CRB Monitor Chart of the Month: Global Digital Asset Regulators – An Update
James B. Francis, CFA, Chief Research Officer, CRB Monitor
Peter Simcox, Senior Analyst, CRB Monitor
This edition of CRB Monitor’s Chart of the Month is an update to our original article from a year ago, Applying Risk Ratings to Digital Asset Regulators. With this update we are satisfying our own curiosity related to the evolution of the regulatory environment for Digital Asset Related Businesses (DARBs). In addition to sharing new relative scores for a considerably higher number of regulators, we will take a look at a time series analysis to see how the landscape has changed over the last year. And we admit that no time series analysis will be perfect because of the nature of this work, which requires a certain level of subjectivity as well as an understanding that our model has changed over time.
Here is an excerpt from our August 2023 article, which highlights a few sources that helped make the case for our research into global regulatory authorities:
- “Recent events have confirmed the urgent need for imposing rules which will better protect Europeans who have invested in these assets, and prevent the misuse of crypto industry for the purposes of money laundering and financing of terrorism.”- Elisabeth Svantesson, Swedish Finance Minister, "Digital finance: Council adopts new rules on markets in crypto-assets (MiCA)."
- “Rampant fraud and dysfunction have become the hallmarks of cryptocurrency and it is time to bring law and order to the multi-billion-dollar industry.” - New York Attorney General Letitia James, “Attorney General James Proposes Nation-Leading Regulations on Cryptocurrency Industry”
- "Banks considering engaging in crypto-asset-related activities face a critical task to meet the 'know your customer' and 'anti-money laundering' requirements, which they in no way are allowed to ignore...A bank engaging with crypto customers would have to be very clear about the customers' business models, risk-management systems and corporate governance structures to ensure that the bank is not left holding the bag if there is a crypto meltdown." - Federal Reserve Governor Christopher Waller, “Banks pump the brakes on cryptocurrency as regulators signal growing concern”
Now let’s take a look at our updates to this research, which is worthy of a refresh. First, let’s review the methodology and then we will move on to the updates of regulators’ scores.
CRB Monitor’s Coverage and Rating of Global Financial Regulators - Methodology
Source: CRB Monitor
Truth be told, there are now 100’s of regulatory agencies worldwide that are doing their best to keep up with several different categories of market participants, with varying degrees of success. But the reality is that, given its attraction for bad actors, regulating the crypto industry is a challenge and financial institutions that facilitate trading and custody of digital asset ETPs should be aware of this added layer of risk.
CRB Monitor’s Coverage and Rating of Global Financial Regulators
Source: CRB Monitor, FATF, Basel, Regulators
As such, CRB Monitor has developed a model which applies “quality” scores to many of the world’s largest licensing authorities. A summary of this model can be found in our August 2023 article Applying Risk Ratings to Digital Asset Regulators. In a nutshell, financial institutions are wedged between a rock and a hard place, craving a transparent, regulatory framework while trying to accommodate the needs of their clients and shareholders to hold crypto assets. And while these institutions expand their participation in the still-nascent digital asset industry through custody, trading, and even new digital asset issuance, the desire for greater transparency and a global regulatory framework persists. This table, which contrasts the degree and effectiveness of regulators in digital asset space, highlights the differences in risk across most of the largest regulatory authorities, and brings to light one of the hidden challenges associated with investing in a spot Bitcoin ETF.
Evolution of Regulators Over the Last Year
Here’s why these periodic updates are important – our bi-monthly data have showed some movement among global regulators. What this translates into is good news for financial institutions, that progress being made by regulators in several markets. The following chart represents a time series of these relative scores for a subset of countries which CRB Monitor covers. There has been substantial improvement in several markets while others have seen little or no progress.
The chart above shows how changes in factors contributing to overall scores can impact the standings of several regulators. As we can see, there has been significant improvement in regulators’ overall quality in India, Cayman Islands, the UAE, Italy, and Gibraltar. This was largely due to changes in Basel and FATF assessments over the last year.
