World Economy
Regulating the Unregulated: What Is the Future of Crypto Assets?

If international rules and regulatory practices are not developed and a global regulatory environment does not emerge, then the rapid spread, high value volatility and growing volumes of the crypto market could become a real threat to the stability of the global finance system and create serious problems for regulators and tax authorities in many countries, writes Valdai Club expert Alexander Losev.

In the second decade of its existence, cryptocurrencies have turned from an IT phenomenon into a popular class of digital assets and are beginning to occupy a special place in the global economy and finance, competing with banks and payment systems in the field of cross-border payments, diverting investment capital from the traditional stock market and even claiming to be so-called “digital gold”, although cryptocurrencies do not perform all of the basic functions of real money.

Cryptocurrencies are digitally encrypted transaction verification codes (tokens) in a distributed, blockchain-based network. Blockchain is a tool for accounting and registration, and token (or digital “coin”) is a new word in accounting after debit and credit. Blockchain is not a productive technology, unlike many other digital technologies such as 3D printing, industrial control systems, digital communications, or digital photo and video. In addition, the technologies of blockchain networks and distributed registries have had a catastrophic effect on the energy efficiency of traditional digital payment technologies. As of January 2022, 2.3 MWh of electricity was spent on one bitcoin transaction, while only 149 kWh of electricity was spent on 100,000 payments in the VISA system. The difference is nine times or more.

There are also risks that the “crypto” process — a super-popular way to earn easy income in the world — may become a “digital cemetery” for investors’ money if regulators fail to curb the elements of the crypto market. Asset bubbles have already begun to deflate, and rising US Federal Reserve interest rates as well as other rising central bank rates will only speed up this process. There is also a danger that quantum computers will, in the near future, demolish the cryptographic foundations of “cryptocurrencies”.

If international rules and regulatory practices are not developed and a global regulatory environment does not emerge, then the rapid spread, high value volatility and growing volumes of the crypto market could become a real threat to the stability of the global finance system and create serious problems for regulators and tax authorities in many countries.

Financial, environmental and criminal risks from crypto assets

The IMF notes on its website that “cryptisation” — the process of transferring funds from national currencies to cryptocurrencies — can reduce the ability of central banks to efficiently conduct monetary policy. It could also pose risks to the financial stability of emerging markets and developing economies. These are systemic risks. Increased demand for crypto assets contributes to the outflow of capital, which in turn affects the foreign exchange market. The (pseudo) anonymity of crypto assets, according to IMF experts, creates data gaps for regulators and can open unwanted doors for money laundering as well as the financing of terrorism. Threats to the fiscal policy of states may increase, given that crypto assets contribute to tax evasion. The central banks seigniorage (profits earned from the right to issue currency) could also decline.

The operational and financial risks associated with the crypto assets, crypto exchanges and wallets in the crypto market are much higher than in the regulated financial market. Risks in the field of protecting the rights of investors and consumers remain significant for all economies in the world. All this underlines the need to develop comprehensive international standards to regulate the crypto market.

The “mining” of cryptocurrencies, which requires enormous energy costs and diverts real resources from the world economy at a time when Europe and Southeast Asia are experiencing serious energy crises, prompts rejection and criticism not only among the adherents of the “green transformation”, but also among the governments of countries, following the principles of sustainable development, and responsible investors committed to the principles of ESG.

Cryptocurrency mining creates a huge carbon footprint, overloading power grids and generating capacity, and this can no longer be ignored.

Cryptocurrencies that allow anonymous payments are a real boon for criminal groups involved in the sale of drugs, extortion, human organs trafficking and other illegal operations. Electronic bitcoin wallets have been used by terrorists in Syria, Iraq, Libya and Afghanistan. Global Drug Survey statistics show a sharp increase in the use of cryptocurrencies to buy drugs in the EU countries.

The US Government Accountability Office report published on January 10, 2022, notes that cryptocurrencies are increasingly being used in human and drug trafficking. The GAO and the Congressional Investigation Committee point to a fivefold increase in the number of suspicious activity reports filed by the Financial Crime Enforcement Network (FinCEN) over the past five years.

Regulation of the unregulated

It is very difficult for governments and central banks to regulate digital decentralised systems, which were originally created to avoid state control and were specifically designed to exclude government agencies and banks from their circuit of “money” circulation and from the confirmation of transactions and rights.

It is even more difficult to develop a common approach to cryptocurrencies for countries with different economic and political weights. In the largest economies of the world, the assets of traditional banking systems amount to tens of trillions of dollars and significantly exceed the size of the global crypto market, but the world’s crypto market is also several times greater than the money supply of some developing countries and several dozen times bigger than that of others. Decentralised forms of finance (DeFi) are gaining popularity in developed countries, while peer-to-peer (P2P) platforms are gaining ground in emerging markets.

