocurrency-based transactions require
to be defined appropriately to help users and digital device ownership. While mobile
communities understand them properly. phone penetration is growing,29 there is still a
substantial device accessibility gap particularly
– Self-hosted wallets, which carry the risk of among low-income populations and women.
forgotten or stolen private keys, put consumers
at high risk of losing their funds. Technical – Additionally, the extent to which cryptocurrency-
failures could also lead to lost funds. based P2P payments meaningfully supports
financial inclusion in a manner that does not mitigating risks. As regulators design frameworks
increase the risk of illicit activity or harm to the for cryptocurrencies, there are opportunities
financially vulnerable is yet to be determined. to align compliance with inclusion by using the
technological advantages of cryptocurrency
By understanding the nuances of cryptocurrencies networks and learning from past mistakes in
and their infrastructure, regulators can decide order to achieve a more balanced approach,
how to balance the risks and benefits in a more particularly in high-risk jurisdictions.
concrete way as well as develop approaches to
3.3 Digital identity
The ability of cryptocurrencies to move and store For regulators applying FATF’s risk-based approach
value quickly without intermediation may also to digital identity systems, there are two issues to
create risks to financial integrity, including money address: (1) understanding the assurance levels of
laundering and terrorism financing. Some regulators the digital identity system’s main components to
have demonstrated that new digital identity determine if it is a reliable, independent source of
technologies30 can enable effective, risk-based AML/ information; and (2) making a broader, risk-based
CFT regimes. Several countries have integrated determination of whether, given its assurance levels,
national digital identity programmes with tiered KYC the digital identity system provides an appropriate
and/or other electronic know your customer (eKYC) level of reliability and independence in regards to
regulations to enable compliant, remote customer the potential ML, TF, fraud and other illicit financing
onboarding consistent with certain global guidelines risks at stake. Digital identity solutions can be
such as the FATF recommendations.31 These evaluated on the basis of whether they appropriately
include Bangladesh (Porichoy and two-tiered eKYC), address both of the FATF issues in order to support
India (UIDAI and eKYC), Nigeria (BVN and three- compliant remote authentication and onboarding
tiered eKYC), Singapore (NDI and eKYC), Ukraine for the enablement of cryptocurrency services. An
(Diia), United Arab Emirates (UAE PASS) and Sierra additional consideration is whether they allow access
Leone (NDIP and eKYC).32 rights to inherit these assets in the event of death.
Regulators should seek to balance the material financial integrity through adequate regulatory
risks of cryptocurrencies (which in some cases coverage, but to increase financial access through
are not significantly different from conventional careful regulation. Of particular focus should be the
financial services) with the potential benefits and issues of de-risking, financial inclusion and digital
regulatory opportunities. There is an opportunity identity in providing a new means of addressing the
not only to eliminate critical risks to end users and policy goals of payment integrity and inclusion.
4 Global regulatory
approaches
Regulators all over the world are grappling
with the best way to regulate the growing
cryptocurrency industry. This section explores
the different approaches of individual
jurisdictions and the guidance from international
bodies. For ease of reference, it will also
present in a visual and objective manner which
countries and regions are taking a more or
less progressive approach to the subject.
4.1 Categories of regulatory approaches
Regulators could take different approaches to risk-proportionate approach to blockchain,

