Author: Zhong Yi; Source: Financial Forum

In recent years, the global cryptocurrency market has developed rapidly and shown a mainstreaming trend, which has become an important part of the financial ecosystem. However, the rapid expansion of the market has also caused concerns about the incomplete investor protection mechanism and potential financial stability risks, prompting major economies to continuously re-examine and adjust their regulatory strategies for cryptocurrencies and gradually form a multi-level regulatory framework.

Although different regulatory paths in different countries, basic consensus has been formed in four core areas: First, implement classified supervision based on asset characteristics and risk levels; Second, strengthen anti-money laundering and combating terrorist financing (AML/CFT) as the bottom line of global regulatory; Third, strengthen consumer and investor protection mechanisms; Fourth, maintain financial stability, especially impose additional requirements on large-scale stablecoins.

Based on these consensuses, regulators adopt differentiated strategies for different types of cryptocurrencies: stablecoin regulation is differentiated, and stablecoins supported by a single fiat currency are included in electronic currency regulation; Bitcoin (BTC) is usually regarded as a commodity rather than a securities; cryptocurrencies such as Ethereum (ETH) that adopt a proof of stake (PoS) mechanism face disputes in securities attributes; tokenized securities and securities tokens (STOs) adjust supervision under the framework of the existing securities law; non-fungible tokens (NFT) supervision follows the principle of "substantive over form" and strictly regulates NFTs with securities attributes.

At the same time, supervision of market service providers is also being improved, including strict access requirements for exchanges, emphasizing customer asset protection and preventing market manipulation, strengthening custody service security standards and bankruptcy isolation mechanisms, and exploring innovative regulatory models for decentralized finance (DeFi) and strengthening cross-border regulatory cooperation.

In recent years, the global cryptocurrency market has experienced rapid growth, with its total market value once exceeding US$3.5 trillion at its peak. Since the birth of Bitcoin in 2009, cryptocurrencies have developed from tools that are free from mainstream financial systems to components that cannot be ignored in the financial ecosystem. They not only formed a transformation from single dominance of Bitcoin to diversified ecosystems, but also showed the characteristics of increasingly integrated cryptocurrency and traditional financial services, and market participation has shifted from retail speculation to institutional mainstreaming

However, the cryptocurrency marketThe rapid expansion of the market has also caused concerns about the incomplete investor protection mechanism and potential financial stability risks, prompting major economies to continuously re-examine and adjust their regulatory strategies for cryptocurrencies and gradually form a multi-level regulatory framework. Overall, despite the different regulatory paths, major economies have formed a basic consensus in the four core areas of cryptocurrency regulation (see Figure 1 for details).

The first is to carry out classified supervision. Major economies adopt classified regulatory methods based on asset characteristics and risk levels, and implement differentiated supervision based on the economic functions, risk characteristics and usage purposes of cryptocurrencies. High-risk activities face stricter supervision, and relevant measures will be dynamically adjusted with market evolution and deepening of risk awareness.

The second is anti-money laundering and anti-terrorism financing (AML/CFT) compliance. Anti-money laundering and combating terrorist financing are the bottom line of global regulation. These requirements run through all levels and links of cryptocurrency regulation, reflecting the international community's determination to jointly combat illegal activities such as money laundering and terrorist financing in cryptocurrency.

The third is to strengthen consumer and investor protection. In response to the high volatility and complexity of the cryptocurrency market, regulators are increasingly paying attention to strengthening consumer and investor protection mechanisms. For example, it emphasizes the reserve management, transparency and redemption rights of stablecoins, requires information disclosure, appropriateness assessment, prohibition of misleading marketing, and establishes complaint and dispute resolution mechanisms.

The fourth is to maintain financial stability. As the crypto market grows in size and its connection with the traditional financial system deepens, its potential spillover effects on overall financial stability have aroused high vigilance from regulators. For example, regulators impose additional requirements on large-scale stablecoins in particular. At the same time, regulatory authorities continue to strengthen monitoring and evaluation of the correlation between crypto ecosystems and traditional finance, and establish corresponding risk prevention and resolution frameworks.

Based on these four major regulatory consensus, major economies around the world have gradually formed regulatory strategies for different types of cryptocurrencies and service providers.

One ​​is based on encryptionThe different characteristics and uses of currencies have adopted different regulatory strategies.

