Now that Bitcoin is back on track, regulatory agencies have suddenly remembered that cryptocurrencies exist. What is next for crypto regulation in 2021, and how much of an impact will new faces like Janet Yellen have? Regulatory uncertainty is once again upon us, and recent statements indicate that investors have a tough year to overcome.

Not an avid reader? That’s fine. You can also discover what’s up next for crypto regulations in 2021 by watching our two-part Youtube series! (US regulations & EU regulations)

Regulators tend to talk about the dangers of Bitcoin and other cryptocurrencies only after the market sees a notable rise in value. 2021 is not any different, and crypto regulation seems to be back on the table. The only question is, how serious is the threat this time around?

As January came to an end, we saw advances coming from three influential regulatory jurisdictions.

In the United States, Treasury Secretary Janet Yellen stated that she plans to limit the use of cryptocurrencies. During her confirmation hearing last month, Biden’s new cabinet pick mentioned that Bitcoin is used for illegal activities such as financing terrorism. She nevertheless acknowledged that cryptocurrencies have a good side to them as well.

In Europe, ECB president Christine Lagarde warned that Bitcoin should be regulated at a global level. Lagarde views crypto not as currencies but as a highly speculative asset used for conducting “funny business.”

To add a cherry on top, we now once again have rumors of a potential crypto ban in India. Their parliament will vote on a regulatory framework in the coming months, which has yet to be discussed.

From these threats alone, we conclude that 2021 will be a turbulent year for cryptocurrencies. And no, we are not talking about the market either. What does the potential regulatory onslaught look like, and does the average investor have any chance to persevere?.

Cryptocurrency regulation in the United States

Out of the three jurisdictions that we will be talking about, the United States certainly has the most uncertain circumstances. The environment is not as dangerous, but it is worth noting that there is more speculation than real information. A new Presidential administration that completely differs from the previous one is now in power, which leaves many wondering what kind of regulatory pressure to expect.

The worrisome sentiment is justified, given that a peculiar new face expressed fear regarding Bitcoin and its use case in funding illegal activities. On her first day in the office, the new U.S. Treasury Secretary Jannet Yellen publicly shared her concern about the use of cryptocurrencies.

Biden’s nominee believes that cryptocurrencies are mainly used for illicit financing. When asked during her confirmation hearing about her intentions, Yellen stated that she would examine how cryptocurrencies can be curtailed. Specifically, she seeks to prevent criminals from utilizing their usual money laundering channels.

A similar attitude was revealed in a letter to the Senate Finance Committee, in which Yellen wrote:

“I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities...If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.”

In another section, the Treasury Secretary addressed the fact that digital assets indeed have the potential to “improve the efficiency of the financial system.”

From an objective standpoint, the U.S. regulatory environment does not look that bad. For now, at least. It was clearly voiced that there is a distinction in how Bitcoin is used and that regulators will only combat money laundering and terrorist financing. There are no intentions of limiting cryptocurrencies in the wake of their astonishing rise.

The terrible departure of OCC Chief Brian Brooks

Can the lukewarm, seemingly neutral, reception of cryptocurrencies voiced by the new administration replace the proactive determination given by ex-OCC Chief Brian Brooks?

Since May last year, Brian Brooks has (by all possible standards) done a great job as the Comptroller of the Currency (OCC). During his tenure, Brooks realized multiple innovative achievements. His most significant accomplishment involves allowing national banks to facilitate payments and other financial activities with the help of stablecoins and blockchain technology.

It is also worth mentioning that the OCC chief dealt heavy blows to those with the most power in the U.S. In October alone, the regulator issued three astounding penalties to careless banking giants. His last remarkable action in this field is a $250 million fine issued to JPMorgan Chase Bank for failing to perform adequate internal controls.

Brooks was indeed a man of the people, doing everything in his power to bring a more decentralized and fairer system. His previous experience at Coinbase, combined with numerous statements that described crypto as the future of finance, left many speechless. Could it be really possible that such a staunch Bitcoin advocate holds an important position?

The story had sadly ended when Brooks stepped down on January 14, as a result of Trump’s five-year term nomination being denied by the United States Senate. Blake Paulson became the OCC chief in the meantime, an individual with no past history with the crypto sector. We know nothing about Paulson’s stance towards cryptocurrencies, and even if we did, it is fair to say that he can never replace his predecessor.

Cryptocurrency regulation in the European Union

In continental Europe, we hear a similar narrative about money laundering at almost the same time. On January 13, ECB president Christine Lagarde told Reuters in an interview that Bitcoin enables money laundering and that it should be regulated at a global level.

Commenting on cryptocurrencies and their adverse side effects, Lagarde said:

“It is a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”

According to Europe’s leading monetary authority leader, global authorities should agree on a set of regulations that would lead to a decrease in criminal activity.

Lagarde points out that multilateral cooperation is needed in this matter, whether in the scope of the G7 or the G20, adding that the process of expanding into cryptocurrencies has already been started by the Financial Action Task Force (FATF).

Being an intergovernmental organization that focuses exclusively on money laundering and terrorism financing, the FATF can kickstart crypto regulations not only in Europe but worldwide as well. The organization has a long history of publishing recommendations on how different countries should implement legal frameworks for digital assets.

While perhaps Lagarde has not said much in her interview, it comes off as an unmistakable signal that the EU is serious with its intent to regulate private digital currencies. After all, her comments were publicized at a time when cryptocurrencies are all the rage.