Some central banks see cryptocurrencies as a threat to the financial sovereignty of their countries and as a risk to traditional banking systems and citizens, including the risks of fraud, theft and hacking, and have therefore come up with a proposal to completely ban them. Other regulators believe that it is enough just to monitor the crypto market so as not to threat the innovation now, but later to apply existing legislation and regulations to this sector of “digital assets”.

In states with unstable regimes, cryptocurrencies can be considered by both the elites and counter-elites as a potential tool of colour revolutions. Crypto, in the event of a crisis of legitimacy, allows certain groups to fund political processes and conduct transactions without the knowledge of the authorities. 

Cryptocurrencies and blockchain-based distributed databases allow the state to be excluded from the system of monetary circulation and proof of rights, so in the event of a crisis of power, dual power and/or the collapse of public administration, interest groups can continue to fund and guarantee proof of their property rights until a new regime is established, or put under control by a foreign power.

But even if crypto technologies bring users into a grey zone in terms of control, the interaction of the crypto market with the real world, real people and real finances is possible and necessary to control. A huge ecosystem has been created in the world, consisting of crypto exchanges, miners, crypto exchangers, cold and hot wallets, investors, speculators, developers, as well as issuers of stablecoins — derivatives of cryptocurrencies. 

Since attitudes towards the crypto market vary between the developed and developing countries and between unstable regimes and mature democracies or strong states, it will be very difficult to adapt the regulatory rules of one country in another country. The rules should be global and exclude regulatory arbitrage.

The problem of regulating the crypto market has become global, so the task of doing so has been taken on by the institutions which manage the financial system, such as the International Monetary Fund, the Basel Committee on Banking Supervision, the Financial Action Task Force on Money Laundering — FATF, and the International Organisation of the Securities Commissions (IOSCO).

It is planned that the control zone of regulators will include operations for the exchange of traditional fiat currencies for cryptocurrencies, crypto exchanges, intermediaries providing access to crypto wallets and services, as well as any economic entities that accept payments in both traditional currencies and crypto. The standardisation of payment systems will be carried out and the certification of providers of services for storing and clearing transactions will be introduced. Cryptocurrency mining will be separately controlled, and a number of countries will ban it.

Recommendations of global institutions for the regulation of crypto assets

The IMF believes that the global regulatory framework should contain at least three main elements: compulsory licensing; unified regulatory requirements for service providers; unified capital and liquidity requirements for financial institutions.

Service providers for the storage, settlement and transfer of crypto assets must be licensed and authorised, and the licensing criteria must be international and common.

Investment services and products should be subject to requirements similar to those set by the securities regulator for brokers and dealers, and payment services and products should be subject to requirements similar to those for bank deposits of credit institutions that are supervised by central banks or authorities regulating payment supervision.

Banking, securities, insurance, and pension regulators should set capital and liquidity requirements for credit and non-bank financial institutions, set limits on different types of crypto assets, and establish a risk assessment and the ability of investors to make prudent decisions. If regulated entities provide custodial services for the storage of crypto assets, then the requirements should be aimed at eliminating the risks arising in connection with the performance of custodial and accounting duties.

Regardless of the initial powers, all of the supervisory authorities of states, including central banks, financial and fiscal regulators, to securities control authorities, should receive additional powers to regulate crypto assets and coordinate their actions at the international level to eliminate the risks arising from various types of use of cryptocurrencies and their derivatives.

The IMF imperatives suggest that the traditional banking system urgently needs to take control over the crypto asset market due to the threat posed by decentralised finance, as financing passes from banks into the hands of people and legal entities which operate outside the legal field, seek to capture a significant share of the crypto market and resist regulatory change.

The IMF also warns that some countries may be tempted to take the easier decision of accepting crypto assets as additional national currencies, as many cryptocurrencies are relatively safe and easy to transact in. In most cases, however, the risks and costs outweigh the potential benefits. Financial integrity would suffer and domestic prices could become highly volatile. The IMF documents do not mention punishing countries that have legalised cryptocurrencies as legal tender, but it is unlikely that the central banks will risk opposing the position of the IMF.

The FATF has set a standard for the regulation of virtual assets and related service providers to take action against money laundering and to limit risks. But while not all countries are consistent in complying with this standard, this can create problems, given the cross-border nature of transactions with crypto assets.

The practice of regulation of crypto assets


In the United States, crypto assets are in the spotlight of several federal agencies at once: the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CAEC), the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), the Financial Crimes Enforcement Network (FinCEN).

