Planning for Inevitable Regulatory Change

The World Economic Forum’s latest report on international crypto regulations indicates that the U.S.’s approach, which leans more towards enforcement rather than clear policies, is creating complications and slowing growth and innovation in this field. In contrast, the EU’s MiCA (Markets in Crypto-Assets) framework offers a structured approach that provides investors with a clear roadmap for engaging with crypto markets. This difference is especially significant when considering decentralized finance (DeFi), where the U.S.’s enforcement strategy has had a chilling effect on innovation. For instance, the SEC’s recent decision to close its investigation into ConsenSys without filing charges serves as an example of the inconsistency in regulations, which can be detrimental to Ethereum-based DeFi projects in the long run.

You are perusing Crypto Long & Short, our weekly digest offering expert insights, updates, and market analysis tailored for seasoned investors. Click here to subscribe and receive it conveniently in your email inbox every Wednesday.

The ambiguity surrounding digital assets is fostering both opportunities and challenges, as conventional financial institutions are expanding their presence in this domain. Compared to smaller crypto-native businesses, traditional finance firms (TradFi) have an edge due to their refined regulatory strategies, developed over many years while navigating intricate compliance landscapes. As prominent entities introduce products like Bitcoin ETFs and tokenized funds, those lacking regulatory knowledge might struggle to compete unless they embrace emerging regulations, such as the Stablecoin Standard’s guidelines for transparency, operational robustness, and reserve backing. This approach could help other innovators meet compliance demands more swiftly, thereby facilitating growth and acceptance.

For institutional investors, a strategic approach is crucial. Using a “regulatory ladder” framework, similar to a fixed-income ladder, can balance risk and opportunity across different asset profiles:

Regardless of election results, upcoming changes in regulations for cryptocurrencies are likely, and investors should consider creating a mixed portfolio that encompasses both traditional finance (TradFi) and innovative companies supported by strategic regulatory plans. In the long run, as the World Economic Forum suggests, the United States may need to reconsider its enforcement-focused approach towards regulation or risk falling behind more forward-thinking regulatory systems in Europe and Asia.

*This article represents the opinions of the writer, which may not align with those held by CoinDesk Inc., its management, or other affiliates.*