Lessons from World Leaders in Cryptocurrency Regulation

As digital assets like cryptocurrencies and blockchains, the technology that records and secures transaction information, continue to gain traction, the United States finds itself at a regulatory crossroads. With a market value of over $2.21 trillion (according to CoinMarketCap.com as of September 21, 2024) and growing mainstream adoption, digital assets are no longer a sideshow—they’re an integral part of the future of finance. Yet the United States has lagged behind in creating a coherent and comprehensive regulatory framework for this emerging sector.

Other countries aren’t waiting. Switzerland, Japan, the European Union, and emerging markets like Nigeria have all taken decisive steps to regulate digital assets in a way that encourages innovation while protecting consumers. The U.S. regulatory landscape, by contrast, remains fragmented, and crypto-focused voters remain uncertain as the presidential election approaches, trying to assess any signs of policy changes by Vice President Kamala Harris or the true motives and credibility of former President Donald Trump.

The Puzzle of US Cryptocurrency Regulation

Senator Sherrod Brown, chairman of the Senate Banking, Housing, and Urban Affairs Committee, and Senator Elizabeth Warren (D-MA), a member of the committee, have joined forces to lead a high-profile anti-crypto movement. Their efforts have manifested themselves in various ways, including through actions by SEC Chairman Gary Gensler and prudential regulators such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), which play key roles in enforcing their regulatory crackdowns on the crypto industry.

But a growing number of Brown and Warren’s Democratic colleagues in Congress say it’s time to change their tune and move toward cryptocurrency-friendly policies that balance consumer and investor protections with support for innovation in the Web 3 economy. Even Rep. Maxine Waters, a ranking member and outspoken cryptocurrency critic, recently hinted at a potential shift in her position. In an interview with Podcast “Native Land” during the Democratic National Convention, she suggested a pro-cryptocurrency approach for the next session of Congress if she were able to regain her position as chairwoman of the House Financial Services Committee.

If the U.S. continues to delay decisive action, it risks losing its competitive edge. Innovation and investment could soon flow to jurisdictions that have already established regulatory clarity, leaving the U.S. behind in the global race for digital assets. While the U.S. grapples with internal debates, several countries have already moved forward with robust and forward-looking regulatory frameworks. By examining its strategies, the U.S. can gain valuable insights into how to navigate this rapidly evolving space.

Learning from Global Leaders: Switzerland, EU, Japan and Nigeria

Switzerland: clear, flexible framework

Switzerland became a global leader in cryptocurrency regulation thanks to its early efforts to establish clear guidelines. The country’s Financial Market Supervisory Authority (FINMA) began developing its cryptocurrency regulatory framework in 2013. Switzerland divides digital assets into three groups: payment tokens (e.g. Bitcoin), utility tokens, and security tokens. This clear taxonomy allowed companies and investors to confidently navigate the regulatory landscape.

Switzerland’s Crypto Valley in Zug has attracted many blockchain startups due to its regulatory clarity and favorable tax policies. However, traditional banks have been hesitant to service cryptocurrency businesses due to concerns about money laundering risks, prompting some firms to relocate. Despite these challenges, Switzerland remains a center of innovation, with the successful launch of the Ethereum initial coin offering (ICO) in 2014 providing a key example of how regulatory clarity can foster growth in the industry.

European Union: MiCA and harmonization of regulations

The European Union is pursuing a unified approach to digital asset regulation through the Markets in Crypto-Assets Regulation (MiCA), proposed in 2020 and expected to be fully implemented by 2025. MiCA aims to harmonise regulation across all 27 EU Member States, ensuring consistent rules on consumer protection and market integrity.

A key goal of MiCA is to regulate stablecoins—cryptocurrencies pegged to traditional assets like the U.S. dollar. MiCA requires stablecoin issuers to maintain adequate reserves and adhere to transparency standards, addressing concerns raised by the collapse of TerraUSD in 2022. While some have argued that MiCA’s rollout has been slow, the legal certainty it brings could make Europe one of the most attractive markets for cryptocurrency innovation.

