Looking Back at 2022 and Towards 2023 to See What the Future Holds for Digital Assets Policy

As 2022 comes to a close, TRM’s policy team took a look back at what 2022 brought to the world of crypto regulation, and what this may mean for the industry in 2023. In short, 2022 was a bit of a bumpy Back-to-the-Future-esque DeLorean ride in the digital assets ecosystem.
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Regulatory response to hacks  
According to TRM analysis, 2022 was a record-setting year for crypto hacks, with about $3.7 billion in stolen funds. Attacks against DeFi projects were particularly common, with approximately 80 percent of all stolen funds, or $3 billion, involving DeFi victims.
TRM Labs has identified ten “mega hacks” in 2022, which we define as hacks involving $100 million or more. These ten hacks account for almost 75 percent of the total amount stolen in 2022.

In the age of crypto, a hack means the loss of life savings. It also means that stolen funds can be used directly by nation state actors like North Korea to fund weapons proliferation and other destabilizing activity. 

For example, the year’s largest hack was perpetrated by North Korea’s Lazarus Group against the Ronin Bridge – an infrastructure attack on a bridge associated with the play-to-earn game Axie Infinity. While North Korea has long engaged in cyberattacks on cryptocurrency businesses to raise funds to fund its weapons programs, nuclear proliferation and other destabilizing activities, the Ronin hack was unprecedented.

💡 TRM Insights: Insights on North Korea’s attacks on crypto businesses can be found here and here. This February report by the Center for New American Security (CNAS), and this series of TRM Talks with North Korea experts are also valuable resources.

In the wake of the proliferation of hacks and other exploits, we also saw increased regulatory action. We saw Treasury’s OFAC use sanctions to go after threat actors. For example, following the attack on the Ronin bridge, OFAC used blockchain intelligence to trace the stolen funds sanctioning both the blockchain addresses to which the funds moved, and the mixing services that North Korean cybercriminals utilized to launder over a billion dollars of cryptocurrency – including centralized bitcoin mixer blender.io and decentralized Ethereum mixer Tornado Cash.

For more on the Tornado Cash sanctions check out Ari Redbord’s conversation with Laura Shin on the Unchained Podcast.

U.S. regulators were not alone in attempting to address the scourge of hacks in the crypto ecosystem. The Monetary Authority of Singapore (MAS) laid out its expectation that digital asset service providers tighten technology risk management measures .

Questions about stability and financial integrity fueled action on stablecoins

The stability of stablecoins was called into question in the first half of the 2022, with the collapse of the algorithmic stablecoin project Terra/Luna and focused regulatory attention on stablecoins and the potential need for reserves. While the year’s biggest story was likely the collapse of FTX, it quickly became clear – in the wake of criminal and civil charges – that there are already laws in place to prevent and punish FTX’s  conduct.

 (For more on this case, read Ari’s article for ACAMS Today and check out these interviews with Bloomberg and Unchained.)

 It was actually the collapse of stablecoin TerraUSD that galvanized global regulators more. In June, shortly after the Terra collapse, the U.S., U.K. Singapore and other jurisdictions issued statements or guidance related to stablecoins. For example, the U.K. government published a consultation paper that outlines a strategy to reduce risk for investors holding stablecoins.

Across the globe, the New York State Department of Financial Services (DFS) issued clear concise guidance for stablecoin issuers regulated in New York State to be fully backed by a reserve of segregated assets.

Meanwhile in APAC, the Monetary Authority of Singapore proposed a regulatory framework to credentialise stablecoins that meet its expectations. Under the new regime, issuers of single currency stablecoins that are backed 100% by cash or equivalents would be able to apply for MAS licensing and regulation as stablecoin issuers.