Stablecoin regulation is showing differentiation. Steady coins such as TEDA (USDT) are supported by a single fiat currency reserve as payment tools and are included in electronic currency supervision, focusing on the qualifications of issuing entities, reserve management and redemption guarantees. Among them, "systemically important stablecoins" face higher capital and governance requirements. Other stablecoins are regulated as investment tools and are subject to securities or commodity regulations. Algorithm stablecoins are partially prohibited due to higher risks.

Bitcoin (BTC) is usually regarded as a commodity rather than a securities; cryptocurrencies such as Ethereum (ETH) that use the Proof of Stake (PoS) mechanism are facing disputes on securities attributes. But no matter how qualitative it is, anti-money laundering and anti-terrorism financing, consumer and investor protection have become a regulatory consensus.

Tokenized securities and securities-type tokens (STOs) are regarded by most regulatory agencies as an extension of the traditional securities concept, and are mainly adjusted and regulated under the framework of the existing securities law. Regulatory focus includes establishing standards for determining securities attributes, strictly implementing issuance and trading standards, strengthening investor protection, and promoting cross-border regulatory cooperation.

Non-fungible tokens (NFTs) supervision follows the principle of "substantive over form" and strictly supervises NFTs with securities or financial attributes, while pure art and collection NFTs are relatively relaxed.

Secondly, the regulatory framework for market service providers is also gradually improving.

Cryptocurrency exchanges generally set market access requirements, and at the same time emphasize customer asset protection, anti-money laundering compliance, market manipulation prevention, etc., especially centralized exchanges as the regulatory focus. Cryptocurrency custody services focus on asset isolation, bankruptcy isolation mechanisms and custody security standards to build an investor protection barrier. For decentralized finance (DeFi), due to its difficult characteristics such as its responsible parties, the traditional regulatory framework is difficult to apply, and countries are exploring the problem of exploring the problem of their respective properties.Search for innovative regulatory models. At the same time, cross-border regulatory cooperation is becoming increasingly important. By enhancing regulatory mutual recognition and information sharing, we will prevent regulatory arbitrage.

Source: CF40 Research Institute

In view of this, this article will systematically explore the key concerns, challenges and mainstream response strategies in the field of global cryptocurrency regulation from the perspective of different cryptocurrency types and service providers.

Classified supervision has become a consensus in global cryptocurrency regulation

Major economies have generally built a risk-based classification regulatory framework for cryptocurrencies.

First is to classify the economic functions, risk characteristics and usage purposes of cryptocurrencies, and formulate differentiated regulatory requirements for different categories. In international regulatory practice, it is usually divided into four categories, namely stable coins, Bitcoin and other cryptocurrencies, tokenized securities and securities tokens (STOs), and non-fungible tokens (NFTs). The second is a risk-based regulatory method, which sets stricter regulatory requirements for higher risk cryptocurrencies. The third is to dynamically adjust regulatory measures to continuously adapt to the development of the crypto market.

Next, this article will introduce the main ideas of four types of cryptocurrency supervision.

1.Stablecoin: Because it is pegged to fiat currency, strict access and strengthened reserve requirements are in parallel.

Stablecoin is a cryptocurrency designed to maintain its value stability by pegging to external reference assets (usually fiat currencies).. According to the different reference assets, it can be divided into four categories: fiat currency collateral (with equal fiat currency as reserve), asset mortgage (with gold and other assets as reserve), cryptocurrency collateral (with excess cryptocurrency as collateral), and algorithm stable (adjusting supply through algorithms). Among them, the US dollar stablecoins occupy an absolute dominance, with the total market value of Tether (USDT) and US dollar (USDC), which are pegged to the US dollar, exceeding US$200 billion, accounting for more than 90% of the market value of all stablecoins.

Major economies have also continued the idea of ​​classified regulation of stablecoins. Stablecoins supported by a single fiat currency are usually regarded as payment tools, and other types of stablecoins (multi-currency support stablecoins, asset mortgage, cryptocurrency mortgage, algorithm stability) are regarded as investment tools, and different regulatory rules are applied respectively. First, for stablecoins supported by a single currency, payment tools or electronic currency regulatory frameworks are applicable; stablecoins collateralized by multiple currencies apply different (usually stricter) rules.

Filipino mortgage-type (single currency support) stablecoins function is similar to electronic currencies in the traditional financial system. When users hold such stablecoins, they expect that they can maintain a stable value of the same value as fiat currency, and can be exchanged into the corresponding fiat currency at any time when needed. Regulators around the world generally regulate it as a separate category. For example, the EU's Crypto Assets Market Supervision (MiCA) divides stablecoins into electronic currency tokens (EMTs) pegged to a single fiat currency and asset reference tokens (ARTs) that refer to multiple assets. EMTs are incorporated into existing electronic currency regulatory rules (EMD2) as payment tools, while ARTs comply with other regulations.

