An overview of regulatory strategies on crypto-asset regulation - challenges for financial regulators in the western Balkans

Abstract

The rise of the crypto-asset market has opened up a number of questions on their benefits and risks. As a new form of virtual property, cryptocurrencies and tokens of investment nature are characterized by specific technological infrastructure. In order to understand the regulatory perspective of the crypto-asset market, it is necessary to briefly present the issues related to digital assets infrastructure and the forms of crypto-assets, which blur the line between financial products and virtual property. Cryptoassets represent a form of fintech innovation that could materially affect the financial landscape (notably payments, investments and capital raising), may have impact on the financial sector and therefore may create conditions for regulatory arbitrage where regulated participants operate in a highly regulated environment. The Paper aims to identify the basic issues of the crypto-assets regulatory framework and the extent of applicable regulatory approaches. Comparative regulatory practices of selected countries, as well as the global regulatory perspective of this market, serve as a guide to assess the existing regulatory framework and regulatory challenges, in order to assess urging issues which the regulators in Western Balkan countries are facing. Regulators are confronted with a dilemma: how to promote financial innovation while preserving financial stability and protecting investors. That is why many regulators have adopted a regulatory stance in regulating distributed ledger (blockchain) technologies and tend to formulate regulatory strategies which are risk based, phased and adaptive. Regulatory responses vary from a complete ban on issuing or trading crypto-assets, warnings and principles-based regulation, to extending existing rules on the capital markets and payment systems to specific intermediaries which are licensed almost as financial institutions per se. A tendency towards developing a new set of legislation specifically aiming to register and/or license providers of services connected to virtual property based on cryptography may be observed, and a proposal for an EU regulation on Markets in Crypto-Assets is a clear example.