At the same time, in the United States there is no single definition of what a cryptocurrency is. From a legal perspective, the use of vague definitions such as “digital assets” gives legislators and regulators more room to regulate and oversee. The main powers are in the hands of the Securities and Exchange Commission, which controls the issuance and resale of any digital asset. Under US law, the concept of “security” includes “investment contract”, which, as defined by the US Supreme Court, means the investment of money in any enterprise with a reasonable expectation of profit from the entrepreneurial or managerial efforts of others. The SEC considers that any issued token has a “utility”, which means it is considered a security and is subject to regulation. And if it is a “security”, then the issuer of cryptocurrency tokens is obliged to register what they issue. And the SEC has the power to both register and refuse registration. For example, Telegram, Kik Interactive Inc and Meta (Facebook) were rejected.

The Financial Crimes Enforcement Network monitors entities providing financial services for the exchange and storage of cryptocurrency assets. There are sanctions for non-compliance with FinCEN rules, including fines and criminal prosecution, and these sanctions may apply to foreigners. This is monitored by the US Treasury’s Office of Foreign Assets Control (OFAC).

FinCEN, for example, imposed a $100 million civil fine on one of the largest virtual currency derivatives exchanges, BitMEX, for violating the Bank Secrecy Act (BSA) and for defying FinCEN regulations.

The Internal Revenue Service (IRS) considers crypto assets to be property that is taxed on any profits from cryptocurrencies, no matter how virtual they are.


The Chinese authorities have imposed a ban on financial transactions with cryptocurrencies and are conducting a consistent fight against the mining of digital assets. In September 2021, the People’s Bank of China declared all cryptocurrency transactions illegal. The Chinese regulator believes that such activities “seriously threaten the security of people’s property”. A statement from the People’s Bank of China emphasises that commercial activities related to virtual currency are “illegal financial activities” and are unacceptable.

The National Development and Reform Commission of the People’s Republic of China (NDRC) issued a notice saying the country would take strict measures against cryptocurrency mining as part of its efforts to reduce carbon emissions. The NDRC ruling states that activities such as mining, and any mining projects, must be marked as “to be eliminated”.

At the same time, China is preparing to launch a digital yuan, which will be one of the forms of China’s national currency along with cash and non-cash yuan.

European Union

Cryptocurrencies are legal assets in the European Union and regulated under the member states separately. The taxation of cryptocurrency in each country is different and the tax rate on income received ranges from 0 to 50%. In 2015, the EU Court of Justice ruled that exchanges between traditional currency and cryptocurrencies or virtual currencies should be exempt from VAT because cryptocurrencies are services, not goods. In 2021, the European Commission published a package of legislative proposals to regulate the transfers of funds and certain crypto assets to protect EU citizens and the financial system from money laundering and terrorist financing. The EU has set a threshold of 1,000 euros for the transfer of information about transactions with crypto assets in accordance with the FATF recommendations.

The EU is proposing to introduce a special regime for crypto asset providers, in line with the Markets in Crypto-Assets (MiCA) regulation and the Digital Operational Resilience Act (DORA). The European Council indicates on its website that the goal of MiCA is to create a regulatory framework for the crypto asset market that supports innovation and uses the potential of crypto assets in a way that maintains financial stability and protects investors. DORA’s goal is to create a regulatory framework for digital operational resilience, by which all firms must ensure that they can withstand all types of information and communication technology-related disruptions and threats in order to prevent and mitigate cyber threats. Once these laws and regulations are passed, only licensed providers will be allowed to offer cryptocurrencies and operate cryptocurrency exchanges in the EU.


Japanese law defines “crypto assets” as payment methods that are not denominated in fiat currency and can be used by anyone. There are no restrictions on owning and investing in cryptocurrencies. In Japan, crypto asset exchange service providers are overseen by the Financial Services Agency (FSA). The FSA also cooperates with two self-regulatory organisations in the cryptocurrency industry: the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA). JSTOA focuses on token issuance projects and crowdfunding events. The JVCEA is authorised to create rules applicable to cryptocurrency exchanges. Since 2021, crypto assets in Japan have been subject to an anti-money laundering regime and cryptocurrencies are subject to the “Act on Prevention of Transfer of Criminal Proceeds”.


There is no single approach to the regulation of crypto assets yet. The regulatory standards applicable to crypto assets in different countries are mainly limited to money laundering and proposals to control financial risks. Global institutions of financial governance insist on the introduction of uniform standards and on the application of existing regulation governing securities, exchange and banking activities to the crypto-currency sphere.

In addition, in the near future, the central banks of developed countries will begin to launch digital versions of their fiat currencies (national digital currency or central bank digital currency, CBDC) into circulation and, perhaps, they will not tolerate competition from cryptocurrency. Then the global financial world will follow the path of banning crypto assets, following the example of the People’s Bank of China or the Central Bank of Russia.%

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.