Historically, financial regulatory agencies were often perceived as lagging behind the institutions they oversaw, particularly in the fast-evolving realm of technology. However, the last half-decade has witnessed a dramatic shift. Regulators globally are not only catching up but actively embracing technological advancements, leveraging tools like cloud computing and machine learning. This proactive stance extends to fintech systems and services, fostering an environment of accommodation and encouragement for both established firms and innovative start-ups.
Virtually every significant financial regulator and central bank now boasts an innovation office or initiative. Many have even established “sandboxes,” secure environments for fintech experimentation, inspired by pioneers like the UK’s Financial Conduct Authority (FCA) and the Monetary Authority of Singapore (MAS) in 2015 and 2016. These programs are often framed around the concept of “responsible innovation.” While regulators maintain their commitment to risk management, they are increasingly united in supporting innovation to bolster industry competitiveness and potentially secure global leadership in the financial technology space.
These converging interests are particularly evident in the rapidly expanding field of digital assets. This domain encompasses virtual currencies, derivatives, blockchain infrastructures, and various forms of tokenization. As digital assets mature and attract growing institutional investment, regulators face the challenge of integrating them into existing regulatory frameworks. The stakes are substantial, with the potential for stablecoins and central bank digital currencies (CBDCs) to fundamentally reshape commerce and become instruments of sovereign economic power.
On one level, the digital asset space represents a fierce competition for technological supremacy. On another, it is evolving into a geopolitical contest, reflected in the pronouncements and actions of government and regulatory officials worldwide.
Europe’s Opportunity to Lead in Digital Finance
Valdis Dombrovskis, Executive Vice President of the European Commission, articulated Europe’s ambition in a June 23 speech, stating, “This is a good chance for Europe to strengthen its international standing and to become a global standard-setter, with European companies leading new technologies for digital finance.” He emphasized planned legislation designed to position the EU at the forefront of digital finance regulation.
“We will present a digital finance strategy for Europe to make the most out of digital finance and compete globally,” says the European Commission’s Valdis Dombrovskis.
Dombrovskis highlighted the motivation behind this push: “To stay ahead of the game and compete globally, [Europe’s financial sector] must make the most of digital opportunities.” He identified crypto assets and distributed ledger technology, commonly known as blockchain, as a “first test case” for a unified legislative approach that “supports and stimulates innovation.” This pro-competitive message was tempered by the standard regulatory caution: “At the same time, we need to continue regulating and supervising risks appropriately… Our approach is to ensure that all activities and all risks are properly regulated and supervised. EU rules must be fully applied, and enforced, by supervisory authorities.” This approach aims to create a benchmark for responsible innovation, ensuring growth alongside stability.
CFTC’s Focus on U.S. Digital Asset Leadership
Heath Tarbert, Chairman of the U.S. Commodity Futures Trading Commission (CFTC), echoes the sentiment of national competitiveness in the crypto-asset arena.
“I want the United States to lead, particularly in the blockchain technology that underlies digital assets,” Tarbert stated in a November 2019 television interview. He believes that “whoever ends up leading in this technology will end up writing the rules of the road for the rest of the world. My emphasis is on making sure that the United States is a leader.”
Tarbert has also expressed that digital assets align well with the CFTC’s principles-based regulatory philosophy. On July 8, the CFTC unveiled its 2020-2024 strategic plan. Among its five core goals is “encouraging innovation and enhancing the regulatory experience for market participants at home and abroad,” specifically to “Address the risks and opportunities arising from ’21st century commodities.’ We will develop a holistic framework to promote responsible innovation in digital assets.” This framework aims to benchmark best practices and encourage growth within a well-regulated environment.
UK Sees Surge in Crypto Adoption, Embraces Innovation
The UK’s FCA, a consistent leader in fintech innovation, released survey results on June 30 revealing a “1.1 million spike” in UK consumers purchasing crypto assets like Bitcoin, Ether, and Ripple, bringing the total to 2.6 million people in just one year.