the design of a regulatory framework. Certain and has launched a regulatory sandbox where
approaches may potentially be combined and/or fintechs, banks and regulators work together. In
vary over time depending on the objectives of the addition, the MAS has developed a payments
regulators in that specific market. We have outlined service framework to ensure AML compliance
four general approaches. for companies involved in the dealing or
exchange of virtual currencies.34 The European
1. “Wait and see” approach: A “wait and Central Bank formed a task force on distributed
see” regulatory approach implies not issuing ledgers and launched a joint research project
specific regulation on the nascent industry in with the Bank of Japan; and the European
order to allow for its development. It usually Commission launched the EU Blockchain
combines existing laws and regulations with Observatory Forum to gather information
close monitoring, which leads to the timely from EU members on use cases, and engage
development of a regulatory framework that experts and practitioners before formulating
addresses potential attendant risks. It ultimately concrete policies.35
seeks to avoid affecting innovation before it
has even taken off, but remains attentive and 3. Comprehensive regulatory approach: The
ready to act if and when required to preserve comprehensive regulatory approach involves
stability, among other needed variables. A good designing and implementing a specific regulation
example is Brazil, where, despite the non- that would govern activities conducted by the
existence of crypto-specific laws or regulations regulated entities. This could typically comprise
issued by the financial authority, cryptocurrency licensing requirements, such as reporting and
entities can operate based on pre-existing laws AML/CFT obligations, in order to provide financial
and regulations applicable to the financial sector. services and foreign exchange restrictions for
cross-border transfers, among others. Examples
2. Public-private partnership approach include Switzerland, Japan and New York, USA.
(balanced/risk-proportionate approach): At the level of the EU, the Markets in Crypto-
The public-private partnership or balanced/risk- Assets (MiCA) Regulation will provide Europe-
proportionate approach entails a collaborative wide regulations for crypto-assets.36
engagement between policy-makers, regulators
and the private sector in order to work together 4. Restrictive approach: The restrictive
through task forces and/or innovation hubs approach implies imposing more broad
on the design and implementation of laws and restrictive measures that affect the market
regulations that aim to develop an inclusive generally. This may be based on a more
and innovative financial system. Under this conservative or precautionary view and/or
approach, regulators tend to develop a may derive from a specific market experience
better understanding of the innovators and or event. Countries that have proposed
adapt quickly to the fast-paced nature of bans due to concerns about fraud and AML/
the environment, while businesses tend to CFT risks include Turkey, India and Nigeria,
adjust more quickly to regulators’ concerns among others. Such determinations are within
to protect the reputational integrity and value the purview of the respective nation states.
of the ecosystem. For example, Singapore However, adopting definitive legislation at an
and the European Union have opted for a early stage and in a broader manner may be
balanced approach.33 The Monetary Authority premature and affect innovation which could
of Singapore (MAS) is taking a collaborative, be of the interest of the nation states.37
4.2 Legal status of cryptocurrencies around the world
FIGURE 1 Legal status of cryptocurrencies38
Permissive laws and regulations Partial and/or imminent ban or mostly controversial status
Prohibitive laws and regulations Uncategorized due to insufficient information
This map visually represents the approach taken by approach. Orange relates to countries that have
most countries to the regulation of cryptocurrencies been adopting partial and/or imminent bans or
as of September 2021. those whose situations are more controversial.
Green indicates countries that have more permissive For a more in-depth look at how these
laws and regulations. This would encompass the approaches might apply at the country level,
first three approaches described in the topic above: we have compared the approaches taken by
i.e. the “wait and see” approach, public-private 11 distinct countries across South America, the
partnership approach and comprehensive regulatory Caribbean, Europe, Asia, the Middle East and
approach. Red covers the countries opting for more Africa. It is hoped this will provide context on how
prohibitive laws and regulations, as described in the jurisdictions might evaluate the elements they
last approach mentioned above: i.e. the restrictive need to consider in regulating cryptocurrencies.
TA B L E 1 Country-level comparison of regulatory approaches to cryptocurrency
Recognition
and definition of Adoption of FATF Country-level
crypto-assets Travel Rule Taxation impact
United Kingdom The Financial Conduct The FCA requires Her Majesty’s Revenue The UK’s regulations
Authority (FCA) policy custodian wallets and and Customs (HMRC) relying on early-
statement PS19/22 crypto exchanges to set forth guidance in stage consultations
(2019) provides register according 2018 that a capital have resulted in less
guidance on crypto- to the 5th EU AML gains tax may apply regulatory uncertainty
assets and the Directive published to the sale, exchange, and a more conducive
applicable regulatory in 2018. use (for payment), policy environment
regime for each transfer and donation for cryptocurrency.
type. Rule PS20/10 of crypto-assets.
(2020) prohibits the
sale of investment
products that reference
cryptocurrencies to
retail clients.
Singapore The Monetary Authority The PSA (2019), The Inland Revenue Singapore’s
of Singapore (MAS) through Notice PSN02 Authority of Singapore’s supportive approach
passed the Payment requires crypto- (IRAS) guidance on the to cryptocurrency,
Services Act (2019), currency service tax treatment of crypto- as illustrated by the
which licenses and providers to adhere to assets establishes that MAS helping crypto
regulates payment AML/CFT compliance individuals/businesses businesses set up in
service providers. measures per FATF who hold DPT as a Singapore, has enabled
It regulates guidance. long-term investment Singapore to grow into
cryptocurrency-based face no capital a burgeoning crypto-
payments and payment gains tax. However, economy, with 43% of
service providers businesses that buy Singaporeans owning
as “digital payment and sell DPT are cryptocurrency.
tokens” (DPT) and required to pay taxes
“digital payment on their profit.
token services”.
Switzerland The Swiss Parliament The AML Act (2020) The Swiss Federal Tax Early guidelines
passed the Federal requires blockchain Administration (FTA) and acts for
Act on Adaptation businesses to verify has set out guidance cryptocurrencies
of Federal Law to customer ID and on the tax treatment of reduced the legal
Developments in report it to the Money cryptocurrencies, which uncertainty such
the Technology of Laundering Reporting establishes that private that cryptocurrency
Distributed Electronic Office, abiding by the wealth generated businesses have been
Registers (2020), which FATF guidance. from cryptocurrencies able to emerge.
sets forth an expanded does not incur taxes.
framework for However, income
regulating blockchain earned from mining and
and DLT based on the trading are subject to
token taxonomy in the taxation. As of February
ICO guidelines (2018). 2021, the canton
of Zug is accepting
tax payments in
cryptocurrency.
Recognition
Japan The Payment Services The Payment In 2017, the National Japan’s move to
Act (Act 59/2009) and Services Act requires Tax Agency ruled establish a regulatory
its Amendment (Act compliance with global that profit earned framework for
50/2020) characterizes AML/CFT such as through the sale or cryptocurrencies
cryptocurrencies as those recommended use of cryptocurrency much earlier than
crypto-assets. The by FATF. is considered most countries has
