WEF Raises Concerns over Potential Risks Involved in Crypto Regulations

Ndubuisi Francis in Abuja

The World Economic Forum (WEF) has expressed concerns that efforts by individual African countries to implement regulations for the cryptocurrency industry may not be effective unless they are supported by globally-coordinated initiatives to regulate the sector.

In its latest whitepaper, which was released at the weekend, the WEF warned of potential pitfalls for country-led crypto regulations.
In the paper titled: ‘Pathways to the Regulation of Crypto-Assets: A Global Approach in May 2023,’ the global economic lobby highlighted the challenges posed by the borderless nature of crypto assets, making it difficult for any single jurisdiction to effectively regulate the sector in isolation.

It argued that a coordinated effort among multiple jurisdictions was necessary to address the complexities and potential risks associated with cryptocurrencies.
According to the whitepaper, the anonymity provided by crypto mixers, self-hosted wallets, and decentralised exchanges also complicates regulation, adding that increasing interconnectedness with traditional finance increases potential contagion risks from the crypto industry, which was only recently full of turmoil.
“Crypto-assets and their ecosystem do not always fit squarely into the existing activity-based, intermediary-focused approach of regulation, even where crypto-asset activities mirror those of the traditional financial sector,” the organisation said.

Commenting, head of the Centre for Financial and Monetary Systems at WEF, Matthew Blake, said: “The evolving crypto-asset ecosystem and recent market events have underscored the pressing need for collaboration and the building of robust guardrails.
“While jurisdictions may take different approaches to regulating crypto assets, it is important to foster partnerships between international organisations, national authorities and industry stakeholders to ensure a baseline level of consumer protection and market integrity.”
Accordingly, advised that countries should harmonise their understanding and classification of digital assets, set common standards, and establish data-sharing initiatives.

Accordingly, WEF argued that there is yet to be a standard definition or characterisation of crypto assets.
For instance, the UK’s revenue authority considers crypto assets to be ‘exchange tokens’ for use in payment while the European Union (EU) considers them as ‘digital assets or property.’

According to WEF, a lack of a common minimum understanding to regulate the crypto assets space will lead to inability to develop ecosystem consensus, and increase in cost for compliance and setting up legitimate global businesses.
The whitepaper generated various classifications of regulatory frameworks to facilitate comparisons.
Two of the classifications mentioned were outcome-based regulation and risk-based regulation.
In outcome-based regulation, the principle of “same risk, same regulatory outcome” is applied, meaning that similar risks should be subject to equivalent regulatory measures.

On the other hand, risk-based regulation involves determining the level of regulatory intervention based on the level of risk associated with a particular activity.
The whitepaper also highlighted the concept of agile regulation, which involves adopting a responsive and iterative approach to policy and regulatory development.

It recognises that the process is no longer solely governed by governments but also involves multiple stakeholders. Agile regulation embraces mechanisms such as regulatory sandboxes, guidance frameworks, and regulators’ issuance of no-objection letters.

The whitepaper pointed to Switzerland’s Financial Market Supervisory Authority (FINMA) as an example of an agile regulator.
The whitepaper also cited Switzerland and Japan as examples of countries that have embraced self-regulation and co-regulation in the cryptocurrency industry.
On the other hand, the United States of America is seen as the home of regulation by enforcement