The Global Challenge of Regulating Virtual Assets

The convergence of traditional finance and cryptocurrencies was more profound than ever this year. From the maturation of crypto-first digital commerce to MicroStrategy’s big bitcoin buy, it was a year of rampant technological adoption.

With the professionalization of the crypto industry came regulatory challenges. Evolving sectors such as decentralized finance (DeFi) and peer-to-peer transfers introduced new problems. Though, in the main, despite high-level confusion both private and public sectors progressed in developing regulatory frameworks and solutions that will continue to affect the crypto industry for years.

This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Michael Ou is CEO of CoolBitX, an international blockchain security company, and creator of FATF Travel Rule solution Sygna Bridge.

FATF’s ‘Travel Rule’

One of the most important gauges of the maturation of the global crypto asset sector this year was the Financial Action Task Force’s (FATF) first review of its Recommendation 16, or “Travel Rule” guidance for the crypto asset industry in July.

After adopting it in June 2019, the FATF conducted a 12-month assessment of the regulatory progress made to address the Travel Rule by member nations and the private sector, in particular Virtual Asset Service Providers (VASPs) and technical solution providers. The rule requires VASPs, such as crypto exchanges or wallet providers, to collect the names of both transaction senders and receivers as well as the national IDs of the former.

Noting that jurisdictions from all corners of the world map were close to or had implemented aligning regulations in July, the FATF noted progress and announced a second review in June 2021. Placing emphasis on emerging sectors such as stablecoins and central bank digital currencies (CBDC), the FATF made it clear that its second review of Travel Rule implementation was not a sign it would loosen its grip on the industry.

As innovation and emerging financial products in crypto such as DeFi – a challenge to effectively regulate due to their decentralized nature – continue to flood the market, the FATF seemed to have acknowledged the need to monitor and identify emerging risks. This will be something to look out for in its second review come July 2021.

Asia continues to lead the way in crypto adoption

In 2020, Asia continued to lead in cryptocurrency adoption and effective regulation.

Jurisdictions such as Singapore, South Korea, Japan and Hong Kong have recognized the advantage of being a first mover in crypto regulations and have taken the Travel Rule into consideration when developing frameworks for regulation.

This year, we have seen the…