‘Crypto Winter’ - An Opportunity to Strengthen Trust in Virtual Assets
Virtual assets are an evolving part of the digital economy that have a wide variety of financial and non-financial applications. While they offer an innovative way to deliver financial services that could improve transparency and efficiency for some use cases, their novelty has been controversial, creating a divide between regulators and virtual asset innovators. Moreover, the increasingly recognised potential for fraud, market abuse, money laundering and terrorist financing (ML/TF) in the virtual asset space had its share in hardening positions on both sides of the divide.
However, the ongoing ‘crypto winter’ – a sharp price correction in major cryptocurrencies and a concurrent decline in volume, provides a welcome opportunity for the virtual asset industry and regulators alike to reset the foundations of this volatile market and explore the best approach to face focus the risks that are affecting virtual assets
In traditional finance, investors rely on trusted and regulated intermediaries to hold their funds, transact on their behalf and even in some cases assure them that an asset will hold an assigned value. In contrast, the virtual assets ecosystem replaces trust in intermediaries with trust in the underlying code that governs an individual virtual asset. The public availability of code for most virtual asset projects in theory lets investors understand the risks associated with it. Yet in practice, very few investors have the skill and experience to understand how such code works, and how it can affect the performance of a given project or protocol.
Codes can have unexpected bugs, or even simply be badly written. There is also the possibility of coders being highly skilled but not having sufficient experience or awareness to account for improbable but high-impact events, leading to undesired outcomes. Left unchecked, the ongoing downturn in virtual assets diminished trust in code and coders which led to an overreaction by investors, pushing them to withdraw from the virtual asset space entirely and lose the potential. benefits of this asset class.
Effective regulations are means to restore trust in virtual assets by providing standards that both must adhere to. As users increasingly use virtual assets– treating them as a vehicle to make payments, earn a return, hedge risks, and protect their wealth – regulators can draw principles from existing frameworks for payments, banking, capital markets and insurance to develop a comprehensive regulatory regime that addresses both the unique risks of virtual assets as well as risks common to all financial services.
In 2018, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market, announced the first comprehensive virtual asset regulatory framework in the MENA region. Developed through collaboration and engagement with the industry, this framework goes beyond ML/TF risks by covering market abuse risks as well as technology governance risks. This proactive approach has allowed ADGM to establish itself early on as a comprehensive jurisdiction where start-ups and investors alike can be dependent on risk-appropriate oversight in the virtual asset space.
Emmanuel Givanakis, CEO of the ADGM Financial Services Regulatory Authority, says: “We believe our robust approach to the regulation of digital and virtual assets is a key pillar of ADGM’s strategy to fostering sustainable and responsible innovation in the financial sector. Businesses and consumers holding and investing in digital assets can be assured that our licensed firms are required to comply with the highest standards.”
The crypto winter may, indeed, be a source of bitter disappointment and dashed dreams for some, but it has provided an invaluable opportunity that should not be squandered to restore trust in the virtual asset space and ensure that investors’ interests are protected. Meanwhile, ADGM continues to champion a collaborative approach with the industry to ensure the virtual asset ecosystem retains the trust of all stakeholders through effective and efficient regulation.