Nicky Gomez

The crypto market has recently witnessed a substantial surge, reflecting a heightened interest in the potential of digital assets. The recent approval of spot bitcoin ETFs by the US Securities and Exchange Commission stands as a landmark event, signaling a step toward regulatory acceptance.&nbsp;



But despite this, the crypto landscape continues to face increased regulatory scrutiny. Companies are finding themselves at a crossroads — particularly in the US.



Operating in a regulation-by-enforcement environment is akin to building a house without a blueprint — it’s chaotic, unpredictable and increases the likelihood of failure.&nbsp;



To foster a healthy and thriving crypto industry, the US should take cues from its more nimble neighbours in the Caribbean. More open, communicative and collaborative regulatory strategies provide a more solid foundation on which crypto businesses can thrive.



<h2 class="wp-block-heading">The crypto regulatory landscape in the US</h2>



The lack of crypto-specific legislation or clear guidelines from regulators on how existing laws apply to crypto has left US crypto companies in a perpetual state of uncertainty.



Only four of the world’s top centralized crypto exchanges are reportedly <a href="https://www.vaspnet.com/articles/how-regulated-are-the-worlds-top-crypto-exchanges">regulated</a> by the SEC. Following ether’s transition to a proof-of-stake consensus mechanism, the SEC’s <a href="https://blockworks.co/news/ethereum-foundation-removes-warrant-canary">recent probe</a> into Ethereum Foundation, a non-profit supporting the Ethereum ecosystem, is yet another example of confusing US crypto policy.&nbsp;



Read more from our opinion section: <a href="https://blockworks.co/news/fca-pro-crypto-regulation-skepticism">No, the UK’s Financial Conduct Authority isn’t now pro-crypto ETF</a>



The US’ regulation-by-enforcement approach — characterized by an emphasis on execution over collaboration — makes operating in the country akin to playing a game without knowing the rules. It’s a frustrating experience for businesses trying to navigate the crypto space.&nbsp;



Instead of providing a stable and predictable environment, the current US regulatory stance often feels reactive, leaving companies to second-guess their strategies, stifling innovation in what’s become a booming, global economic market. And given the current political climate in the US and the upcoming election, it is unlikely we will see bipartisan support for any crypto-specific legislation until 2025 at the earliest.&nbsp;



<h2 class="wp-block-heading">The appeal of smaller, nimbler jurisdictions</h2>



Many US crypto companies have begun exploring other jurisdictions for their non-US business, alternatives that embrace innovation while fostering a cooperative regulatory atmosphere. This is evidenced by the fact that 79% of the top centralized exchanges <a href="https://www.vaspnet.com/articles/how-regulated-are-the-worlds-top-crypto-exchanges">registered</a> with the Financial Crimes Enforcement Network (FinCEN) are also regulated in at least one other country.



Regions with a quicker-moving approach to crypto regulation have taken the opportunity to lead internationally on the innovation of crypto regulation. For example, Gibraltar implemented the DLT Provider Regime back in 2018 and became the first jurisdiction to supervise crypto service providers with a principles-based regulatory framework. 



In addition, the allure of the Caribbean as a burgeoning crypto hub is hard to ignore. Several countries in the region are taking positive steps by reflecting on, learning from and working to adapt their existing crypto legislation.&nbsp;



On Feb. 13, the Ministry of Financial Services in the Cayman Islands <a href="https://github.com/MinistryFinancialServices/Virtual-Asset-Amendment-Consultation">launched</a> a consultation on amendments to the Virtual Asset (Service Provider) Act. The changes build on its existing registration regime focused on anti-money laundering, counter-terrorist financing, and cybersecurity. They also introduced a licensing regime for virtual asset trading platforms and custodians.



On Feb. 29, the Bermuda Monetary Authority (BMA) <a href="https://www.bma.bm/viewPDF/documents/2024-02-29-16-55-24-Notice---Consultation---Digital-Asset-Business-Custody-of-Client-Assets-Rules-2024.pdf">launched</a> a consultation on its proposed Digital Asset Business (Custody of Client Assets) Rules 2024, which will enhance its current regulatory regime for digital assets, providing further clarity on the BMA’s expectations of any digital asset business holding client assets.



