Crypto Assets and Regulation, a Master Thesis in Best Practices for Crypto Regulation

Abstract

Crypto assets are no longer a niche topic for geeks but have developed into an important trend and development in financial markets, and hence, an uprising asset class. The uprising of the crypto market has led to predictions suggesting that the underlying technology, blockchain, could potentially have the same disruptive impact on the world as the internet had. But with attention, extreme growth, and profits, so come risks and exploitations of the immature and unprotected financial market. The rapid growth of the crypto assets’ ecosystem has intensified the focus of regulators. Based on the ongoing development of an adequate response to the risks associated with the market, regulators are challenged to design the response and mitigate risks, while fostering technological development. At an EU-level, there is currently a need for a unified regulatory framework. Countries have been developing their own responses to the emerging risks in the market, which has caused a regulatory gap between countries. This gap contributes to regulatory uncertainty and weak investor protection, alongside great costs to crypto market participants to comply with the varying regulations across borders. Crypto assets are by default global in their nature, hence national regulation is not considered to be desired and creates opportunities for regulatory arbitrage. This thesisseeks to determine risks associated with the crypto market and propose recommendations for an adequate response to the perceived risks while continuing to foster future innovations based on the technology. This will be done by obtaining an understanding of the technology and future opportunities, analysing risks based on relevant literature, and analysing investors’ responses to certain regulatory events and scandals. Furthermore, this thesis will explore how regulation of the traditional finance industry can be adopted into the crypto market. This will set out the analysis needed for the thesis to create its own framework, the 3 C’s. The purpose of the 3 C’s is to provide recommendations for mitigating risks, hereunder protecting investors, mitigating criminal activities and trades, and providing transparency, while still fostering further innovation. The 3 C’s comprehends classification, crypto participants, and cryptography. Finally, this thesis will compare its findings and responses with the proposed regulation set out in the EU Directive, Markets in Crypto Assets (MiCA). Based on this, the thesis concludes that there are currently being taken extraordinary measures in use, for MiCA to provide a framework for regulating the crypto market and that the regulatory responses may not be in line with the perceived risks in the crypto market, but an adequate response would generate certainty and foster growth, while mitigating risks and protecting investors.