act, enforced by the miscellaneous led to the proliferation
Financial Services Additionally, the Act income. Additionally, of regulated crypto
Agency (FSA), on Prevention of inheritance tax will exchanges and
regulates crypto- Transfer of Criminal be imposed on the custody services
asset exchanges and Proceeds (2018) was estate of a deceased in the country.
custody services. amended to require individual who held
crypto businesses to crypto-assets.
verify customer IDs
and report suspicious
transactions to
the authorities.
United Arab In 2018, the Abu Dhabi The Financial Services There is no regulation Regulatory certainty
Emirates Global Market (ADGM) Regulatory Authority or guidance on from the financial free
released the first set of (FSRA) Guidance the taxation of zones and the federal
regulations in the UAE (2018) and SCA cryptocurrencies regulator has resulted
for cryptocurrencies. Decision (2020) in the UAE. in an increasing number
In 2020, the Central prescribe the AML/ of crypto businesses
Bank of the United CFT requirements for setting up in the UAE.
Arab Emirates (CBUAE) abiding by the FATF
and the Securities and guidance, and the
Commodities Authority necessary controls and
(SCA) released crypto scope of AML/CTF,
regulations through respectively.
guidance and decision.
Bermuda The Companies The Bermuda Monetary Digital assets do not Bermuda’s open
(Initial Coin Offering) Authority put forth incur income capital regulatory framework
Regulation (2018) and AML/anti-terrorist gains, withholding or has lowered the
Amendment, followed financing (ATF) other taxes. Digital barriers to entry
by the Digital Asset guidance in Sector- asset transactions are for crypto-asset
Issuance Act (2020) Specific Guidance generally exempt from businesses. As such,
provide the framework Notes for Digital the foreign currency Bermuda has emerged
of digital asset Assets, to be followed purchase tax of 1%. as a regional fintech
issuance. The Digital in conjunction with the hub. At present,
Assets Business Act main Guidance Notes nine leading fintechs
(2018) regulates their for AML/ATF applicable have registered in
businesses. to regulated financial the country to take
institutions. advantage of the
favourable rules on
crypto-assets.
Recognition
Brazil No specific regulations The current set The tax authorities Despite the absence
have been issued for of AML/CFT laws have issued specific of crypto regulation,
cryptocurrencies, but and regulations, instructions for cryptocurrency
the existing regulations especially Brazil stating ownership of innovations have
for the financial sector Ordinary Law No. cryptocurrencies such emerged in Brazil.
provide a framework 9613/98, are being as information on bitcoin However, the existence
for cryptocurrency applied extensively holdings and capital of specific crypto
businesses. and comprehensively, gains in the case of sale regulations would create
and apply to of bitcoin, as well as the necessary legal
businesses dealing transactions above a security for the growth
with cryptocurrencies. certain amount. General of crypto businesses.
capital gains rules
apply to cryptocurrency
transactions.
The Civil Code Since China has Income earned from Despite its legal
China (2020) recognizes prohibited virtual asset the purchase and sale recognition of
cryptocurrency as activities, many AML/ of “virtual currencies” cryptocurrencies, they
inheritable property. KYC requirements is considered taxable are greatly restricted.
However, China has remain inapplicable, income for individual China is placing more
banned cryptocurrency as specified in FATF’s income tax computed emphasis on central
exchanges and mining 2020 Report. under “property bank digital currency,
operations. transfer income”. namely the digital
yuan, which is currently
in development.
Therefore, the place
of privately issued
cryptocurrencies in
China is uncertain.
India In 2018, the Reserve There is no regulation No regulation or The absence of crypto
Bank of India (RBI) implementing the guidance has been regulation and the
prohibited entities from FATF’s Travel Rule issued for the taxation ensuing regulatory
dealing with crypto- for cryptocurrency of cryptocurrencies. uncertainty is a hurdle
related businesses. This service providers. for innovation in the
order was struck down industry. However, in
by the Supreme Court May 2021, it was
of India in March 2020. reported that the
government may form
a committee to regulate
cryptocurrencies.
Nigeria The Central Bank Although crypto Nigeria describes Nigeria’s approach
of Nigeria (CBN) exchanges are cryptocurrency as an to the regulation of
and Securities and unregulated, CBN intangible asset other cryptocurrencies has
Exchange Commission (2017) requires banks than goodwill, and created uncertainty for
(SEC Nigeria) have to ensure their clients does not levy any taxes developers and SMEs
not yet regulated follow appropriate on cryptocurrencies. within Nigeria, along
cryptocurrencies, but KYC/AML procedures. with those attempting
have recommended to do business within
since 2017 that financial the market. The recent
institutions do not deal focus on collaboration
in crypto, nor hold the has created some
accounts for crypto optimism that useful
exchanges. However, engagement can create
the SEC and CBN have regulatory certainty.
agreed to “collaborate
and conduct research
with a view to finding
ways of regulating
the cryptocurrency
market”.39
South Korea The Government The Act on Reporting The Ministry of South Korea’s
of South Korea and Using Specific Strategy and Finance cautious position on
has maintained its Financial Transaction announced that they cryptocurrencies and
stance of warning Information (2021) would impose a the related businesses
about the speculative requires VASPs to 20% tax on income has restricted
nature of investment interoperate their earned from renting crypto innovation.
in digital assets customers with real- and transferring
since its Emergency name bank accounts digital assets from
Meeting on Digital and report doubtful January 2022.
Currencies (2018). transactions.
Risks of over-regulation and under-regulation
The above map and table reveal the range of It should also be noted that, in view of the digital
approaches countries are taking and could take and global reach of cryptocurrencies, both scenarios
to the regulation of cryptocurrencies. Indeed, – over-regulation and under-regulation – may also
cryptocurrencies present new and quite complex imply regulatory arbitrage. As different jurisdictions
governance challenges. They are also challenging develop regulatory approaches to the cryptocurrency
considering their speculative nature and potential industry at different paces, innovators may gravitate
impact on financial stability and macroeconomic to jurisdictions with more favourable, transparent
growth. These differing regulatory approaches, and reliable regulatory regimes.
which vary from total risk-aversion to governmental
endorsement, present different obstacles and Therefore, the regulatory model for cryptocurrencies
consequences for consumers, industry and should be proportionate and risk-based. This
innovation, as well as government. includes clarity of regulatory expectations for the
industry and the potential impact on competition,
Both over-regulation and/or under-regulation should innovation and financial inclusion.
be avoided. Over-regulation, such as early-stage
costs for licensing requirements, tax burdens or The approach should also consider and reflect
very strict foreign exchange controls, may suffocate international discussions and collaboration through
innovation efforts. Conversely, there are also risks to standard-setting bodies to support harmonization
taking an under-regulation approach. For instance, of treatment as far as is feasible, as exemplified by
failing to address ML, TF, fraud and ransomware the United Kingdom’s consultation with industry
risks could lead to significant losses to consumers and stakeholders on a regulatory approach for
(as covered in the consumer protection section), crypto-assets and stablecoins.40
businesses and investors, in addition to potential
financial stability risks.
4.3 Guidance from international bodies
In addition to country-level approaches, the focusing on the issue of taxation of cryptocurrencies.