Sheldon Mills, interim executive director of strategy and competition at FCA, commented on the report, stating it “reveals the increasing popularity of crypto assets among the U.K. consumer population and underlines the importance of our work to gain a deeper understanding of this market and how people interact with these assets. Crypto assets present risks and opportunities for consumers, and we hope these insights will help inform the policy debate in the U.K. and internationally as the use of these assets continue to grow.”
The FCA is collaborating with the government and the Bank of England through the UK Cryptoasset Taskforce to mitigate risks associated with crypto assets while simultaneously fostering innovation for consumer benefit. In March 2020, the government announced intentions to consult on measures to bring certain crypto assets under financial promotions regulation.
Further solidifying its fintech leadership, the FCA granted a multilateral trading facility (MTF) license to the futures platform Crypto Facilities, making it the first licensed crypto derivatives venue outside the U.S.
Jesse Powell, CEO and co-founder of Kraken, the parent company of Crypto Facilities, remarked on July 6, “We undergo these licensing efforts because Kraken is about making crypto accessible for everyone. This particular license means that a sophisticated class of investors, limited by their own requirements to interface with a regulated venue such as an MTF, will now have access to crypto derivatives in Europe for the first time. More participants means more liquidity and a better experience for everyone.”
Global Regulatory Collaboration Takes Center Stage
The UK regulator initiated the Global Financial Innovation Network (GFIN), a collaborative body of over 50 agencies formed in 2019. GFIN promotes international cooperation and knowledge sharing and “seeks to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.” This network serves as a platform to benchmark regulatory approaches and encourage consistent standards globally.
“My emphasis is on making sure that the United States is a leader,” says Commodity Futures Trading Commission chairman Heath Tarbert.
Another significant collaborative entity is the Bank for International Settlements (BIS) Innovation Hub, established last year “to foster international collaboration on innovative financial technology within the central banking community.” Initial hub centers were established in Hong Kong, Singapore, and Switzerland, working with their respective central banks. Expansion plans for the next two years include centers in Canada, the UK, and with the European Central Bank, along with a strategic partnership with the Federal Reserve System.
BenoÎt CoeurÉ, head of the Innovation Hub and former European Central Bank director, stated, “With this expansion, the Innovation Hub will be well placed to advance work on a broad range of issues of importance to the central banking community, including digital currency and digital payments, cybersecurity, distributed ledger technology and artificial intelligence. This expansion is a testament to the central banking community’s commitment to innovation and cooperation.”
The Monetary Authority of Singapore (MAS), actively participating in both GFIN and the BIS hub, demonstrated its commitment to innovation by announcing the completion of Project Ubin with Temasek. The final report highlighted the commercial potential of their blockchain-based multicurrency payments prototype and its benefits for the financial industry and blockchain ecosystem.
MAS chief fintech officer Sopnendu Mohanty commented, “As with all innovation adoption, there is a time for experimentation, and a time for commercialization. [Project Ubin] has worked with the financial industry and blockchain community on a journey of experimentation, prototyping and learning. This has built a strong foundation of knowledge, expertise and experience, and paved a path towards commercial adoption. Following the successful experimentation over five phases, we look forward to greater adoption and live deployment of blockchain technology.”
New York’s Proactive Stance on Virtual Currencies
Innovation competition extends beyond international borders, encompassing competition between U.S. states. The New York State Department of Financial Services (DFS) took an early and assertive stance on virtual currencies with the introduction of the BitLicense in 2015. DFS leaders emphasized both the necessity of compliance and enforcement and the desire to maintain New York’s position as a global hub for financial services and fintech.
In June of this year, DFS Superintendent Linda Lacewell announced further policies and guidance concerning virtual currency conditional licensing, self-certification of coin listings, and enhanced transparency of DFS practices. These measures aim to “mak[e] it easier for virtual currency companies to successfully operate in New York,” according to the official announcement.
The DFS also signed a memorandum of understanding (MOU) with the State University of New York to launch “SUNY BLOCK,” a virtual currency program designed to support “nascent virtual currency entities from local communities, including those started or run by students or alumni,” under the newly proposed conditional licensing framework.
