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Robust regulation key to limiting fallout from repeat of crypto winter

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The world of digital assets is still reeling from ‘crypto winter’ — Massive Collapse in Asset Valuations in Early 2022 caused by Bankruptcy of major stablecoinswhich resulted in the bankruptcy of some institutions.

This episode shared many of the hallmarks of the global financial crisis. Arrogance around systemic risk from high-yield, low-risk strategies, excessive leverage, and mutual exposure of financial institutions. Luckily, it was small, and the digital asset industry is fairly self-contained, so it had far less impact on the broader economy.

But in crypto winter Little has been done to dampen the dynamism of the sector And while valuations are still down, innovation and development are on track. The potential for new models of economic activity enabled by the digital asset ecosystem remains exciting for businesses and creators even as the speculative bubble of $2.8 trillion market cap is blown.

A digital asset ecosystem built on a decentralized infrastructure promises a means of monetizing digital products independent of traditional intermediaries. In regulated industries, many of these intermediaries have roles that new technologies cannot easily remove, but there are still compelling opportunities to improve efficiencies and add new capabilities.

OMFIF’s ‘Digital Assets’ report examines the economic opportunities presented by digital assetslooks at the different types of digital assets and the possibilities they offer for businesses and individuals to deliver value and generate revenue.

One of the most exciting areas where the digital asset ecosystem could drive change is the infrastructure of financial markets. In the course of researching the report, we observed a convergence between the architecture of the world of crypto investing and decentralized finance and that of traditional finance.

As the cryptocurrency world learns prudent risk management policies and regulations, traditional finance will use the technology behind cryptocurrencies to tokenize and split financial instruments to broaden the investor base and improve liquidity. and add functionality.

A functioning digital asset ecosystem cannot develop overnight. For it to work effectively, various technical services must become commonplace. Some, such as cloud services, are already in place. Others, like digital identities, still have a lot of work to do before they are suitable to underpin a systemically important digital asset ecosystem.

The report also examines the development of the legal framework for digital assets. As digital assets grow in importance, the consequences of a repeat crypto winter will become more severe. Regulators are therefore doing their best to develop the regulatory architectures necessary to make the digital asset class a healthy and safe marketplace. Achieving financial stability, protecting investors and preventing financial crime without compromising the efficiency and privacy features that digital assets can provide is a major challenge for regulators.

Finally, I am proud to introduce OMFIF’s Digital Asset Regulation Policy Tracker, created in partnership with Bittrex Global. Tracker provides a breakdown of the most important pieces of digital asset regulation in 23 major jurisdictions around the world. This allows users to see if a jurisdiction has enacted bespoke regulations for crypto assets or uses existing securities regulations. The tracker also allows users to see where different jurisdictions stand on issues such as cryptocurrency mining, exchanges and derivatives trading.

The development of digital assets is rapid and the potential is only beginning to become apparent. We didn’t see a crypto winter last year, but robust and well-crafted regulations will mitigate the damage. The benefits offered by the digital asset ecosystem will prove worthwhile.

Lewis McLellan is the editor of OMFIF’s Digital Monetary Institute.

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