In 2023, the <a href="https://www.linkedin.com/company/securities-commission-of-the-bahamas/">Securities Commission of The Bahamas</a> (SCB) held a consultation with key crypto stakeholders on its proposed Digital Asset and Registered Exchanges Bill. We anticipate the SCB’s revised regulatory regime will soon come into force. In addition to strengthening the existing regime, the bill proposes to bring more novel services such as staking under the regulatory remit, and includes specific provisions for stablecoin issuances.



By embracing the potential economic benefits of crypto innovation, countries such as the Bahamas, Bermuda and the Cayman Islands are actively courting industry leaders, offering a regulatory framework that balances regulatory objectives with the freedom to innovate.&nbsp;



<h2 class="wp-block-heading">The way forward for crypto regulation</h2>



2024 is set to be a huge year for the crypto industry. Progressive regulatory regimes allow innovative firms to flourish, while regressive ones punish good actors and create conditions for bad actors to capture market share.&nbsp;



The migration of crypto firms to these more adaptive jurisdictions signifies a broader shift in the industry’s landscape. While the US is home to many key players in the crypto space, firms are seeking out jurisdictions that not only understand the technology underpinning crypto, but also actively engage in collaborative efforts to shape effective regulations.



As the industry navigates these changes, it’s clear that jurisdictions willing to embrace innovation while working hand-in-hand with industry leaders will be at the forefront of shaping the future of crypto regulation.&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Nicky is the Senior Partner at XReg Consulting, a boutique public policy and regulatory affairs consultancy specializing in cryptoassets. A former regulator with 15 years of experience in the crypto and financial services industries, Nicky leads the development of XReg’s presence in the Americas, with a strategic focus on Latin America, the Caribbean and North America.

Since founding XReg, Nicky has supported governments and international public bodies with the development and implementation of risk-based, outcomes-oriented cryptoasset regulatory frameworks and strategies that mitigate risk and leverage smart innovation.

He also provides strategic regulatory advice to some of the largest crypto businesses in the world and has successfully secured licenses and authorisations for clients in Europe, Gibraltar, the Caribbean and Asia. As the co-chair of the Global Digital Finance (GDF) AML working group, he helps shape global cryptoasset regulatory standards that mitigate risk and encourage innovation.

Prior to founding XReg, Nicky spent over nine years at the Gibraltar Financial Services Commission (GFSC) as the Head of Risk and Innovation, where he was part of the team that led the design and implementation of the world’s first bespoke regulatory framework for firms using Distributed Ledger Technology (DLT).</div>


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America should look to the Caribbean for crypto regulation

Sebastian Sinclair

<div id="highlights-block_62a93562f3afd" class="highlights">
 <ul>
 <li>Trust in crypto has been shaken by recent events, leading to calls for greater regulatory oversight and more consumer protections</li>
 <li>Regulation could hold the key in providing a balance between shielding investors and fostering innovation, according to Albert Isola</li>
 </ul>
 
</div>



There is no doubt that faith in the crypto industry has been shaken in recent weeks.



A dramatic <a href="https://cms.blockworks.co/crypto-total-market-capitalization-under-1t-after-10-fall/" target="_blank" rel="noreferrer noopener">market rout</a> and panic have gripped both retail and institutional investors, forcing them to reconsider holding risk-on assets amid developing <a href="https://cms.blockworks.co/did-macro-kill-crypto-or-are-risk-laden-lenders-to-blame/" target="_blank" rel="noreferrer noopener">macroeconomic factors</a>.



Embattled crypto lender Celsius, which&nbsp;<a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">locked</a>&nbsp;users out of their accounts following rumors of its insolvency, continues to face the music from disgruntled participants as it attempts to navigate leveraged positions.