Regulators across the globe began to build frameworks for digital assets

🇪🇺 MiCA

In July, after two years of debate and discussion, the European Parliament reached an agreement on the comprehensive framework for digital assets which requires crypto-asset service providers (CASPs) to take action related to consumer protection, the environment, anti-money laundering (AML), stablecoins and other areas. Arguably the most important provisions create a passportable license with which CASPs, after obtaining approval from regulatory authorities in an EU country, can extend operations to other EU countries without having to obtain additional licenses. A vote on the legislation originally scheduled for this month has been pushed back to February because of concerns about the length and complexity of the text. Firms will then have between 12 and 18 months (depending on their classification) to comply with the legislation.  

🇺🇸 Responsible Financial Innovation Act and White House Framework for Digital Assets 

In July, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Giilibrand (D-NY) unveiled new legislation dubbed the Responsible Financial Innovation Act (RIFA) that would provide a clear legal framework for crypto. The bill tackles who will regulate – the SEC or the CFTC –what they will regulate – defining what assets are securities and which are commodities – and more. 

The executive branch in the U.S. also took action. In 2022 we saw an executive order, entitled Ensuring Responsible Innovation in Digital Assets (Order), which outlined “the first ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology,” setting forth a national policy for cryptocurrency across “six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”This ultimately culminated  in a Framework for the Responsible Development of Digital Assets.

🇸🇬 Singapore and APAC

MAS was busy in 2022, starting the year with new restrictions on public advertising by digital asset service providers.

Then, in what was perhaps the key moment for crypto regulation in Singapore in 2022, MAS Managing Director Ravi Menon gave a speech entitled "Yes to Digital Asset Innovation, No to Cryptocurrency Speculation,” in which the MAS leader explained that while MAS wants to attract leading crypto players to Singapore, it also will maintain a stringent and lengthy licensing process for those who want to carry out crypto-related services. MAS has also been issuing strong warnings against retail investments in cryptocurrencies and has been taking increasingly stronger measures to restrict retail access to digital assets.

Finally, in October, on top of the new stablecoin regime, MAS doubled down on consumer protection with proposals to prohibit sign-up incentives and introduce a knowledge and risk assessment for retail investors looking to invest in digital assets.

And, MAS has not been alone in APAC. India and Thailand tightened their watch on digital asset advertisements, and the Philippines has required firms advertising digital asset services to provide proof of registration with the BSP and Philippines SEC since July 2022.

To learn more, check out TRM Insights and TRM Talks delving into the regulatory landscape in Singapore.

🇦🇪 United Arab Emirates

In 2022,  Dubai and  Abu Dhabi took significant steps toward establishing a global crypto hub. The UAE has been aggressively implementing crypto regulation this year issuing more than 30 exchange licenses and establishing the world’s first regulatory body devoted solely to crypto - Dubai’s VARA. VARA quickly issued regulatory guidelines on marketing and promotion of digital assets.

In April, ADGM’s Financial Services Regulatory Authority (FSRA) published a discussion paper which provided a thorough analysis of DeFi regulation. Check out our TRM Talks on the paper here.

🇬🇧 United Kingdom

In March, the UK’s Advertising Standards Authority (ASA) issued a "red alert" enforcement notice to over 50 companies advertising digital asset products in conjunction with bans on advertisements by several digital asset service providers “for misleading consumers and for being socially irresponsible.” Following the ASA’s actions, the FCA consulted on and concluded that crypto assets should be included in its high risk category of financial products which means that authorized firms will have to approve crypto asset promotions before they go live to consumers. These rules will come into effect February 1, 2023.

Following the invasion of Ukraine, the UK issued its second Economic Crime and Corporate Transparency Bill in September which significantly increased the powers of law enforcement to freeze and seize digital assets. 

The UK also got to work on the foundations of its future regulatory framework for digital assets by including stablecoins and ‘digital settlement assets’ in amendments to the Financial Services and Markets Bill, allowing these to be treated as financial instruments .

🇧🇷 Brazil and Latin America

Just this month Brazilian lawmakers approved a comprehensive regulatory framework for digital assets that has been in the works for 7 years. The new rules recognize Bitcoin as a digital representation of value that can be used as a means of payment and as an investment asset, but does not make Bitcoin or any cryptocurrency legal tender in the country.