positions taken by international bodies on The report served as a cross-country comparison
cryptocurrencies are critical and have significant of the tax treatment of cryptocurrencies across
ramifications for country-level adoption and the main tax types, i.e. income, consumption and
regulations, as well as global regulatory and property taxes. It highlighted challenges such as the
operational interoperability. As standard-setting nature of cryptocurrencies (decentralized protocols),
bodies, they have an important role to play in valuation difficulties and hybrid characteristics in
building an enabling environment for the effective taxing cryptocurrencies. It also considered the
use of cryptocurrencies and setting the foundation challenges posed by emerging issues such as
for consistency across jurisdictions in the treatment forking, stablecoins, central bank digital currencies
of cryptocurrencies. (CBDCs), the evolution of consensus mechanisms
and DeFi, among others. Advocating the need for
International bodies recognize the opportunities clear guidance by countries on the tax treatment
and challenges that the cryptocurrency architecture of cryptocurrencies and other crypto-assets, the
presents to the global economy. For the purposes OECD also emphasized the need to review/adapt
of this paper, five global organizations/institutions such guidance frequently. With the aim of ensuring
have been identified that have been instrumental tax transparency, it is also working on designing
in shaping the dialogue on the regulation of a tax-reporting framework for cryptocurrencies
cryptocurrencies from different perspectives. and the income derived from their sale.
The Financial Action Task Force (FATF) has examined The International Organization of Securities
and provided recommendations for a risk-based Commission (IOSOC) is focused on protecting
approach to regulating cryptocurrencies aimed at investors, ensuring that markets are fair,
preventing money laundering and terrorism financing transparent and efficient, and reducing systemic
activities using cryptocurrencies. To this end, it has risk. While recognizing that cryptocurrencies may
extended its Travel Rule obliging cryptocurrency facilitate capital formation and financial inclusion,
service providers to obtain, hold and exchange it has warned against the risks arising from using/
information about beneficiaries and originators investing in cryptocurrencies. It has, therefore,
of cryptocurrency transfers. It also monitors the focused on promoting education among retail
implementation of these rules by way of a 12-month investors in this regard.44
review. This has led to increased focus on AML/
CFT risks associated with cryptocurrencies and the In sum, international institutions have been
development of technological solutions addressing working on analysing various risks relating to
these issues. Uneven implementation of the cryptocurrencies. The major risks that these
recommendations has also resulted in issues relating guidelines seek to address pertain to money
to jurisdictional arbitrage.41 laundering, terrorism financing, risks to retail
investors, risks to the stability of the banking/
The Financial Stability Board (FSB) has analysed financial system and taxation of cryptocurrencies.
cryptocurrencies from the lens of financial In order to minimize these risks, international
stability. In a 2019 report, the FSB reported that bodies recommend the following:
cryptocurrencies do not pose a risk to financial
stability, with a caveat that the topic of regulatory 1. Need for regulatory certainty: Clarity in the
approaches and potential gaps and the question regulatory status of cryptocurrencies will allow
of increased global coordination be kept under the ecosystem to grow and promote innovation,
review. It, therefore, highlighted the need for vigilant thus harnessing the benefits of cryptocurrencies
monitoring systems, taking into consideration the while mitigating the risks arising from them.
rapid development of new products and services.42
2. Developing a coordinated approach: Given the
The Basel Committee on Banking Supervision cross-border nature of the crypto ecosystem,
(BCBS) is working on developing policy countries should coordinate and collaborate
frameworks pertaining to risks and rewards due with each other and with international
to the increased exposure of banking systems to standard-setting bodies to avoid issues of
cryptocurrencies. For this purpose, it has released jurisdictional arbitrage.
a public consultation. Categorizing cryptocurrencies
such as bitcoin as Group 2 crypto-assets, which 3. Taking a risk-based approach: The crypto
are being considered as higher-risk assets due to ecosystem should be regulated commensurate
their volatility and opacity, has led to a conservative, to the risks posed. This involves countries
prudential treatment of such cryptocurrencies.43 assessing the various risks posed by
cryptocurrencies and proactively focusing on
The Organisation for Economic Co-operation and mitigating them.
Development (OECD) released a report in 2020
4. Evolving agile frameworks: Keeping in line with stablecoins/CBDCs, international bodies have
the rapid pace of development in this space, been working towards analysing risks relating
countries should follow agile frameworks, such to those spheres as well.
that they can be monitored and reviewed on
an ongoing basis. As an example, while in the These international recommendations highlight the
initial years the focus of international guidelines need to evolve regulatory certainty, domestically
were the intermediaries that had emerged in the and globally, through a coordinated approach,
crypto space (exchanges, custodians, brokers with the aim of promoting uniformity and clarity
etc.), today, with developments in decentralized while minimizing the potential risks arising from
protocols, new consensus mechanisms and cryptocurrencies.
The main takeaways revealed by the approaches Within the context explored and weighing the risks
being taken by different jurisdictions on the and opportunities therein, we are confident that the
treatment of cryptocurrencies and the guidance observance of the following guiding principles shall
coming from international bodies are as follows: be of interest to regulators:
1. Regulation of cryptocurrencies is an 1. Banning is not necessarily efficient: Considering

