Why regulation of cryptocurrencies should be global?
Both the ban on cryptocurrencies and the absolute absence of regulation have their costs: the ban reduces the risks for the financial system, but hinders the development of innovation. However, for large banks, the risks of deterring innovation can be offset by the ability to acquire foreign companies that provide crypto-currency services, unless foreign operations with crypto-currency are also banned.
The difference in the regulation of cryptocurrencies at the national levels reduces the effectiveness of regulatory measures: the tightening of legislation in one country leads to the flow of operations to more friendly jurisdictions. When China introduced a complete ban on cryptocurrencies, mining “moved” to countries where it is not prohibited.
In particular, the share of the USA and Kazakhstan in bitcoin mining has tripled since the beginning of 2021, increasing to 35% from 10.5% for the USA and to 18% from 6% for Kazakhstan, while the share of Russia has increased by more than 1.5 times, exceeding 11%. In Kazakhstan and Kosovo, where some Chinese mining has also moved, this has led to massive power outages. In Kosovo, this resulted in a ban on mining at the national level, and in Kazakhstan, to a temporary forced shutdown of Kazakh crypto farms from the supply of electricity.
An example of the consequences of regulatory arbitrage is the history of one of the world’s largest crypto exchanges, Binance, whose trading turnover is approaching $8 trillion. The exchange was founded in Hong Kong, where regulation has long been friendly to cryptocurrencies and where, in particular, the Tether stablecoin was created. The introduction by the Hong Kong regulator of compulsory licensing of exchanges and the ban on non-professional investors working on them led to the “migration” of Binance servers to Malta, which is more loyal to cryptocurrencies.
Today, many regulators have claims against the exchange: the United States suspects it of non-compliance with the law on combating money laundering and tax evasion, Germany accuses it of violating EU securities laws, and Japan and Thailand accuse it of operating on their territory without registration required by law. However, this does not prevent the exchange from growing in other markets – after all, the regulator, to which Binance would report directly, simply does not exist.
“The flow of cryptocurrencies across sectors and across national borders is hindering the effectiveness of national action,” write Tobias Adrian, head of the IMF’s Money and Capital Markets Department, and colleagues. Countries follow completely different strategies, and existing laws and regulations do not always apply to all areas that are related to cryptocurrencies.
In addition, individual measures that are not internationally coordinated could cause capital flows that destabilize markets, economists warn. In December, they called on the Financial Stability Board to develop uniform international standards for managing these risks. These standards should be applicable everywhere and minimize regulatory arbitrage.