In 2023, the cryptocurrency industry experienced a milestone as major jurisdictions such as the European Union and the United Kingdom tightened their regulatory frameworks. Duncan Ash, the Strategic Director of blockchain protection company Coincover, discussed the key trends expected to shape the cryptocurrency regulatory landscape in 2024 and how they would impact the industry's long-term development.

The term "cryptocurrency regulation" itself is somewhat contradictory. While the cryptocurrency market is built on the foundation of peer-to-peer transactions, it has gradually departed from its pure origins as regulatory bodies seek greater oversight. Reforms vary across different jurisdictions. The European Union, for instance, passed the landmark Markets in Crypto Assets (MiCA) regulation last summer.

The UK, on the other hand, has adopted a more phased approach, with new regulatory frameworks set to be announced this year following the conclusion of consultations in February 2024. Progress in the United States has been much slower, with the Securities and Exchange Commission (SEC) primarily managing through enforcement actions and often in opposition to the Commodity Futures Trading Commission (CFTC).

While the specifics of new regulations and their enforcement remain to be seen, stricter regulation and oversight of cryptocurrencies are inevitable. In 2024, industry participants will strive to adapt to this shift, with three key trends playing a central role in shaping the regulatory landscape:

Increasing Demand for Regulatory Expertise

Traditional finance and decentralized finance are becoming increasingly intertwined. The recent approval of a Bitcoin ETF in the United States highlights this convergence. As the gap narrows, we can expect cryptocurrency companies to seek more recruits with financial regulatory experience to ensure they remain ahead in compliance.

For example, Circle, the issuer of USDC, appointed former CFTC Chairman Heath Tarbet as Chief Legal Officer in July last year to oversee regulatory affairs. With regulatory bodies increasing market pressure, cryptocurrency firms may prioritize hiring personnel from traditional finance (TradFi) and regulatory sectors to avoid fines and penalties for non-compliance with new requirements.

Regulatory agencies' aggressive stance on the cryptocurrency market underscores the significant risks involved. For instance, from October 2022 to September 2023 alone, the SEC issued fines totaling around $5 billion to cryptocurrency firms for various illegal activities, including violations of anti-money laundering regulations and offering unregistered securities.

To address these challenges, cryptocurrency companies will increasingly seek expertise from TradFi and legal fields to ensure compliance with evolving regulatory requirements.

New Technologies Require New Regulations

Persisting in defining cryptocurrencies strictly as "securities" or "commodities" is unsustainable and ultimately unhelpful in enhancing the security of the cryptocurrency market in the long run. For regulatory efforts to effectively promote the sustainable development of cryptocurrencies, regulatory agencies must understand the complexity of the cryptocurrency market and solicit rigorous feedback from market participants on any new proposals.

While cryptocurrencies belong to the same group, their behaviors vary. This means that regulating the entire ecosystem under a single framework will only create friction between regulators and market participants.

For example, stablecoins and cryptocurrencies serve different functions within the crypto ecosystem and thus require different regulatory regimes. Although Bitcoin and Ethereum are the most popular cryptocurrencies by market capitalization, they have some fundamental differences. The latter provides a decentralized platform for creating and implementing smart contracts and decentralized finance applications (dApps).

Each cryptocurrency does not require its own regulation. Instead, any new regulatory measures should be tailored to the unique attributes of the cryptocurrency market and consider its various use cases.

Election Uncertainty Slows Progress

2024 will be a monumental year for elections, with over 60% of the world's economic output represented by countries holding elections. Elections bring uncertainty, and during uncertain times, the pace of any regulatory or legislative reforms tends to slow down.

Take the UK, for example. Prime Minister Sunak has historically positioned the UK as a "business-friendly" nation and has been a proactive advocate for cryptocurrencies and blockchain. His government has supported major stablecoin provisions like those in the Financial Services and Markets Act (FSMA). However, with polls indicating potential changes at Downing Street, regulatory agencies may lean towards delaying the release of any new frameworks until after the next general election.

The situation is similar in the United States. In July this year, the House Financial Services Committee passed a landmark bill aimed at establishing a regulatory framework for cryptocurrencies. However, with increasing congressional focus on the presidential election, progress on this bill may be slowed down.