Just weeks prior, the crypto market was rocked by the implosion of the <a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">Terra ecosystem</a> when its algorithmic stablecoin de-pegged from a 1:1 ratio with the US dollar in what has been called &#8220;<a href="https://cms.blockworks.co/stablecoins-are-cryptos-killer-app-so-far-just-not-terra/" target="_blank" rel="noreferrer noopener">reckless financial engineering</a>.&#8221;



Year to date, crypto&#8217;s bellwether asset bitcoin is down 55% and has fallen 70% from its all-time high of nearly $69,000 in November 2021 to $21,300, according to <a href="https://www.blockworksresearch.com/assets/btc/" target="_blank" rel="noreferrer noopener">Blockworks Research</a> data.



While far from the first time the market has witnessed freefall, many minds are questioning how this dismal situation could have been prevented and what avenues should the industry take for future cycles.



To some, such as Albert Isola MP, Gibraltar’s minister for digital and financial services, regulation holds the key to providing appropriate investor protections while helping smooth out volatility over a long-term horizon.



&#8220;One of the key issues we&#8217;re going to be living through now is trust, and perhaps a lack of trust,&#8221; Isola told Blockworks when asked what he thought of crypto&#8217;s recent market turmoil. &#8220;When people begin to realize that crypto and the space is volatile and subject to fluctuations, as is the traditional financial services market, you begin to think, &#8216;How can this happen?&#8217; and that all boils down to trust.&#8221;



The minister pointed to balanced regulation as a vehicle to restore that trust. &#8220;I think it&#8217;s in these most challenging times that regulation is even more important. Regulations have got to get better, not worse,&#8221; Isola said.



<h3 class="wp-block-heading">Gibraltar studies lessons learned</h3>



According to Isola, <a href="https://cms.blockworks.co/terra-collapse-sparks-stablecoin-regulation-in-the-uk/" target="_blank" rel="noreferrer noopener">regulators around the world</a> would now move to heavily scrutinize firms like Terra and Celsius in order to better understand how they got there, how they behaved during their respective crises and how they are answering the call to fix it.



&#8220;In all of these things, it&#8217;s never what happens — it&#8217;s how you respond to what&#8217;s happened that&#8217;s important,&#8221; the minister said.



Gibraltar considers itself a hub for both budding and established crypto and blockchain businesses, having implemented one of the world&#8217;s first licensing regimes for the industry in 2018. 



The overseas British territory also amended legislation in April which seeks to curb manipulation by asking crypto firms to respect markets in which they operate and monitor for potentially shady behavior.



The former naval garrison, located on the southern tip of Spain, may also soon permit a takeover of its regulated Gibraltar&nbsp;Stock Exchange by local <a href="https://www.theguardian.com/technology/2021/dec/27/blockchain-rock-gibraltar-moves-to-become-worlds-first-cryptocurrency-hub" target="_blank" rel="noreferrer noopener">blockchain firm Valereum</a> in a potential world first that would see crypto, bonds and equities traded under one roof.



Whichever services, whether traditional finance, online gambling or crypto, they have to be regulated, according to Isola, who added appropriate policy not only protects the consumer but the reputation of the jurisdiction.



Gibraltar currently has around 15 major crypto firms operating within its 6.7 km2 borders, including the likes of Bitso, FTX, Huobi and Bullish, the exchange backed by PayPal&nbsp;co-founder&nbsp;Peter Thiel. Isola reasoned lessons from overseas jurisdictions like Singapore and the European Union have provided ample examples of how to provide balance between consumer protection and fostering innovation.



It is because of Gibraltar&#8217;s favorable regulations that crypto and blockchain businesses from around the world are drawn there, according to Isola. 



&#8220;The interest of all of us [firms and regulators] in looking after consumers and doing things properly is totally aligned,&#8221; he said. &#8220;Ultimately, I think our desire is for an international set of standards to be applied around the world.&#8221;



&#8220;At least let&#8217;s have a minimum set so that everybody is playing by a set of basic rules,&#8221; Isola added.



<h3 class="wp-block-heading">Ahead of the curve</h3>



Indeed, some have argued for more oversight and control over the way in which Celsius and Terra behaved in the market. 