Japan: Leader

Japan was one of the first major economies to regulate cryptocurrencies after the collapse of Mt. Gox, a Tokyo-based exchange, in 2014. Japan amended its Payment Services Act (PSA) in 2017 to recognize Bitcoin and other cryptocurrencies as legal forms of payment. The country operates a dual regulatory system: payment tokens are regulated under the PSA, while security tokens are governed by the Financial Instruments and Exchange Act (FIEA).

Japan’s clear distinctions between different types of digital assets have allowed the country to develop a vibrant cryptocurrency market while maintaining solid consumer protections. However, smaller exchanges have struggled to meet the stringent requirements imposed by the Financial Services Agency (FSA), leading to closures and consolidation in the market. Despite these challenges, Japan’s focus on investor protection has helped restore confidence in the cryptocurrency market after several high-profile security breaches.

Nigeria: Financial Inclusion Through Cryptocurrencies

Nigeria provides a unique perspective on cryptocurrency regulation. Although the Central Bank of Nigeria (CBN) has banned financial institutions making it easier cryptocurrency transactions in 2021, cryptocurrencies are not illegal. Nigerians have turned to peer-to-peer (P2P) bitcoin trading, making Nigeria one of the largest bitcoin markets in the world.

Cryptocurrency has gained popularity in Nigeria as a hedge against inflation and currency devaluation. Bitcoin in particular is widely used for remittances, reducing the fees associated with international money transfers. Despite government restrictions, cryptocurrency has become a means of financial inclusion for Nigeria’s unbanked population, offering stability in an unstable economic environment.

Nigeria’s experience underscores the potential of digital assets to empower individuals in developing economies. As the United States considers its regulatory framework for digital assets, Nigeria’s example illustrates how cryptocurrencies can improve financial access for underserved communities.

America’s Bilateral Path Forward

The next U.S. Congress has a unique opportunity to examine global regulatory approaches and create a bipartisan framework that ensures transparency, fosters innovation, and protects consumers.

• Create a clear taxonomy:A classification system like the one in Switzerland could help resolve ongoing jurisdictional disputes between regulators and provide businesses with much-needed certainty.
• Create regulatory sandboxes:Implementing a federal test environment, similar to those used in Switzerland and Japan, would allow cryptocurrency companies to experiment under the supervision of regulators, encouraging innovation while ensuring compliance.
• Strengthening consumer protection:Like MiCA and the Japanese FSA framework, the United States should adopt clearer investor protection measures to prevent high-profile bankruptcies like the FTX scandal.
• Use cryptocurrencies for financial integration:Learning from Nigeria’s experience, Congress could explore how digital assets can improve access for underserved communities to the financial and innovation economy.

America’s delay could be a lever for the world

If the U.S. does not respond quickly and in a bipartisan manner in the next session of Congress, it risks losing its competitive advantage to countries that have already established clear, crypto-specific regulations. Innovation and investment could flow to jurisdictions like Switzerland, the EU, Japan, and even emerging markets like Nigeria, India, and Indonesia, leaving the U.S. behind in the global race for digital asset leadership.

For example, according to the Chainalysis Global Adoption Index 2024 released on September 11, 2024, India and Nigeria have already secured the top two positions in the world for grassroots crypto adoption, with Indonesia emerging as the fastest-growing market. Indonesia’s nearly 200% year-over-year growth and $157.1 billion in cryptocurrency market value are a changing landscape. These emerging markets, particularly in regions like Central and South Asia, are embracing alternative investments, decentralized finance (DeFi), and decentralized exchanges (DEXs) while bypassing traditional regulatory barriers. Their rapid adoption signals a global shift as these countries seize the opportunity to leverage the potential of cryptocurrencies.

The US remains fourth on the Chainalysis Index, but ongoing partisan gridlock could lead to further declines. Emerging markets, often seen as financially underserved, are increasingly embracing cryptocurrency as a tool for financial inclusion and economic innovation. Countries such as India, Nigeria, and Indonesia are showing significant growth, reflecting a global shift in digital asset adoption.

For the United States to remain competitive, a proactive, bipartisan approach is essential. By supporting innovation and protecting consumers through clear regulation, the United States can ensure it continues to lead in the emerging digital economy. As global progress continues at a rapid pace, the need for timely action is clear.