Here are some updates on several individual regulators, courtesy of CRB Monitor’s research team:
France, Rating: Excellent
The European Regulation on Markets in Crypto-Assets (MiCA) was published in the Official Journal of the European Union on June 9, 2023, and is set to take effect in December 2024, with provisions related to stablecoins becoming enforceable earlier, in June, 2024 (ESMA). Under MiCA, Crypto Asset Service Providers (CASPs) are now required to obtain mandatory licensing, a significant change from the previous optional registration system. This licensing framework allows CASPs to operate across all EU member states using a European passport, thereby simplifying cross-border operations. Moreover, while MiCA generally excludes non-fungible tokens (NFTs) from its regulatory scope, it may apply to NFTs that meet certain specific criteria (AMF).
According to the AMF, ten services will require mandatory authorization under the European MiCA Regulation starting December 30, 2024. Market participants offering crypto-asset services in the EU must obtain prior authorization for these services.
- providing custody and administration of crypto-assets on behalf of clients;
- operating a crypto-asset trading platform for crypto-assets;
- exchanging crypto-assets for funds;
- exchanging crypto-assets for other crypto-assets;
- executing crypto-asset orders on behalf of clients;
- placing of crypto-assets;
- receiving and transmitting orders for crypto-assets on behalf of clients;
- providing advice on crypto-assets;
- providing portfolio management on crypto-assets;
- providing transfer services for crypto-assets on behalf of clients.
Austria, Rating: Good
Austria received an overall good score for its progress in regulating Digital Asset Related Businesses (DARBs). The Austrian Financial Market Authority (FMA) is the primary regulator in the space and sets clear expectations and requirements for companies operating there. Virtual asset service providers are required to register with FMA. Austrian regulators demonstrate excellent transparency through a database of registered/licensed entities. The country also has cracked down on bad actors with clear evidence of enforcement and penalties. Similar to other European nations, Austria will also be implementing the MiCA standards.
Canada, Rating: Fair
Canada's primary securities regulator, the Canadian Securities Administrators, receives a fair score due to their ongoing development and regulatory improvement in the Digital Asset Space. Per the CSA, "To help protect investors, all crypto asset trading platforms must be registered in Canada. Registration adds a layer of investor protection because, for a crypto asset trading platform (CTP) to be registered in Canada, it needs to meet the same standards (designed for your protection and to promote stability in our investment markets) that apply to every other investment dealer in the country". Canada has tightened cryptocurrency regulations to enhance consumer protection and financial stability. Federally, the 2024 budget introduced the Crypto-Asset Reporting Framework (CARF), mandating crypto service providers to report transaction and client data to the Canada Revenue Agency to curb tax evasion, with implementation starting in 2027 (Source).
New Zealand, Rating: Fair
New Zealand has not announced any major regulatory changes in 2024. Despite robust AML/CFT procedures, New Zealand's cryptocurrency regulatory environment receives an overall fair score. With the Reserve Bank of New Zealand acting as the regulatory authority, the country currently treats digital assets as property. Additionally, as indicated in this Regulatory Impact Statement “The Financial Markets Authority in New Zealand does not regulate cryptoassets, and only regulates cryptoasset issuers or providers to the extent that a product they are offering meets existing definitions for financial products and services.” Digital Asset Related Businesses (DARBs) register as financial service providers or money service businesses/e-money due to the government having no distinction currently in place. However, New Zealand-based trading platforms must register on the financial service providers register (FSPR). New Zealand encounters challenges in the cryptocurrency space, such as insufficient domestic acceptance and a lack of transparent measures.
South Africa, Rating: Fair
South Africa has made significant strides in regulating cryptocurrencies and crypto assets between 2023 and 2024. In March 2024, the South African government announced plans to license 59 crypto firms to operate in the country (Source). While the nation's Financial Sector Conduct Authority is lacking in its transparency and enforcement of the sector; when you combine this with a low FATF/Basel AML score the country has made progress in the regulatory space. As such, South Africa’s cryptocurrency regulatory environment receives an overall Fair score an upgrade from its previously Poor rating.
CRB Monitor reviews and monitors digital-asset related company data daily. Our commitment to providing accurate and valuable insights drives our continuous research efforts to keep our clients well-informed about the evolving regulatory landscape and its impact on digital asset- related businesses. Please stay tuned for x`further updates as we continue to enhance our coverage and understanding of the digital asset sector.
Wondering what a Tier 1, Tier 2 or Tier 3 DARB is?
See our seminal ACAMS Today white paper Defining ‘Digital Asset-related Business’ and Digital-Asset Related Businesses - What Financial Institutions Need to Know