This could have prevented a spillover to other sectors that the industry now finds itself in, as the number of public crypto-related stocks continues to grow.



When asked how difficult it is to stay ahead of financial and technological innovation while metering out appropriate legislation, Isola said the task was considerable due to crypto&#8217;s nascence.



&#8220;When you&#8217;re innovating, by definition you are doing something that has not been done before and that is quite scary,&#8221; the minister said. &#8220;Yet in every instance, innovation is driven forward by the experts in the field.&#8221;



Even proponents of regulation would like to see governmental bodies move faster to set clear rules of the road.



&#8220;In terms of the regulator, I think every industry would tell you we wished they could do things quicker, that&#8217;s the overriding complaint consistently,&#8221; Isola said. &#8220;To do things properly, unfortunately, does take time.&#8221;



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Gibraltar Minister: Balanced Regulation Key to Restoring Trust in Crypto

Sam Reynolds

<div id="highlights-block_61a61d973642e" class="highlights">
 <ul>
 <li>Institutional exchange Bullish, backed by Peter Thiel and Galaxy Digital, launches in Gibraltar today as institutional interest in digital assets continues to climb</li>
 <li>The exchange launched with deep pools of crypto liquidity thanks to the backing from controversial EOS developer Block.one, and already plans to go public via a SPAC</li>
 </ul>
 
</div>



Bullish, an institutional exchange backed by some of the biggest names in traditional finance as well as Block.one of EOS fame, launched today in Gibraltar.



The exchange was <a href="https://cms.blockworks.co/biggest-names-in-macro-back-new-10b-digital-asset-exchange-bullish/" target="_blank" rel="noreferrer noopener">first announced</a> back in May and caught the attention of many, given the names attached to it like Peter Thiel, Galaxy Digital, global investment bank Nomura, and fund manager Alan Howard, as well as the significant capital commitment from Block.one in the form of 164,000 bitcoins, 20,000,000 EOS tokens, and $100 million in cash.



Gibraltar, not a well known destination for the digital assets industry, was chosen because the Gibraltar Financial Services Commission’s “principles-based approach” sets the outcomes that it intends to achieve, leaving the ‘how’ to achieve compliance up to the regulated firms,” said Anthony Smith, the exchange’s head of compliance.&nbsp;&nbsp;



Bullish is unique insofar as it integrates its own internal automated market-makers (AMM), a defining aspect of decentralized exchanges, but will do so in a regulated environment. In a release, Bullish said that it is initially making available $3 billion of its over $10 billion on the balance sheet to its liquidity pools.



“What sets us apart is that the Bullish exchange is designed to integrate a regulated and compliant exchange, operating a high-performance central-limit-order-book matching engine. This is combined with Decentralized Finance (DeFi)-derived liquidity pools to enable automated market-making (AMM) capabilities and yield earning opportunities,” Michael Lau, Head of Institutional Clients, told Blockworks via email. 



In the future, Bullish users will be able to stake their assets via Bullish Earn to provide liquidity to the exchange’s AMM in exchange for yield. However, no details on the staking and yield arrangement have been released.&nbsp;



Lau added that Bullish plans to draw materially on its own digital assets and dollars to facilitate liquidity, something that many decentralized and centralized exchanges would find “hard to replicate” simply because they don’t have the war chest.&nbsp;



For now, Bullish is only available to non-US residents, and it doesn’t have a timeline as to when that will change. The exchange isn’t providing a full list of its institutional customers yet, but says that a non-U.S. affiliate of Virtu Financial and Hong Kong based liquidity provider <a href="https://cms.blockworks.co/amber-group-raises-100-million-series-b-as-defi-booms/" target="_blank" rel="noreferrer noopener">Amber Group</a> are among the first to be onboarded.