A plan set in motion months ago?

Regulatory announcements are nothing new in the EU. The campaign officially began in late September 2020 when the European Commission put forward plans to regulate crypto assets for the first time. It is interesting to note that this event occurred only a week before the European Central Bank (ECB) released its report on the digital euro.

At the time, the union’s executive branch announced that it seeks to reduce market fragmentation in the field of digital finance. The Commission’s Vice President Valdi Dombrovskis stated in an interview that crypto service providers would soon be able to interact with citizens from all member states instead of being limited to their home country.

But while European crypto companies are pushed forward, the Commission intends to have an iron fist when it comes to the use of stablecoins. The entity plans to create a clear distinction between certain types of assets that will enjoy friendly regulations and those that may fall under the scope of Europe’s securities markets legislation (MiFID).

The first category of cryptocurrencies will fall under a new pilot regime that enables financial assets to be traded and settled in the form of crypto assets. These assets will be exempt from Europe’s legal infrastructure and agencies such as the MiFID.

For the second category, which includes stablecoins, the EU Commission has a more aggressive approach in mind. An official press release notes:

“For other crypto-assets, the Commission is proposing a comprehensive framework that will protect consumers and the integrity of previously unregulated markets in crypto-assets.”

Another section of the press release states that the framework will not only cover entities issuing crypto assets but all kinds of firms that offer similar services as well. This list includes crypto custodians, crypto exchanges, and other crypto trading platforms. As for stablecoins, the commission will subject them to ‘enhanced rules.’

In an interview with CNBC, Dombrovskis confirmed that the legislative process for incorporating the crypto asset regulatory framework would take at least a year.

Digital euro

As previously mentioned, the EU Commission’s announcement was coincidentally shared only a week before the ECB released a report of its own. Published on October 2, the ‘report on a digital euro’ reveals that the Central bank plans to release a Central Bank Digital Currency (CBDC) that will revolutionize the continent’s digital payments network.

Specific paragraphs from the report show that the ECB also stands firmly against the use of stablecoins. This is only natural considering that private digital currencies represent a direct competitor to the future digital euro.

Moreover, it was noted that the regulatory sandbox period would last until mid-2021. Briefly put, this period is made for testing the digital euro and discovering what benefits it offers. If there are more advantages than disadvantages, the ECB will almost instantly commence the digital euro’s development.

No one knows how long the development phase could potentially last. But based on the previous announcement, it is evident that the crypto regulatory framework is made explicitly for supporting the incoming digital euro.

With that in mind, do Lagarde’s recent comments indicate that Bitcoin and stablecoins represent a threat to the digital euro? Officially the threat comes from criminals and terrorist financing. However, that would not be the first time that regulators use this narrative for obstructing decentralized cryptocurrencies.

2021 might be, in fact, a year in which the European Union expands its pressure on cryptocurrencies and private crypto companies. Instead of an outright ban, it is more realistic for the EU to make investing in cryptocurrencies and using them as difficult as possible.

This has severe implications on widespread adoption. Instead of using decentralized cryptocurrencies like Bitcoin, EU citizens may end up using centralized digital currencies like the digital euro instead.

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Cryptocurrency regulation in India

India is infamous for having a constant stream of news regarding cryptocurrency bans. In the past couple of years, not even a month passed without either rumors or official sources saying that a ban is imminent.

Cryptocurrencies are quite controversial in India. The nation’s citizens have to continually fight against regulatory threats in order to preserve the freedom of holding decentralized assets. Most investors enjoyed the seemingly calm state for most of 2020, but the new year presents new trouble.

In late January, the government introduced a draft bill titled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.” Before becoming a part of the official legal framework, the bill must first be discussed by the Indian parliament.

The main goal of the proposed law is to create a framework in which the Reserve Bank of India can issue a central bank digital currency. However, it will also prohibit the use of all private digital assets, except those that “promote the underlying technology of cryptocurrency and its uses.”

This approach to cryptocurrencies is nearly identical to the one of the EU. Here, we also have a case in which central banks and governments wish to ostracize decentralized cryptocurrencies while introducing their own centralized cryptocurrencies.

At the time of writing, crypto assets can be sold and purchased in India, but they are not recognized as a form of legal tender. Instead of proposing a framework that would legalize cryptocurrencies and making them safer, the Indian government will instead outright ban them.

Again, this is not yet confirmed as the bill might still change before it is passed by the Parliament. Nevertheless, the direction in which this is heading remains clear.

Final word

Cryptocurrency regulations are not necessarily harmful, especially when they are designed to protect investors. The blockchain industry is not perfect at all, and with the number of scams circulating, it is a matter of time before all governments begin to regulate digital assets.

We had the chance to find out that this is not the case this year. Crypto regulations are created for institutions and not for the people. While the United States fares well at the current moment (apart from the Ripple fiasco with the SEC), two major crypto markets appear to be in trouble.

Both the European Union and India are working on creating the foundation for a future CBDC. Since there is a conflict of interest, this means that private cryptocurrencies will have to be limited or even banned. Whilst not critical or panic-inducing, the current events might foreshadow the state of crypto regulation for the rest of 2021.

Who will prevail in this battle? Usually, it would be certain that institutions have the upper hand. However, the recent Gamestop clash between Reddit investors and hedge fund managers proved that we have the ability to overturn everything with the right motivation.

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