A Regulatory Overview of 2023

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The year 2022 was marked by disruptive events in the crypto world, reminding us of the need for precautions and measures. The FTX collapse was a catastrophic event that showed how quickly the entire system can be affected and how this economy is taking on an ever-growing scale. As a result, security entities and governments in many countries are developing new measures and protocols to deal with these events and guarantee exchange stability.

In 2023, stability and transparency will be crucial elements that must be ensured so that transactions take place securely and fraud and money laundering are reduced.

In Elliptic’s “Regulatory Outlook report 2023”, the most interesting issues to expect for this year are outlined. It is important to note that the global cryptocurrency market size was estimated at USD 4.67 billion in 2022 and is expected to reach USD 5.15 billion in 2023. With the ever-increasing popularity of cryptocurrencies, there is a need to regularize and protect these assets.

Governments and regulators around the world are recognizing the need for greater oversight of the crypto industry. In the US the SEC has taken a more active role in regulating the market, and in Europe, the European Union is currently working on a regulatory framework for cryptocurrencies. The goal of these measures is to ensure that the market remains stable and that investors are protected.

The report from Elliptic shows how this year promises to be interesting for the overall crypto industry. At the beginning of 2023, we are already seeing how the bases for greater control are being set up.

The focus of the debate is MiCa, that is the Markets in Crypto-Assets Regulation: this is a new regulatory framework for European crypto-assets aimed at protecting investors and ensuring financial stability while fostering innovation.

MiCA will require issuers of certain types of crypto assets, such as stablecoins, to be authorized by the Central Bank of Ireland, which will be the main control authority and meet regulatory requirements. This move towards greater oversight is a clear indication that regulators are taking the crypto industry seriously.

Moreover, the European Banking Authority will supervise significant issuers of Asset Reference Tokens (ARTs) and Electronic Money Tokens (EMTs).

It will be interesting to see how the crypto industry responds to MiCA and other controlling measures that are likely to follow.

One of the biggest pieces of regulatory news in 2022 was that the European Union finalized the text of its mammoth Markets in Cryptoasset (MiCA) regulatory framework. It is due for a formal vote by the EU Parliament and publication in the first half of 2023, and MiCA’s full provisions are expected to come fully into force before the end of 2024″

… from Elliptic Regulatory Outlook Report 2023

The Markets in Crypto-Assets Regulation (MiCA) is set to have a significant impact on entities that provide crypto asset services to third parties on a professional basis, known as Crypto-Asset Service Providers (CASPs). These CASPs will be required to meet a number of requirements, including those related to governance and liquidity.

MiCA also introduces new rules aimed at preventing market abuse related to any type of crypto asset transaction or service. The implementation in the EU is expected to take place in the coming months, with different timelines for different types of issuers and CASPs.

“Cryptoasset service providers (CASPs) in Europe will face extensive compliance requirements as a result of MiCA designed to enhance transparency around their operations, minimize the potential for market contagion, and reduce risks to users”

… from Elliptic Regulatory Outlook Report 2023

Another problem to deal with, which has so far not received the proper consideration, is the instability of stablecoin. They were born to be more stable than cryptocurrencies, but just to provide an example, the collapse of UST, of the Terra ecosystem, was upsetting. Measures are necessary and are among the central issues of the new regulations.

With the introduction of Mica, issuers of stablecoins will be monitored and required to have protected and liquid reserves in a 1:1 ratio.

Algorithmic and decentralised stablecoins will also be regulated. In addition, there will be a maximum daily transaction limit for each stablecoin.

“Stablecoin issuers will face stringent reserve and disclosure requirements to ensure token holders are protected from bank-style runs”

… from Elliptic Regulatory Outlook Report 2023

We have also seen that 2022 was characterized by fraud in the blockchain space; this was not something new, but the extent was greater than in previous years. One kind of crime is the so-called cross-chain crime, which refers to illicit activities that occur across different blockchains or cryptocurrency networks. This can include fraudulent transactions, hacking, theft, and other forms of illegal activity that take advantage of the interoperability between different blockchain networks. Criminals may exploit vulnerabilities in one blockchain to steal assets from another blockchain or use different cryptocurrencies to obfuscate their transactions and avoid detection.

Cross-chain crime is a growing concern in the crypto world as more blockchains and cryptocurrencies are developed, and new regulatory frameworks struggle to keep pace with the rapidly evolving technology.

“Innovations in DeFi sector have created a rich multi-chain ecosystem that is increasingly frictionless, user-friendly and offers the prospect for compelling new services to launch across the crypto space. Yet these innovations are also providing new gateways for illicit actors to launder crypto”

… from Elliptic Regulatory Outlook Report 2023

The reality of Metaverse is gaining more and more traction, as it will give access to many financial services, but because of its decentralized structure and the absence of intermediaries, it is vulnerable to hacks and fraud.

This is another issue central to the debate and analysed by Elliptic, given its potential and the projects that are underway on so many fronts.

“Citi estimates that the metaverse economy could ultimately be worth up to $13 trillion. Major brands are already experimenting with launching services in the metaverse … During 2023 we think regulators and watchdogs will turn their attention to curtailing emerging financial crime risks in the metaverse as well. In some cases, this may simply involve clarifying where pre-existing regulation extends to activity conducted in the metaverse”

“We expect that in 2023, AML/CFT authorities globally will direct their full attention to combatting cross-chain financial crime. This will include issuing detailed alerts and red flag indicators of cross-chain crime that they expect virtual asset service providers (VASPs) to detect”

… from Elliptic Regulatory Outlook Report 2023

Click here to read the full Report from our Premium Partner Elliptic:


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