"Tough" US Regulation Approach Positive For Industry, WEF Report Finds

In a new report on the state of digital asset regulation, the Word Economic Forum analyzes digital assets regulatory frameworks in nine jurisdictions spanning the European Union, Gibraltar, Hong Kong, China, Japan, Singapore, Switzerland, the United Arab Emirates, the United Kingdom, and the United States.

The report "draws key lessons" from approaches and "reveals unintended consequences" addressing anti-money laundering and know your customer implementations as well as privacy and security, among other topics.

In the US, the report claims that "while some in crypto perceive the US to be too heavy-handed when it comes to combating illicit finance, others believe that the tougher approach has ultimately been a positive for the industry." The assessment is provided without footnote.

The report further finds a lack of regulatory clarity, noting that companies have pointed to “regulation by enforcement” approaches, noting a lack of clarity regarding "which regulatory bodies have jurisdiction in certain circumstances,causing several market leaders to expand their presence overseas." The report notes that "the share of fundraising deals that take place in the United States has fallen every year" due to regulatory uncertainty.

The report recommends that policy makers, regulators and industry stakeholders should explore the adoption of "technology-enhanced solutions to meet AML and KYC requirements. [...] This can include the use of digital identity verification methods and blockchain technology to streamline processes while enhancing accuracy and security."

"For example, the use of privacy- preserving KYC solutions that leverage cryptographic techniques such as zero-knowledge proofs to validate user identities without exposing personal data has proven useful for enhancing AML and KYC goals," the report states without footnote.

"Additionally, artificial intelligence (AI) and advanced analytics platforms have been effective in monitoring and detecting suspicious activities," the report further states without footnote. "Specifically, real-time analytics platforms that uncover anomalies and identify illicit activities have proven effective in serving as a deterrent for bad actors."

The report addresses the European Union’s Markets in Crypto-Assets (MiCA) regulation, finding it "poised to set a precedent for comprehensive digital asset oversight."

MiCA bans Crypto Asset Service Providers (CASPs) from issuing so-called privacy coins, stating that "the operating rules of the trading platform for crypto-assets shall prevent the admission to trading of crypto-assets that have an inbuilt anonymisation function unless the holders of those crypto-assets and their transaction history can be identified by the crypto-asset service providers operating a trading platform for crypto-assets."

The EU will further require identity verification of asset holders using CASPs under MiCA and the supervision of transactions under the FATF Recommendation 16, also known as the Travel Rule, which requires the defacto attachment of personally identifiable information to payments made via financial institutions, including the name and address of the transmitter.

As the report finds, "European authorities have been able to instil increasing confidence on the topic of KYC and AML with the takedown of cryptocurrency mixers such as ChipMixer and Bitzlato, which enabled money laundering."

It appears unclear how WEF arrived at the conclusion that confidence has been instilled in KYC and AML procedures with the takedown of two custodial cryptocurrency mixers, given the fact that the EU's proposal for stricter money laundering regulations states that "almost 99% of criminal profits escape confiscation, remaining in the hands of offenders."

In unintended consequences, the report finds MiCA stablecoin reserve requirements "too strict" without further comment. MiCA instates reserve requirements for "asset-referenced tokens", ensuring that "the value of the reserve amounts at least to the corresponding value of tokens in circulation."

MiCA's reserve requirements are most likely to affect the stablecoin Tether, which was delisted by BitStamp for lack of MiCA compliance in June. Coinbase has announced that it will delist MiCA non-compliant assets by December. According to Cryptoslate, Tether CEO Paolo Ardoino warned that MiCA's reserve requirements would pose systemic risks to banks and digital assets.

According to Tether's quarterly reports, Tether holds the majority of its close to $120 Billion in assets in US Treasury Bills, with only $110 Million in readily available cash and bank deposits.

The report notes the "clarity and predictability" of digital asset regulation in Switzerland, where much of existing law is applied to the digital asset sector. However, in unintended consequences, the report notes that Switzerland has faced challenges with crypto-related crimes, stating that Switzerland's regulatory environment "may inadvertently attract bad actors that could facilitate scams and illicit activities, damaging the country’s ecosystem," linking to a single source on the shutdown of a "rogue crypto school" which allegedly violated Swiss licensing law involving less than CHF10 Million.

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