Regulations have been the stumbling block of crypto for years. Since 2019, crypto adoption has seen stable and systemic growth, and so has the regulatory scrutiny around digital assets. However, 2023 was transformative for crypto regulation, bringing much clarity to how certain regions will treat crypto in the coming years.
So, what key regulatory milestones have we reached this year, and how is the landscape set to evolve in 2024?
2023’s Crypto Regulations, Charting New Territory
One of the year’s significant landmarks was the finalization of the Markets in Crypto-Assets Regulation (MiCA) in Europe. This comprehensive legal framework will likely bring up investor confidence, offering a standardized approach to crypto asset regulation across Europe, and also set a precedent of embracing digital asset innovation while safeguarding market integrity.
By comparison, the UK’s approach was more cautious. According to the FCA’s new regulations, firms had to be registered with the authority or have their marketing campaign approved by an authorized firm to be able to advertise to UK consumers.
The UK Law Commission also conducted a detailed review of property rights, considering an amendment to better fit the specifics of digital assets. Their conclusion that English law could adapt to support the use of smart contracts without the need for extensive reform reflects a nuanced understanding of the evolving digital landscape.
Across the Atlantic, the US grappled with its regulatory approach. The debate on whether the Commodity Futures Trading Commission (CFTC) or the SEC should supervise crypto assets remained a controversial matter. While the SEC suffered setbacks like the dismissal of the Ripple lawsuit and federal approval of Bitcoin spot ETFs, the US regulatory roadmap stays unclear as the industry awaits the upcoming election to see if attitudes may shift.
Ultimately, according to the AMLBot’s research, the global regulation perspectives show accepting developments. Hong Kong, aspiring to be a crypto hub, issued its first licenses 2023 for regulated crypto exchanges, emphasizing investor protection and attracting capital. Japan is creating a friendlier environment for crypto, focusing on investor protection and overturning stringent rules on capital gains taxes.
Crypto Derivative Regulation to Take Center Stage
As the crypto market rebounds from the prolonged crypto winter, 2024 will likely bring the regulation of crypto derivative contracts into key focus. According to Kaiko Research, in 2023, the trading volume of crypto derivatives was a staggering six times higher than spot trading. This surge is further highlighted by data from CCData, which reported that derivatives constituted a dominant 78.2% of all cryptocurrency trades on centralized exchanges. These stats clearly indicate the increasing participation in this sector, as crypto investors shift their attention to more complex financial instruments.
Additionally, we must consider the increase in trading volumes on DeFi platforms, which averaged over $50 billion and accounted for 15% of total transaction volume in 2023. This substantial engagement points to a growing appetite for crypto-based financial products beyond traditional exchange frameworks. Centralized exchanges have responded to this trend by expanding collateral options for crypto lending programs, further blurring the lines between conventional financial services and the crypto ecosystem.
With the decentralized finance (DeFi) platforms and centralized exchanges pioneering increasingly sophisticated and diverse offerings, the demand for a comprehensive regulatory framework for crypto derivatives will grow.
Paving the Way for Institutional Digital Asset Trades
The combined efforts of the International Swaps and Derivatives Association (ISDA) and the International Capital Markets Association (ICMA) have the potential to overcome existing regulatory hurdles in the year ahead. Central to this evolution is the new version of the ISDA Master Agreement and the Common Domain Model (CDM), both set to redefine the trading of institutional digital assets.
AMLBot’s co-founder, Slava Demchuk shared that the ISDA has introduced the Digital Asset Derivatives Definitions: a key step towards creating a clear, consistent contractual framework for digital asset derivatives. This new framework is designed to address unique features of digital assets, like fork events, and to establish standardized protocols for disruption events, such as price source or hedging disruption.
In addition, the ISDA’s collaboration with ICMA and the International Securities Lending Association (ISLA) has led to the development of CDM 5.0. This update extends the model to include exchange-traded derivatives and enhances collateral management coverage, particularly in the context of triparty deals. The CDM’s controlled language structure, which is easily translatable into code, integrates well with smart contracts, automating and streamlining processes in digital asset trading.
These frameworks evolve in 2024, helping to bring greater legal and operational certainty to the digital asset market, which is critical for its growth and integration into the broader financial system.
Automation Challenge in Smart Contracts
One of the biggest regulatory concerns 2024 will bring is the automation challenge in smart contracts. In the case of traditional financial contracts, defaults typically trigger complex legal and negotiation processes, allowing for flexibility and human judgment. A smart contract, though — unless designed with contingencies in mind — may continue to execute its algorithm, potentially amplifying a financial crisis or causing unintended legal consequences.
This lack of an ’emergency switch’ is a significant regulatory concern, raising questions about how to incorporate necessary legal safeguards into an otherwise automated system. The possible solution lies in integrating smart contract technology with traditional legal principles to ensure they can adapt to extraordinary events, and maintain fairness.
Bridging the Gap Between Innovation and Trust
As we look towards 2024, the landscape of crypto derivatives regulation remains a dynamic frontier. The strides made in 2023, particularly with the advancements in the regulatory frameworks by the ISDA and ICMA, have laid a solid foundation for further development. Yet, significant work remains to be done to address the sector’s challenges.
The evolving nature of digital asset derivatives calls for continuous adaptation of legal frameworks. Regulatory bodies and industry groups must ensure their policies and standards keep pace with technological advancements, which includes expanding the scope of digital asset definitions and continuously refining the ISDA Master Agreement to encompass a broader range of digital assets and transaction types.
In this context, we cannot overstate the role of international cooperation. As digital assets inherently cross borders, building a cohesive regulatory framework demands a united front: it involves harmonizing standards, sharing knowledge, and tackling jurisdictional hurdles.