evolving and global challenge, which is the decentralized governance model of
primarily being dealt with on a country most cryptocurrencies, and the particular
level but is also of importance to circumstances surrounding their existence and
international bodies and regulators. transfer, a legal ban will not necessarily imply
the end of the activities surrounding them.
2. Although certain countries are taking a
more reactive approach, others are making 2. Promoting an environment of legal certainty is
more efforts to create a better regulatory a positive sign: The enablement of frequent
environment for the development of communication between regulators, the
cryptocurrency businesses, while also markets and the consumers, alongside the
establishing frameworks to limit malicious creation of more precise and clear rules,
activities and financial stability risks. promotes an environment of legal certainty,
which is commonly understood as a positive
3. Over-regulation or under-regulation can lead to sign for investors and businesses.
regulatory arbitrage as players seek to establish
businesses in more advantageous jurisdictions. 3. Regulating while allowing for innovation is best:
It should be noted, however, that this does not Efforts should be made to allow innovation.
mean entities are necessarily looking for more However, regulators should find an appropriate
deregulated jurisdictions. Actually, large venture balance between encouraging innovation
capitalists (VCs) and institutional players are and mitigating its risks. This requires an
usually looking for jurisdictions that will allow enabling yet robust regulatory environment
more clarity and security for the development of that minimizes any potentially negative
their businesses. As such, a balanced approach macroeconomic impacts.
to regulation is necessary across jurisdictions.
Conclusion
This report provides industry perspective to The unique characteristics of cryptocurrencies that
regulators on the development of prudent drive their adoption also make them difficult and, in
regulation for cryptocurrencies. Regulators should some cases, impractical to regulate. Specifically,
draw on this report’s analysis and expert insights the decentralized nature of cryptocurrencies
across several themes related to cryptocurrency allows them to be transacted at a peer-to-peer level,
regulation, including: across-borders, without intermediaries. In addition,
holders of cryptocurrency are often pseudonymous,
1. The characteristics of cryptocurrencies and the unless they have gone through a KYC process with
underlying blockchain technology a regulated exchange or financial institution product,
for example. Existing financial regulations for a fiat-
2. Cryptocurrencies’ incongruence with traditional based economy are inadequate to monitor and guide
financial regulation and associated risks to the cryptocurrency activity in the financial system; they
financial system are also insufficient to protect the financial system
from key risks, such as fraud, money laundering and
3. Key challenges and considerations for the irreversibility of erroneous transactions.
regulating cryptocurrency activity
It is integral that regulators develop tailored
4. Current best practices for regulation regulatory frameworks that create an environment
and examples from forward-looking conducive to the adoption of cryptocurrencies
regulatory regimes and development of crypto-based commerce,
alongside mechanisms to protect the integrity,
Cryptocurrencies will continue to gain traction in security and stability of the financial system and
the global economy across retail and institutional its actors. Prudent regulation requires an in-depth
use cases, as individuals, businesses and banks understanding of the blockchain technology that
adopt cryptocurrencies for investment, payment underpins cryptocurrencies, and its power to
and an array of other utilities. They touch every revolutionize the global financial system. Cross-
aspect of financial activity and regulation, jurisdictional cooperation and government-industry
including market conduct, taxation rules and collaboration are essential to a pragmatic global
consumer protection. regulatory environment for cryptocurrencies.
Contributors
The Global Future Council on Cryptocurrencies speak to regulators in countries that are in the
would like to extend its sincere thanks to the preliminary stages of understanding and decision-
regulators, policy-makers and central bankers who making, as well as those much more advanced in
contributed their insights and perspectives to this the process. Written from an industry perspective
guidance document. The feedback received from with objective feedback from decision-makers,
these authorities spanning multiple continents it serves as a practical resource for formulating
was instrumental to developing a guide that could regulatory approaches to cryptocurrency.
Subject leads
Gabriel Abed Denelle Dixon