Lacewell stated, “This MOU with SUNY is a strategic step to diversify and deepen the next wave of innovators in the virtual currency space in New York. The DFS actions . . . will boost responsible innovation and help get New York’s economy back on its feet. DFS is proud to foster accessibility and will continue to blaze a trail in the virtual currency marketplace.”
Concerns Over Perceived U.S. Lag in Digital Finance
Despite proactive initiatives in certain regions, there is a growing chorus within the crypto community calling for greater leadership and clarity from U.S. authorities.
Reacting positively to reports of the G-20 working on a regulatory framework for digital payments, Ted Quek, CTO of Broctagon Fintech Group, urged governments to “take an active approach in developing a crypto regulatory consensus as more traditional investors continue to enter the ecosystem.”
New York’s DFS “is proud to foster accessibility and will continue to blaze a trail in the virtual currency marketplace,” says superintendent Linda Lacewell.
Chris Larsen, co-founder and executive chairman of Ripple, expressed concern in a YouTube interview that the U.S. is “slow to the game” on blockchain and cryptocurrency, potentially losing ground to China. China is a major center for cryptocurrency mining and is perceived to be leading the way in the development of a central bank digital currency (CBDC).
The non-profit Digital Dollar Project, co-led by former CFTC chairman J. Christopher Giancarlo, aims to stimulate discussion around a U.S. CBDC. The group argues that private sector initiatives like Facebook’s Libra are driving innovation, but “the time has come to future-proof the greenback by exploring implementation options for a U.S. digital dollar.” Senator Tom Cotton has also voiced support for the concept.
The Digital Dollar Project’s white paper asserts, “If the U.S. dollar is to remain the world’s primary reserve currency in the unfolding century, it cannot remain an analog instrument and unit of account for things increasingly denominated as digital tokens. It must itself become a digital tokenized currency that measures, supports, and transacts with the world’s digital tokenized things of value.”
Larsen of Ripple warned that failure to provide greater regulatory clarity on blockchain, cryptocurrencies, and related technologies could lead to a “potential catastrophe” for the U.S. in the next-generation global financial system.
Jeremy Allaire, co-founder, chairman, and CEO of Circle Internet Financial, testified to the Senate Banking, Housing, and Urban Affairs Committee in July 2019, stating, “In the United States, regulatory uncertainty and the application of laws that do not contemplate digital assets has led to the loss of significant opportunity for U.S. crypto companies, and ultimately for consumers, businesses, and the national economy as a whole.”
Allaire added that SEC precedent and registration requirements for assets deemed securities have “had a material impact on the competitiveness of U.S. crypto companies, and is a backward- rather than forward-looking approach.” He urged Congress to consider new laws that protect consumers without hindering innovation by focusing on outdated definitions.
Looking Towards Global Leaders in Crypto Regulation
Broctagon CEO Don Guo considers China and Singapore, his base of operations, as “leading the way in terms of regulation.” He noted in a May Yahoo Finance article that “a clear regulatory framework for cryptos is yet to be put in place. In the U.S., all tokens are classified as securities, which makes it very difficult for most crypto companies to operate there, while at the same time, countries like India and South Korea have just decided to overturn their cryptocurrency bans.”
Allaire echoed this sentiment in his testimony, stating that “While the U.S. has been working through these issues, foreign, mostly Asian-based, crypto companies have begun to dominate, while U.S. companies have lost considerable market share.” He attributed this to the “uncertain and restrictive regulatory environment” which has led many digital asset projects and companies to domicile outside the U.S. and restrict access for U.S. individuals and businesses. Circle, for instance, moved part of its operations to Bermuda, drawn to its “forward-looking Digital Asset Business Act.”
SEC Commissioner Hester Peirce, often dissenting in favor of crypto industry advocates, concluded a July 21 speech in Singapore by saying, “Innovation in the digital asset industry has and will continue to challenge us as securities regulators. I would prefer that we not only hold accountable the reckless innovators . . . but also attempt to provide the more cautious innovators some guidance on how to avoid the hall of mirrors and on what we consider to be adequate braking technology.”
J. Christopher Giancarlo of the Digital Dollar Project, which says that to maintain its primacy as a reserve currency, the U.S. dollar should become tokenized.