<figure class="wp-block-image size-large"><img decoding="async" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/11/shutterstock_1073747786-1024x537-1.jpg" alt="Gibraltar" class="wp-image-11918"/><figcaption>Gibraltar; Source: Shutterstock</figcaption></figure>



<h3 class="wp-block-heading">The EOS legacy</h3>



Despite having some of the biggest names in TradFi attached to the project, many industry observers are skeptical of Bullish given its connections to EOS and Block.one. Block.one launched EOS in 2016 as an ‘Ethereum Killer’ and raised approximately $4 billion via an ICO in 2018. But despite the impressive funds available to it, EOS has never really gone anywhere. None of the major DeFi protocols listed on <a href="https://defipulse.com/" target="_blank" rel="noreferrer noopener">DeFi Pulse</a> are on the chain, and there’s only one Dapp based on EOS — a game called UpLand — on DappRadar’s top-25 list. In the era of Solana and Polkadot, EOS just isn’t a competitive proposition.



This mega-ICO attracted the attention of regulators, and the SEC <a href="https://www.sec.gov/news/press-release/2019-202" target="_blank" rel="noreferrer noopener">fined</a> Block.one in 2019, the company behind EOS, $24 million for selling unlicensed securities.



That’s not the only negative attention EOS has gotten in recent history. In August, forensic financial analysis firm <a href="https://www.integrafec.com/post/eos-ico" target="_blank" rel="noreferrer noopener">Integra FEC</a>, posted a 14-page paper levelling some serious allegations that the EOS ICO was “pumped up” from wash trading. The paper identifies 21 wallets that during the ICO made whale-sized purchases of EOS and then dumped them on exchanges less than an hour later, a process the paper identifies as “recycling.” For its part, Block.one commissioned the law firm Clifford Chance LLP to test the Integra FEC claims. With help from PwC, Clifford Chance LLP said that it “found no evidence of any arrangements between Block.one and third parties by which third parties bought tokens on Block.one’s behalf.”



Meanwhile, token holders were disappointed both by the regulatory scrutiny on Block.one and the underperformance of EOS. The Crypto Assets Opportunity Fund (CAOF), along with investor Johnny Hong, had accused Block.one of failing to sufficiently decentralize EOS and not due proper legal due diligence in the process of launching the EOS crowd sale in order to &#8220;capitalize on the investor fervor for cryptocurrencies.&#8221; The resulting class action lawsuit <a href="https://b1.com/press/announces-settlement-of-class-action-lawsuit/?utm_source=twitter&amp;utm_medium=social&amp;utm_campaign=corporate_news&amp;utm_content=settlement" target="_blank" rel="noreferrer noopener">was settled in June 2021</a> for $27.5 million.&nbsp;



<h3 class="wp-block-heading">Is a SPAC’ed Bullish another crypto macro proxy?</h3>



Bullish <a href="https://cms.blockworks.co/bullish-plans-to-go-public-through-spac-merger/" target="_blank" rel="noreferrer noopener">previously announced</a> its intention to go public through a SPAC back in July. This was a surprising move considering that the exchange had yet to launch. Sam Bankman-Fried, FTX’s founder and CEO, suggested that one reason why there was an expedited push for a SPAC despite Bullish being nothing more than a website, at the time: the market wants listed macro proxies for crypto more than it wants another exchange.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">15) But anyway, maybe this is all besides the point. Bullish seems to be comparing itself to Bakkt and Coinbase, but maybe that&#39;s not really what it is. Maybe Bullish is really another MicroStrategy.&mdash; SBF (@SBF_FTX) <a href="https://twitter.com/SBF_FTX/status/1413688840489816065?ref_src=twsrc%5Etfw">July 10, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Bankman-Fried (admittedly, a Bullish competitor) concluded, after reviewing the exchange’s pitch deck, that their fees are higher than what the market can support, and their growth projections are optimistic. Still, the value of Bullish’s holdings has increased to nearly $9 billion since this SBF summer tweet, plus $6 billion in additional crypto assets could make for an interesting listed crypto play for investors that can only hold listed companies, and are willing to pay a premium for them.



“Maybe Bullish is really another MicroStrategy,” rather than a competitor to Coinbase or Bakkt, SBF concluded. That may be the reason why so many significant players in TradFi are lending their names to the project despite the EOS albatross.



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