The bill tasks the executive branch with overseeing the digital assets market with the expectation that the Central Bank of Brazil (BCB) will be in charge when BDitcoin is used as payment, while the country’s securities and exchange commission (CVM) will be the watchdog when it is used as an investment asset. The bill establishes a new crime of fraud involving virtual assets, with a penalty of two to six years in prison plus a fine.

2022 saw an explosion of interest in digital assets in the LATAM region, with Brazil seemingly in the lead in terms of adoption and regulation. But Brazil, the region’s biggest crypto hub, is not alone. For more on crypto in regulation in the region check out TRM Talks LATAM here and TRM Insights deep dive here.

What’s in store for 2023

While 2022 was filled with twists and turns that would surprise even Marty McFly, one thing is certain in 2023 - we are going to see policy makers continue to react to events in the digital assets space, while, at the same time, attempting to craft thoughtful regulation for a more decentralized ecosystem. 

Regulation in the age of DeFi and NFTs

While over the last few years regulators have been focused on how to regulate centralized exchanges - think the travel rule and how exchanges engage with self-hosted wallets - global policy makers will be focussing more on what regulation can and should look like in a more decentralized world. For example, the recent White House framework for digital assets tasked the U.S. Treasury Department with completing an illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023. 

We are seeing indicators that policymakers worldwide, as first suggested by the Financial Action Task Force (FATF) in 2020 guidance, may treat certain NFTs as fungible cryptocurrency for AML and other regulation. One thing is certain– we will see a regulatory focus on the growing DeFi and NFT space next year.

Further regulatory focus on strengthening financial integrity

Given the string of high-profile events in 2022, we can expect even more action from regulators in 2023, with a continued focus on combating hacks and sanctions evasion.

The events of 2022 will likely also heighten and accelerate regulatory policymaking already in motion. On the global stage, we will see consultations run by international standard setting bodies come to a close and make recommendations for global regulations for digital assets. We’ll be watching the work of IOSCO who is looking to tailor guidance on their regulatory principles for digital assets and the conclusion of the Financial Stability Board’s work .

At the national level, we will also see big strides forward by certain jurisdictions. 

The UK will be establishing a comprehensive framework for digital assets, and will also consult on the role of CBDCs in the country.

In the EU, policymakers will get to work on the details of MiCA, passing much of the work to institutions like the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to write the technical requirements for implementation. And, the focus will shift in the EU from policy making to implementation as member state regulators will have to start implementing MiCA licensing requirements. 

In the U.S., while likely too early for a MiCA-style comprehensive framework, we will likely see piecemeal work starting with stablecoin legislation. In the wake of the Terra collapse, the House Financial Services Committee has been working on stablecoin legislation and we will see more activity in the Senate as well. 

In APAC, Singapore can be expected to continue to push forward with its consumer protection measures and MAS has signaled its intent to expand its regulatory oversight to the custody and transfer of digital assets. We will also see the introduction of digital asset regulatory frameworks elsewhere in the region, with Australia, Korea and Hong Kong committed to introducing new digital asset regulatory regimes in 2023. With India at the helm of the G20, we can also expect to see more dialogue on global standards for digital asset regulation.

And, in the Middle East, expect financial centers Dubai and Abu Dhabi continue the UAE push to become a hub for digital assets. Expect to see more industry engagement efforts from the newly launched Crypto Hub Abu Dhabi as well as Dubai’s new dedicated regulator for virtual assets, VARA.

In conclusion

In 2022 the digital assets space took off at DeLorean-esque speeds fueled by institutional adoption and a relatively strong market for Bitcoin and other digital assets. As the “crypto winter” set in, we saw prices drop and projects struggle and fail. But, we also saw Goldman Sachs and other players – even in the wake of the FTX collapse – lean into the space and the promise of the technology. As we look to the future,  optimistic about the promise of a nascent technology,  it is also important to look back to learn the lessons of a challenging year in the cryptoverse. 

And, as Marty McFly would say, “If you put your mind to it, you can accomplish anything.”