Ambassador of Barbados to the United Arab Chief Executive Officer, Stellar Development
Emirates and Chairman, Abed Group, Barbados Foundation, USA
Alpen Sheth Rosine Kadamani

Senior Technologist, Financial Innovation, Mercy Regulatory LATAM, Stripe, Brazil
Corps Ventures, USA
Co-authors
Vansa Chatikavanij Yusuf Hussain

Director, Digital Assets Asia, Thailand Head of Risk, Gemini, USA
Matthew Davie Paul Maley

Chief Strategy Officer, Kiva, USA Managing Director, Global Head of Securities
Services, Deutsche Bank, United Kingdom
Jose Fernandez da Ponte
Vice-President, General Manager Blockchain, Sebastian Serrano
Crypto and Digital Currencies, PayPal, USA Chief Executive Officer, Ripio, Argentina
Brad Garlinghouse
Chief Executive Officer, Ripple, USA
Council manager
Clarisse Awamengwi
Project Specialist, Blockchain and Digital Assets,
World Economic Forum
Reviewers
Marwan Al Zarouni Kibae Kim

Chief Executive Officer, Dubai Blockchain Center, Project Fellow, Centre for the Fourth Industrial
United Arab Emirates Revolution, World Economic Forum
Arushi Goel Ashley Lannquist

Project Specialist, Data Policy and Blockchain, Project Lead, Blockchain and Digital Currency,
World Economic Forum World Economic Forum
Mariana Gomez de la Villa Sheila Warren