Brian Brooks, former chief legal officer of Coinbase, testified before a California legislative committee in October 2019, stating, “Contrary to popular belief, the cryptocurrency market is subject to a complex web of state and federal regulatory oversight.” He suggested that California could create “a single charter for crypto companies that would allow such companies to operate within a single corporate entity that is supervised in a rigorous manner but without the ambiguity and complexity that characterizes the status quo. California could successfully compete with New York for crypto businesses if it solved a few discrete problems.”
Brooks later joined the Office of the Comptroller of the Currency (OCC) and is now acting comptroller. He has expressed his ambition to be seen as the “first fintech comptroller.” In a July 22 interpretive letter, the OCC clarified banks’ authority to provide cryptocurrency custody services and “reaffirm[ed] the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.” This regulatory clarity can be seen as a benchmark for other jurisdictions.
Europe’s Single-Market Potential in Digital Finance
Continental Europe, particularly Germany in digital banking and payments, has shown pockets of fintech success. The European Union aims to amplify this success with its developing digital strategy, as outlined by Dombrovskis. He addressed challenges faced by start-ups, including varying licensing procedures that hinder their ability to “explore the full potential of the single market.”
Dombrovskis emphasized, “If Europe is to make the most out of innovations such as distributed ledger technology, artificial intelligence and data-driven finance, we have to maximize the single market’s potential so that companies can scale up across borders . . . This is essential if European companies are to compete with their peers in Asia and the United States.”
He announced that “later this year, we will present a digital finance strategy for Europe to make the most out of digital finance and compete globally, removing more regulatory barriers between countries, while ensuring adequate supervision.” This strategy will bring much-needed legal certainty to crypto assets with a common approach that “supports and stimulates innovation.” It will also include a proposed “pilot scheme to give some regulatory flexibility for experimentation – but well framed and under close supervisory oversight,” ensuring proportionate risk management. This approach can act as a benchmark for balancing innovation and regulation.
Dombrovskis clarified that “lighter rules for less risky projects” would be implemented. However, he cautioned that “stablecoins are likely to raise additional challenges in terms of financial stability and monetary policy. In these cases, because of their potentially systemic role, our rules will be stronger.”
Global AML/CFT Standards Remain Paramount
Regardless of the evolving national and supranational regulatory landscape for digital assets, anti-money laundering (AML) and countering the financing of terrorism (CFT) will remain constant priorities. The Financial Action Task Force (FATF), the global AML/CFT watchdog, underscored this in a June report to G-20 finance ministers and central bank governors regarding the application of its standards to stablecoins.
The report stated, “To mitigate the ML/TF risks of virtual assets, the FATF revised its standards in June 2019 to require virtual asset service providers [VASPs] to implement the full range of preventive measures against ML/TF,” further clarifying, “The revised FATF standards clearly apply to so-called stablecoins.”
Whether classified as virtual or traditional financial assets, “a range of the entities involved in any so-called stablecoin arrangement will have AML/CFT obligations under the revised FATF standards. Which entities will have AML/CFT obligations will depend” on the centralized or decentralized structure of their offerings.
FATF also addressed CBDCs, stating, “Once a CBDC is established, financial institutions, designated non-financial businesses and professions and VASPs that deal in the CBDC will have the same AML/CFT obligations as they do with fiat currencies or cash. A customer transacting using a CBDC will have the same customer due diligence obligations as if it was an electronic transaction using fiat currency.”
In conclusion, the global regulatory landscape for digital assets is rapidly evolving, characterized by a proactive embrace of innovation and a competitive drive for international leadership. Regulators worldwide are actively exploring blockchain and other technologies, establishing sandboxes, and fostering collaboration to create frameworks that encourage growth while mitigating risks. As this space continues to mature, international cooperation and the establishment of benchmarks for responsible innovation will be crucial in shaping the future of digital finance. While the keyword “federated learning” was not directly applicable to the core themes of this article, the principles of data privacy and security inherent in federated learning are implicitly relevant to the ongoing discussions around digital asset regulation and AML/CFT compliance. The focus remains on creating a robust and secure ecosystem that fosters innovation and global competitiveness in the digital age.
