Crypto regulations are key to the current digital finance system today. Regulations that have been developed for years are finally being enacted in regions like the European Union with the Markets in Crypto-Assets (MiCA) framework. These regulations come from seeds laid years ago, but many regulators struggle to take into account new and fast changes in blockchain technology. There are some countries still trying to define which of their agencies are responsible for crypto, or the legal definitions that digital assets would sit in.
The evolution of crypto regulations may be slow, but it has developed in a similar way as a snowball going down a hill. They started small, but are slowly gaining speed, size, and impact. In this article, we have broken down the evolution into three stages: the early days, the reactionary phase to those beginnings, and what the modern-day regulation scene looks like.
The Wild West
When cryptocurrency was born, there was no regulation. That was largely the point. With no regulatory oversight, the emergence of Bitcoin was greeted as an unknown, anonymous digital asset. There was no oversight, accountability, or legal framework. There is nothing quite so exemplative of the early days of cryptocurrencies testing regulatory bodies, as the Silk Road.
The Silk Road was a dark web marketplace for anything from illegal documents to drugs. Bitcoin was the exclusive payment method for anything purchased on the Silk Road, so when the founder, American man Ross Ulbricht, was arrested in 2013 and the entire site was shut down, Bitcoin experienced a significant price drop. There was now an association of Bitcoin - and digital assets in general - with illegal activity. It was an initial panic that set many legal agencies into a spin about the use of Bitcoin. Later that year, the European Banking Authority (EBA) issued a public warning against virtual currencies.
However, once that initial alarm faded, the perception shifted. The breakdown of Silk Road actually allowed cryptocurrency to move away from its initial reputation of being just a facilitator of illegal activity. The FBI’s involvement in the incident went a long way toward helping that, as they later released statements assuring the public that ‘bitcoins are not illegal in and of themselves and have known legitimate uses.’ It was a strong statement for public confidence. Estimates were made that only around 4% of Bitcoin transactions through that period were dedicated to Silk Road. Bitcoin prices rebounded.
This stage of the evolution of regulation could be seen as simply the absence of any regulation at all. The period that came after was all about reacting to the consequences of that absence.
Reactionary fall out
After the Silk Road was closed down, the new regulations that came into force in America were largely reactionary ones in response to that event. Agencies scrambled to find ways to protect customers who fell victim to scams and to try to prevent crypto from being used in the same ways as on the Silk Road.
In America, where the Silk Road investigation and arrests took place, the FBI may have stepped in to pick up the pieces after arrests were made, but it was quickly understood that cryptocurrency was not something for the FBI to take the lead on. This began a long debate in the US as to who would take responsibility instead.
Around the world, other reactions to the rise of crypto were swift and decisive. China ‘banned’ crypto, although there is some debate as to whether their restrictions can be considered an outright ban. It was still possible in 2021, for example, to hold cryptocurrency privately. As Coindesk put it in their Nasdaq article refuting that China banned crypto: ‘In other words, if you lose your life savings on some meme coin, don’t go crying to the government about it’. The rules are there but they are often and widely circumvented, and every year there are rumors that China will reverse these restrictions. Crypto enthusiasts in the People’s Republic of China are preparing for that day.
The regulatory period that came into effect after the initial years of crypto could hardly be called regulation at ll. It was reactionary punishment for illegal activities and a scramble to figure out how to protect customers from fraud and scams.
Modern-day regulation
Regulation - with industry consultation, various agency inputs, and strict consumer protections - is now being implemented globally. Here is a quick rundown of some of the most important frameworks that are emerging worldwide:
- Europe’s Markets in Crypto-Assets (MiCA) regulation. MiCA was created by the European Union in 2020. It started in 2018 as the FinTech Digital Action plan, and went through years of consultations before being enforced in June 2023.
- Australia’s ‘token-mapping’ exercise. The Australian Treasury described this as ‘a foundational step in the Government’s multi‑stage reform agenda that commits to developing appropriate regulatory settings for the crypto sector.’ This consultation will be used to create regulatory frameworks for digital assets.
- USA’s ‘Fit21’ bill. This bill was passed in May 2024, as an effort to establish a new legal framework for cryptocurrencies. However, the Securities and Exchange Commission (SEC) warned that the bill would leave regulatory gaps exposed.
- Thailand’s world-first regulations. Thailand's SEC was one of the first financial bodies to start implementing digital asset regulation. Crypto is highly popular in Thailand, and crucial for the country’s economy. Regulation is strongly focussed on exchanges and providers making sure risks are clear, and strong licensing protocols are in place.
- Latin American’s varied approach. While El Salvador allows Bitcoin as legal tender, Bolivia has completely banned cryptocurrency since 2014, claiming too much volatility. There is little to no consistent regulation across Latin America, making any protocols highly localized and non-transferable across regional borders.
Regulation and the future of cryptocurrency
The future of cryptocurrency looks set to be determined by regulatory decision-making. MiCA is being rolled out across the European Union at different times and being adapted within different countries. And with the upcoming election in the United States, all eyes will be on regional regulatory bodies to see what changes in crypto policy happen.
Many see CBDCs (Central Bank Digital Currencies) as the next arena for regulators. They are controversial, with issues of privacy and how democratic digital assets can be with a central banking authority involved. Each government and issuer will also have their own interpretations of how to use and regulate CBDCs.
The main challenge for regulators will be balancing innovation and customer safety, as well as financial stability. It will also likely require much more international cooperation and cross-border harmony. Cryptocurrency knows no borders or barriers, so the quicker regulatory bodies can work alongside each other, the better - and safer - the future of cryptocurrency will be.
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