Crypto innovation, regulatory challenges
Published Date: 05 March 2025
Published in: Business Recorder
Cryptocurrency has emerged as a transformative force in the global financial ecosystem. What started as an experimental form of digital money with Bitcoin has now evolved into a multi-trillion-dollar industry, encompassing decentralized finance (DeFi), stablecoins, and non-fungible tokens (NFTs).
However, with rapid growth comes the need for structured regulatory oversight to balance innovation with investor protection and financial stability.
Cryptocurrency is no longer a fringe technology; it has become a mainstream financial asset with major institutional backing. Companies like Tesla, Visa, and JPMorgan have incorporated crypto into their business models.
Governments are also exploring Central Bank Digital Currencies (CBDCs) as a response to the rise of decentralized finance. Despite its potential, regulatory uncertainty remains a key barrier to widespread adoption.
The Financial Innovation and Technology for the 21st Century Act (FIT21), introduced in 2024, is a landmark law designed to provide regulatory clarity for digital assets.
Key provisions include defining jurisdiction, where the Commodity Futures Trading Commission (CFTC) will oversee digital commodities like Bitcoin, while the Securities and Exchange Commission (SEC) will regulate digital assets offered as part of investment contracts.
The Act also implements market integrity protections with enhanced disclosure requirements and anti-fraud measures to protect investors, while encouraging innovation by supporting blockchain technology and decentralized finance while harmonizing U.S. regulations with global standards.
Similarly, the Lummis-Gillibrand Payment Stablecoin Act of 2024 aims to establish a clear regulatory framework for stablecoins, ensuring financial stability and consumer protection.
The bill mandates that stablecoin issuers maintain one-to-one reserves backed by liquid assets such as US Treasury bonds. Issuers with assets exceeding $10 billion fall under federal regulation, while smaller issuers are regulated at the state level. Additionally, algorithmic stablecoins, which could pose financial risks due to their unbacked nature, are banned under this legislation.
Regulatory developments in cryptocurrency are not limited to the US; other major countries have also been actively shaping their frameworks to address the challenges and opportunities presented by digital assets.
In the European Union, the Markets in Crypto-Assets (MiCA) regulation, implemented in 2024, represents a significant step forward. MiCA provides a comprehensive regulatory framework for crypto service providers, including licensing requirements, consumer protection measures, and stringent anti-money laundering (AML) rules.
By harmonizing regulations across member states, MiCA aims to create a unified market for digital assets while ensuring financial stability and investor protection. This regulation is seen as a model for other regions, as it balances innovation with robust oversight.
In Asia, countries like Japan and South Korea have been at the forefront of cryptocurrency regulation. Japan, one of the earliest adopters of crypto-friendly regulations, has established a licensing system for cryptocurrency exchanges under the Payment Services Act. The country’s Financial Services Agency (FSA) closely monitors exchanges to ensure compliance with AML and cybersecurity standards.
South Korea, on the other hand, has implemented the Financial Transactions Reports Act (FTRA), which requires crypto exchanges to register with the Financial Intelligence Unit (FIU) and adhere to strict AML and know-your-customer (KYC) requirements. Both countries have taken a proactive approach to fostering innovation while mitigating risks associated with digital assets.
China, despite its ban on cryptocurrency trading and mining, has been actively developing its central bank digital currency (CBDC), the digital yuan. The People’s Bank of China (PBOC) has piloted the digital yuan in various cities, positioning it as a tool to enhance financial inclusion and reduce reliance on traditional cash.
While China’s stance on decentralized cryptocurrencies remains restrictive, its focus on CBDCs reflects a broader trend among central banks worldwide to explore digital currencies as a means of modernizing financial systems.
In the United Kingdom, the Financial Conduct Authority (FCA) has been tightening its grip on the crypto industry. The FCA requires all crypto asset firms to register and comply with AML regulations.
Additionally, the UK government has been exploring the potential of a digital pound, with consultations ongoing to assess the feasibility and implications of CBDC. The UK’s approach emphasizes consumer protection and market integrity, aiming to position itself as a global hub for responsible crypto innovation.
India, after years of regulatory uncertainty, has begun to formalize its stance on cryptocurrencies. In 2023, the Indian government introduced a taxation framework for digital assets, imposing a 30% tax on crypto gains and requiring the deduction of tax at source (TDS) for transactions.
While this move has been criticized for its high tax rates, it signals a shift toward recognizing cryptocurrencies as a legitimate asset class. The Reserve Bank of India (RBI) has also been exploring the development of a digital rupee, aligning with global trends in CBDC adoption.
Cryptocurrency mining plays a crucial role in securing blockchain networks and validating transactions. However, it faces challenges such as high energy consumption, leading to a shift toward sustainable mining practices. While China has banned mining activities, countries like the US and Canada are becoming attractive locations for miners due to favorable policies.
Ethereum’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) has significantly reduced energy consumption, showcasing a move toward more sustainable blockchain solutions.
Apart from mining, a robust crypto transaction monitoring framework is essential for regulatory compliance and fraud prevention. This process begins with data collection and integration, where blockchain transaction data from multiple networks like Bitcoin, Ethereum, and Binance Smart Chain is aggregated.
Integrating with cryptocurrency exchanges enables access to off-chain data such as user identities and fiat-crypto conversions, while APIs facilitate real-time data retrieval from blockchain explorers and exchanges.
Moreover, Know-Your-Customer (KYC) integration ensures that user identities are verified through document verification and biometric scans. Customer risk profiling is conducted based on factors such as geographic location and transaction history, and ongoing monitoring helps ensure compliance with declared activities.
Similarly, Know-Your-Transaction (KYT) implementation is essential in identifying suspicious transactions. Transactions are analyzed in real-time for anomalies, and risk scores are assigned based on factors such as transaction size, frequency, and connections to high-risk wallets. Additionally, suspicious activities like structuring and rapid fund movement between wallets are flagged for further review.
Anti-Money Laundering (AML) compliance involves tracing transaction paths using blockchain analytics tools to detect illicit activities. The wallet addresses and transactions are cross-checked against global sanctions lists such as OFAC. The suspicious transactions linked to darknet markets, ransomware payments, and terrorist financing are flagged and reported to authorities.
Real-time alerts and reporting mechanisms enhance compliance efforts. Similarly, automated alerts are triggered for high-risk transactions, prompting manual investigations to determine legitimacy. Compliance reports, including Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs), are generated by regulatory authorities.
As cryptocurrency adoption continues to grow, collaboration between industry leaders, governments, and regulatory bodies will be essential. The key to success lies in striking a balance between fostering innovation and ensuring investor protection. Governments that embrace regulatory clarity while encouraging blockchain innovation will emerge as leaders in the new digital financial era.
With frameworks like FIT21, the Lummis-Gillibrand Act, and MiCA, the world is moving toward a more structured and secure crypto ecosystem. The future of finance is digital, and the right regulatory measures will ensure that it remains both revolutionary and sustainable.