First, supervision focuses on ensuring the security and reliability of a single currency supporting stablecoin as a payment tool. To this end, the issuing entity is usually required to meet a range of conditions: it is necessary to obtain a specific license, such as a payment institution or an electronic currency license; it has sufficient minimum capital; it is particularly critical.It is the management of reserve assets, and it is necessary to ensure that their value fully covers the issuance volume (100% reserve), is properly kept to prevent various risks such as theft, fraud, and cyber attacks, strictly separate from the issuer's own funds, and maintain high liquidity (mainly cash and short-term government bonds).

At the same time, the user must be given the right to redeem at face value at any time. In addition, the issuer must bear the responsibility for consumer and investor protection, such as information disclosure, complaint handling, data protection, etc., and must strictly implement anti-money laundering and anti-terrorist financing regulations.

Secondly, in order to prevent and control the systemic risks that stablecoins may cause, regulators generally impose stricter regulatory regulations on "systemically important stablecoins". In response, major global regulators have adopted different strategies from clear standards to case assessments, with the EU and Singapore being two typical representatives.

The EU's MiCA clearly distinguishes "significant EMTs" from general electronic currency tokens (EMTs) from standards such as the number of users, issuance scale, and degree of connection with the financial system. Important EMTs are considered large-scale stablecoins with potential systemic risks, and MiCA has higher capital, governance, liquidity management and additional reporting requirements, and are also directly regulated by the European Banking Authority (EBA).

The Monetary Authority of Singapore (MAS) does not set a clear set of quantitative standards to define the so-called "systemically important stablecoins", but retains regulatory discretion to determine through case-by-case assessment whether a particular stablecoin needs to impose stricter or additional regulatory measures due to its size, relevance or risk characteristics.

The third is to generally implement differentiated (usually stricter) regulatory regulations for reserves of stablecoins that contain multiple currencies. This is mainly because compared with stablecoins supported by a single currency, stablecoins supported by multiple currencies face more complex risk environments, such as liquidity issues, credit risks, etc., which makes it difficult for them to fully comply with pure payment tools or electronic currency regulatory rules. Based on this general understanding, differentiated treatment methods have been adopted in regulatory practice.

For example,The EU's MiCA classifies stablecoins supported by multiple currencies as asset reference tokens (ARTs) together with tokens reserved by other assets (such as gold), and has formulated specific standards for reserve composition, liquidity management and capital adequacy ratio for these tokens, which are more stringent than the regulatory requirements for "electronic currency tokens" (EMTs) supported by a single currency.

Second, for other stable coins (asset mortgage, cryptocurrency mortgage, algorithm stable), according to their contract structure and functional characteristics, they may be applicable to regulatory frameworks similar to securities and commodities respectively.

First, for stablecoins that may be regarded as securities, the applicable international consensus is that as long as cryptocurrencies (including such stablecoins) meet the definition of "financial instruments", they should be regulated as securities.

When people buy and hold stablecoins, it may be more suitable for risk management by using securities regulatory (such as stocks, bonds) models.

The famous American "Howey Test" provides reference standards for how to determine whether a stablecoin constitutes a "security". According to the test, four conditions must be met to determine that an asset constitutes a "security" at the same time: (1) investment of money must be invested; (2) invested in a collective enterprise or a common enterprise; (3) investors have reasonable expectations of profits; and (4) profits mainly come from the efforts of the issuer or third party, rather than the investor themselves.

For stablecoins, "profit expectations" may originate from various forms, including but not limited to: interest generated by reserves, appreciation of related tokens (such as governance tokens), share of reserve management income, and pledge or borrowing income generated by decentralized (DeFi) protocols through the management of user collateral assets.

Based on this standard, different types of stablecoins have certain probability of belonging to the scope of securities regulation, and are sorted from large to small according to the possibility.Especially:

(1) Cryptocurrency collateralized stablecoins are the most likely. This is because their value relies primarily on other cryptocurrencies as a guarantee (such as minting $100 DAI, requiring depositing at least $150 worth of ETH) and often operates through complex decentralized financial platforms, such as earning income through borrowing or pledge. This way of operation is much like an investment pool or structured product, and investors are actually expecting a return through the operation of the system.

