The crypto sector has often been referred to as ‘the Wild West’ due to a lack of cohesive crypto regulations. However, a significant effort to define clear rules has already been made in many countries. Recent events have shown that there is still much to do. According to an Elliptic report, here are the main areas of focus for 2023.

MiCA

The FTX collapse triggered a lot of discussions about crypto regulations and policy at the end of 2022. It is hoped that these discussions will bring greater transparency and accountability to crypto markets. Indeed, the bankruptcy of FTX sparked losses at several other firms in the crypto industry with exposure to Bankman-Fried’s exchange.

One much anticipated set of crypto regulations is the European Union’s Markets in Crypto-Assets (MiCA) regulatory framework. The text of MiCA has now been approved. In summary, MiCA includes detailed provisions about stablecoin issuance, market manipulation, custody, transaction reporting and more.

The provisions of MiCA are anticipated to come into effect before the end of 2024. It is scheduled for a formal vote by the EU Parliament and publication in the first half of 2023. Of course, this will significantly alter the landscape of crypto regulations.

MiCA was created to increase operational transparency and reduce both user risk and the possibility of market contagion. As a result of MiCA in Europe, the crypto asset sector will face broad compliance requirements.

Understandably, foreign service providers will be attracted to this regulatory regime. Organizations that have registered in one EU member state will be able to ‘passport’ their services across Europe. There will be no need for them to seek regulatory clearance in each of the EU's member states.

Furthermore, due to MiCA's scope, objectives and comprehensiveness, it will most probably be taken as a model for crypto regulations. This is, therefore, likely to impact other countries around the globe during 2023.

Most probably, financial watchdogs will urge nations to take legislative steps towards a unification of regulatory requirements for cryptocurrencies. This might lower the likelihood of regulatory arbitrage.

Cross-chain laundering

The crypto ecosystem has undergone a fundamental shift as a result of recent developments. What’s more, these developments pose challenges to crypto regulations, as the sector never stands still. Users are now able to conduct cross-chain transactions to easily access goods and services that are available on many blockchains. Cross-chain bridges, for instance, allow users of one blockchain to move their assets to another blockchain without relying on exchanges.

These developments may facilitate the introduction of exciting new services throughout the crypto ecosystem. However, these developments are giving illegal actors new ways of laundering cryptocurrency.

Elliptic's study indicates that since 2020, criminals have used cross-chain services to launder more than $4 billion. Thus, the lack of a unified framework of crypto regulations is proving very costly.

Indeed, Elliptic estimates that by 2025, the value of cryptocurrency laundered through chain or asset hopping will be $10 billion.

It is expected that in 2023, AML/CFT agencies around the world will focus exclusively on stopping cross-chain financial crime. This is likely to involve sending specific alerts and warning signs about cross-chain criminality to virtual asset service providers (VASPs). Similarly, regulators will probably require that VASPs implement screening capabilities for identifying cross-chain risk exposure.

Crypto regulations: DAOs

The next area to consider in terms of crypto regulations is DAOs.

DAOs provide the governance framework for many popular DeFi services but they also raise complex legal and regulatory issues. Who, for instance, is liable for a DAO's activity? Does a DAO need to register as a business entity? Can regulators claim authority over DAOs or over specific holders of governance tokens?

In fact, DAOs are expected to rank among the most important 2023 concerns in terms of crypto regulations and policy. Clearer legal boundaries will aid DAOs in gaining credibility, which will ultimately encourage expansion and guarantee responsibility.

On the other hand, regulators will also implement a number of enforcement measures in 2023. We expect to see more enforcement proceedings against DAOs being brought by the CFTC and SEC this year. In other parts of the world, regulatory pressure on them will increase as well. For instance, the EU has already begun making changes to include DAOs in its crypto regulations.

The hazards of financial crime linked with DAOs will also receive increased attention in 2023. These include the possibility that criminals could launder money by purchasing DAO governance tokens with crypto-assets of illegal origin.

Crypto regulations for the metaverse

As metaverse activity continues to grow, a concerted effort to control this new virtual area via crypto regulations is anticipated. In fact, criminals are already looking for ways to take advantage of these virtual worlds. User fraud and scams, as well as hacking and theft of users' digital property are all examples of this. Moreover, the rise of digital clothing and luxury goods may create new opportunities for digital money laundering.

In 2023, we predict that watchdogs and regulators will focus on preventing new financial crime threats in the metaverse. This momentum in terms of crypto regulations is likely to clarify how far any existing regulations apply to the metaverse. Additionally, it will cover regulatory sandboxes to engage innovators in the DeFi area, as in the Abu Dhabi Global Market.

Crypto regulations and policy: other trends

Crypto regulations will be developed during 2023 in other areas too. For example, many countries are now likely to address the way unhosted wallets have to be treated for AML purposes. 

The announcement of significant regulatory enforcement proceedings in the area of NFTs can be expected as well. Such proceedings are particularly likely in relation to possible market manipulation and violations of securities laws.

Another trend in crypto regulations is an increasing effort to monitor the banking sector’s exposure to cryptocurrencies. This is to avoid the risk of the spread of contagion if any further FTX-like events occur in the future.

Central bank digital currencies are a fundamental innovation in the financial industry that can revive economic growth. Therefore, any regulatory developments will involve them too.

Conclusions

Better regulation of the crypto sector is something that has been required for a number of years. Recent events have highlighted this even more. Although these developments will lead to more stringent crypto regulations in the short term, they will ultimately improve investor confidence.

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