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Are Regulations and Sanctions Driving Change in the Crypto Industry?

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The powerful combination of incoming crypto regulation in the US, and the immediate global impact of Russian sanctions, mean the crypto exchange market looks to be in for a serious shake up in 2022. Just this week US Senator Elizabeth Warren announced a new piece of legislation to stop crypto businesses outside the US from working with sanctioned companies. It also authorizes the Financial Crimes Enforcement Network (FinCEN) to force US citizens with crypto transactions of $10,000 or more to report them.

Clearly global sanctions against Russia have moved crypto exchanges firmly into the center of geo-politics for the first time. Coinbase announced it was banning 25,000 Russian accounts. While Binance declared that: “To unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists.” But just as revealing was the news from Wasabi Wallet that it will start introducing censorship methods into its mixing procedures, showing that fear of regulation was starting to impact beyond mainstream exchanges even before Warren’s planned legislative action.

What this means in all probability is that the advantage the exchanges outside the US had in largely ignoring regulations, benefiting from lower overheads and restrictions to their business activity is well and truly over. It’s not all bad news, as the positive response to the US administration’s crypto executive order shows, but it certainly means the industry needs to consider what this means for the long term, and what this means for crypto investors and traders looking for the best deal or the most secure transactions.

The US executive order underlines the seismic changes in the administration’s approach to crypto by seeking “to establish the first-ever comprehensive federal digital assets strategy for the United States” and by directing the Depart of Commerce to create a framework that “drives U.S. competitiveness and leadership in, and leveraging of, digital asset technologies.” In summary the administration’s six key priorities, according to the fact sheet, are to protect US interests, protect global financial stability, prevent illegal uses, promote responsible innovation, financial inclusion, and US leadership. As confirmed in a CoinDesk report, the order does not lay out specific positions the administration wants agencies to adopt, or impose new regulations on the sector. Indeed, it was welcomed by many in the industry who see it as a positive step forward. According to Jeremy Allaire, the CEO of Circle, which runs stablecoin USDC, “this is a watershed moment for crypto, digital assets, and Web 3 akin to 1996/1997 entire government wakeup to the commercial internet.”

Circle CEO Jeremey Allaire in a Twitter thread responding to the news.

But as the legislative moves by Senator Warren demonstrate, its actions and not words that count. The recent news of action to reign in the SEC by the US Congress after its enforcement arm chased “information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the Commission’s standards for initiating investigations” shows that significant risks for crypto exchanges remain while the US decides its crypto policy.

Despite the understandable focus on the US crypto regulation in recent weeks this sea change hasn’t appeared overnight, for example the China ban on crypto trading and mining took place in 2021, after the ICO ban in 2017. In contrast in Singapore, a leading location for the crypto industry, as late as July 2021, while the rest of the world was hellbent on cracking down on crypto, “crypto players like Binance have found Singapore to be a paradise of opportunity, even while a regulations storm looms over the industry in other parts of the globe.” As recently as last October following the latest crypto crackdown in China, the city-state of Singapore was seen as a chief beneficiary of fleeing businesses.

But then in December 2021 Binance, with a daily turnover of US$76 billion, no doubt fed up with the delays and opaqueness of the MAS licensing system, withdrew its Singapore application. In 2022 how Binance responded is also revealing, with its move to partner with Paysafe in the UK, providing the exchange with access to the UK payments network despite concerns from the UK financial regulator the FCA. While this week Binance’s CEO CZ has been meeting Brazilian regulators after signing an MOU to buy a securities brokerage and secured a virtual asset license in Dubai in a series of moves underling its look to secure its future in a more regulated crypto marketplace.

All these moves, along with competitors such as FTX and Coinbase, are to establish a future in the more regulated global environment in crypto. Anndy Lian, chairman of BigONE Exchange said, “I believe these twin forces of policy regulation led by the US, and even tighter Russian sanctions on crypto transactions, will in the near future in the next 12 – 18 months result in an expanded more regulated sector with greater competition particularly between exchanges and tighter profit margins than in the past.” Speaking after his expert contribution to Crypto Expo Dubai, Lian suggested this meant that decentralized exchanges, and privacy platforms, will be more clearly separated from the mainstream than in the past. “What does this mean for mainstream exchange service and offerings? The bottom line is that it’s got to be led by the needs of the community, by the exchange’s users,” he added.

How best to accomplish this community involvement is clearly still up for grabs. Notable are the remarks by Ethereum’s co-founder Joseph Lubin who has questioned the longer term viability of Solana, which in his eyes pays overly generous rewards to users validating transactions on the network, all backed up by generous VC cash. Solana needs to “figure out a more sustainable business model for the network”, Lubin said. In response to Lubin’s criticism, Solana Labs, said that “simply looking at protocol revenue doesn’t tell the full story of the long-term performance” of a blockchain’s economic model. Figuring out the economic model for crypto businesses, faced with new regulation and Russian sanctions, whether decentralized or centralized, is key to the future of the long term future of the crypto sector.

Speaking on the panel ‘Why are crypto exchanges still flourishing?’ at Crypto Expo Dubai on March 16 Lian warned: “I believe being regulated is a very good thing, it’s the reason I invested my time in giving cryptocurrency and blockchain advice to government over the years. But the thing is we also have to understand the other side of the crypto startup equation which is innovation; if we kept ourselves solely in the sandbox environment, in a closed regulated environment it the real risk is the innovative decentralized aspect will be lost and we’ll end up with a centralized world.”

Anndy Lian is the chief digital advisor for the Mongolian Productivity Organisation, a partner and fund manager overseeing blockchain investments for Passion Venture Capital Pte. Ltd. He is the author of the best-selling book, “Blockchain Revolution 2030” published by Kyobo, the largest bookstore chain in South Korea. He was previously the chairman of BigONE Exchange and an Advisory Board Member of Hyundai DAC.