(2)Algorithm stablecoins are second, especially governance tokens or "share" tokens that match them. These tokens are designed to share the risk of price fluctuations or share the profits generated by the system (such as the gains obtained by minting new coins), which is essentially an investment in the future development of the system. These tokens are often emphasized in publicity with value-added potential and therefore may be in line with the basic characteristics of securities.

(3) Certain asset-collateralized stablecoins may also meet the definition of "securities". In particular, when the reserve assets of these stablecoins are more complex (for example, including multiple securities or low-rated bonds), or the project party actively manages these assets in search of returns, or their overall structure is similar to fund shares (for example, gold ETFs), they are more likely to be included in the securities category.

As for the inclusion of specific cryptocurrencies in securities regulation, a certain international consensus has been formed. For example, former chairman of the Securities and Exchange Commission (SEC) Gensler has repeatedly emphasized that most cryptocurrencies are likely to fall into the securities category. Similarly, the EU, Japan, Singapore, etc. generally believe that if cryptocurrencies meet the local definition of "financial instruments" (or similar), they should be regulated as securities. The core of this type of regulation is to protect investors, and the main measures include mandatory registration, information disclosure, and market behavior supervision. Second, for situations that may be considered as commodities, the focus of regulation is to ensure fair, transparent and efficient operation of the commodity market and prevent market manipulation.

Two types of asset-solidated stablecoins may be classified as commodities:

The second category is stablecoins that use cryptocurrencies that have been recognized as "commodities" by law. For example, in the United States, the Commodity Futures Trading Commission (CFTC) has identified Bitcoin as commodities, so stablecoins that use Bitcoin as reserve assets may also need to comply with commodity regulatory regulations. Especially when their operating model is similar to commodity funds or involves related derivative transactions, the rules of institutions such as CFTC may apply.

This model has inherent fragility: under extreme market pressure, the stability mechanism is prone to failure, which may cause the currency price to seriously deviate from the target value and even fall into a "death spiral" - the token price plummeted and cannot recover. The Terra/Luna incident in 2022 is a painful example.

In view of these risks, major economies are generally cautious about algorithmic stablecoins. For example, the EU's MiCA has explicitly banned the issuance of algorithmic stablecoins that are not supported by sufficient actual assets. In the United States, although a nationwide regulatory framework has not been finalized, several legislative proposals under discussion also tend to impose strict restrictions on them. For example, the relevant draft discussed by the House Financial Services Committee has sought to ban the issuance of new "endogenous collateral stablecoins" (usually regarded as a key type of algorithmic stablecoins) and impose a two-year moratorium.

Fourth, all stablecoins must comply with anti-money laundering and anti-terrorist financing.nt-="">(AML/CFT) regulatory provisions.

No matter what type of stablecoin it is, and the service providers associated with it (such as issuing agencies, trading platforms, fund custodians, etc.), they must comply with the universally applicable anti-money laundering (AML) and anti-terrorism financing (CFT) regulations. These regulations are usually based on the standards of the International Financial Action Task Force (FATF) and have been adopted and enforced by major economies such as the United States, the European Union, Japan, and Singapore.

Specific supervision includes three aspects: one is institutional access management, requiring institutions (VASPs) that provide virtual asset services must first register or obtain a license before they can conduct business; the second is customer identity review, which must verify the customer's true identity, understand the nature of their business, and conduct stricter investigations on customers with higher risks; the third is a transaction monitoring and reporting system, requiring a system to be established to monitor suspicious transactions and report to relevant departments, and at the same time, the necessary information of both parties to the transfer of virtual assets must be transmitted.

2. Bitcoin, Ethereum and other cryptocurrencies: The classification is controversial, and they all emphasize anti-money laundering compliance and consumer protection

In addition to stable currencies, there are also cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) that are not pegged to any other assets in the market. According to whether there is an independent blockchain infrastructure, these cryptocurrencies can be divided into two categories: main chain coins and application-based tokens. Main chain coins are the native currency of the blockchain network, with its own independent blockchain infrastructure and consensus mechanism; while applied tokens are built on the existing blockchain platform, with specific functions or representing specific rights and interests. The regulatory trends of this type of cryptocurrency are mainly concentrated in the following aspects: First, for main chain coins, Bitcoin (BTC) is generally regarded as a commodity; and whether its token (ETH) should be regarded as a securities after Ethereum turns to the Proof of Stake (PoS) mechanism has caused widespread regulatory controversy.