Program Director, Distributed Ledger Technology, Deputy Head, Centre for the Fourth Industrial
ING, Netherlands Revolution Network, World Economic Forum
Nadia Hewett
Project Lead, Data for Common Purpose Initiative,
Endnotes
1. As yet, there is no unique or official definition of cryptocurrencies, though international bodies are making significant
efforts in reaching a common view of the concept. You may consult these resources for a more in-depth explanation
of cryptocurrencies: Houben, Robby and Snyers, Alexander, Cryptocurrencies and Blockchain: Legal Context and
Implications for Financial Crime, Money Laundering and Tax Evasion, European Parliament, 2018; World Economic
Forum, Cryptocurrencies: A Guide to Getting Started, 2021 (links as of 4/8/21).
2. Double-spending is a situation in which the same token can be spent more than once. Fundamental cryptography offers
tools to prevent double-spending while maintaining transaction anonymity.
3. More information about the architecture of Bitcoin and Ethereum, and on the relevance and potential of these projects,
can be explored in the educational content made available by specialist and educator Andreas Antonopolous through his
books and videos. A general framework on Bitcoin is also provided in Kadamani, Rosine, Panorama Bitcoin, Blockchain
Academy, 2021.
4. Identity documentation may still be required to fight against illicit activity. However, it is not required for the technical
transfer of cryptocurrency.
5. Please note that these are liable to change as networks change their mining and governance mechanisms.
6. “Crypto-assets” and “cryptocurrencies” are used interchangeably in this report.
7. Frankenfield, Jake, Mt. Gox, Investopedia, 26 March 2021 (link as of 4/8/21).
8. Consumer Protection Data Spotlight, Federal Trade Commission, May 2021 (link as of 4/8/21).
9. The 2021 Crypto Crime Report, Chainalysis, 2021 (link as of 4/8/21).
10. EBA Opinion on Virtual Currencies, European Banking Authority, 11 August 2014 (link as of 4/8/21).
11. As an example, see Chainalysis KYT, Chainalysis (link as of 4/8/21).
12. He, Dong et al., Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Notes, SDN/16/03,
January 2016 (link as of 4/8/21).
13. See van der Hoeven, Tyler, Using Protocol 17’s Asset Clawback, Stellar, and Assets, Algorand (links as of 4/8/21).
14. The Use of DLT in Post-Trade Processes: Advisory Groups on Market Infrastructures for Securities and Collateral and for
Payments, European Central Bank, April 2021 (link as of 4/8/21).
15. For more on decentralized finance and its opportunities and risks that should drive policy-making, see the Decentralized
Finance (DeFi) Policy-Maker Toolkit, World Economic Forum, June 2021 (link as of 4/8/21).
16. SOC for Service Organizations: Information for Service Organizations, AICPA (link as of 4/8/21).
17. 12-Month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers,
Financial Action Task Force (FATF), June 2020 (link as of 4/8/21).
18. Proposed Rule: Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets,
Financial Crimes Enforcement Network (FinCEN), 23 December 2020 (link as of 4/8/21).
19. Lee, Alexander, What Is Programmable Money?, Board of Governors of the Federal Reserve, 23 June 2021
(link as of 4/8/21).
20. Ibid.
21. De.risking, Council of Europe (link as of 4/8/21).
22. De-risking in the Financial Sector, World Bank, 7 October 2016 (link as of 4/8/21).
23. The Global Findex Database 2017, World Bank (link as of 4/8/21).
24. KYC Innovations, Financial Inclusion and Integrity in Selected AFI Member Countries, Alliance for Financial Inclusion,
March 2019 (link as of 4/8/21).
25. Overcoming the Know Your Customer Hurdle: Innovative Solutions for the Mobile Money Sector, GSMA, 2019 (link as of
4/8/21).
26. Remittance Prices Worldwide Quarterly, World Bank, March 2021 (link as of 4/8/21).
27. #Envision2030 Goal 10: Reduce Inequalities, United Nations (link as of 4/8/21).
28. For more on stablecoins, see Arner, Douglas et al., Stablecoins: Risks, Potential and Regulation, BIS Working Papers,
No 905, Bank for International Settlements, November 2020 (link as of 4/8/21).
29. The Mobile Economy 2020, GSMA, 2020 (link as of 4/8/21).
30. Examples include Kiva Protocol and X-Road (links as of 4/8/21).
31. Digital Identity, FATF, March 2020. In 2020, FATF issued specific guidance on the use of digital identity and related
verification methods noting, specifically, that remote identification “may even be lower risk [for ML/TF purposes]” than
in-person verification. This guidance applies to all regulated financial institutions, including virtual asset service providers
32. See Kiva Protocol, X-Road, UAE PASS, Diia (links as of 4/8/21).
33. International Finance Corporation, Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging
Market, EMcompass, Note 57, September 2018 (link as of 4/8/21).
34. A Guide to Digital Token Offerings, Monetary Authority of Singapore (MAS), May 2020 (link as of 4/8/21).
35. Ibid; EU Blockchain Observatory and Forum (link as of 4/8/21).
36. Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and Amending
Directive (EU) 2019/1937, European Commission, 24 September 2020 (link as of 4/8/21).
37. Ibid.
38. The classifications are based on assessments of available information. Where information was insufficient to make a
determination, countries have been marked as “uncategorized due to insufficient information”. The map is designed for
simplicity and objectivity, but more complexity may apply in certain cases. Therefore, despite the categorizations given
herein, the treatment of cryptocurrencies across jurisdictions remains highly nuanced. You may provide feedback on this
regulatory heat map by emailing blockchain@weforum.org.
39. Announced at a virtual lecture attended by a Council member.
40. UK Regulatory Approach to Crypto-Assets and Stablecoins: Consultation and Call for Evidence, HM Treasury, 7 January
2021 (link as of 4/8/21).
41. Second 12-Month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers, FAFT,
July 2021 (link as of 4/8/21).
42. Crypto-Assets: Work Underway, Regulatory Approaches and Potential Gaps, Financial Stability Board, 31 May 2019
43. BIS, Prudential Treatment of Crypto-Assets Exposures, Consultative Document, Basel Committee on Banking
Supervision, June 2021 (link as of 4/8/21).
44. IOSCO, Investor Education on Crypto-Assets, The Board of the International Organization of Securities Commission,
December 2020 (link as of 4/8/21).
The World Economic Forum,
committed to improving
the state of the world, is the
International Organization for
Public-Private Cooperation.
The Forum engages the

foremost political, business
and other leaders of society
to shape global, regional
and industry agendas.

91–93 route de la Capite
CH-1223 Cologny/Geneva
Switzerland
Tel.: +41 (0) 22 869 1212
Fax: +41 (0) 22 786 2744
contact@weforum.org
www.weforum.org

WEF Navigating Cryptocurrency Regulation 2021

Uploaded by

Copyright:

Available Formats

WEF Navigating Cryptocurrency Regulation 2021

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

WEF Navigating Cryptocurrency Regulation 2021

Uploaded by

Copyright:

Available Formats

Global Future Council

1.1 What is a cryptocurrency and a cryptocurrency network? 5

1.2 What are some characteristics of cryptocurrency networks? 5

2.1 Macro-level and multi-jurisdictional risk 7

2.2 Consumer protection 9

2.3 Infrastructure-specific issues 10

2.4 Key takeaways and guiding principles 12

3 Regulatory opportunities for inclusion and innovation 13

3.1 De-risking and its global implications 14

3.2 Addressing financial inclusion and exclusion 14

3.3 Digital identity 16

3.4 Key takeaways and guiding principles 16

4 Global regulatory approaches 17

4.1 Categories of regulatory approaches 18

4.2 Legal status of cryptocurrencies around the world 19

4.3 Guidance from international bodies 24

4.4 Key takeaways and guiding principles 25

1.1 What is a cryptocurrency

1.2 What are some characteristics

There are currently thousands of different participating in transaction verification; or (2)

2.1 Macro-level and multi-jurisdictional risk

2.2 Consumer protection

This section will unpack concerns surrounding the

Custody and safekeeping of cryptocurrencies

Mitigating the risks of self-custody

The importance of technical and jurisdictional interoperability

3.1 De-risking and its global implications

3.2 Addressing financial inclusion and exclusion

Public blockchain-based payments

Universal access to financial services

Cryptocurrency-based P2P payments

– Users, especially those with low levels of – The pseudonymity of cryptocurrencies

3.3 Digital identity

3.4 Key takeaways and guiding principles

4.1 Categories of regulatory approaches

Regulators could take different approaches to risk-proportionate approach to blockchain,

FIGURE 1 Legal status of cryptocurrencies38

Prohibitive laws and regulations Uncategorized due to insufficient information

Risks of over-regulation and under-regulation

In addition to country-level approaches, the focusing on the issue of taxation of cryptocurrencies.

4.4 Key takeaways and guiding principles

1. Regulation of cryptocurrencies is an 1. Banning is not necessarily efficient: Considering

Gabriel Abed Denelle Dixon

Alpen Sheth Rosine Kadamani

Vansa Chatikavanij Yusuf Hussain

Matthew Davie Paul Maley

Marwan Al Zarouni Kibae Kim

Arushi Goel Ashley Lannquist

Mariana Gomez de la Villa Sheila Warren

The Forum engages the

World Economic Forum

You might also like