Lesson 3: Regulation, the crypto ecosystem launch pad

Confidence, innovation, transparency and stability are just some of the benefits to be had from crypto regulation. The cryptoasset ecosystem and the adoption of cryptocurrencies depend on a solid regulatory base.

Why does everything hinge upon crypto regulation? How can it contribute to its adoption? For any industry or business sector, “regulation and its design is a key factor for growth and productivity and marks the difference in the wealth of an economy”, according to Spanish researchers at the Ministry of Industry, Trade and Tourism. But what are the mechanisms that enable regulation to generate trust?

Confidence in a sector is most likely the most important variable to ensure its stability and success. Because customers, companies and public bodies invest in areas with a clear regulatory framework, established rules and a certain degree of standardisation. A deregulated sector fails to inspire confidence by its very nature.

The main benefits of market regulation

Among the benefits to be had from regulatory bodies like Spain’s National Securities Market Commission (CNMV) and its National Markets and Competition Commission (CNMC) or Switzerland’s Financial Market Supervisory Authority (FINMA) and its Competition Commission (COMCO) are the prevention of monopolies and oligopolies, consumer protection and the assurance of financial stability, to name but a few.

Is the MiCA to cryptoassets to be what the PSD2 is to APIs?

PSD2, the European Union (EU) Payment Services Directive, was adopted in 2015 and came into force in 2018. Since then, the Application Programming Interface (API) ecosystem (comprising protocols to develop applications and their intercommunication) has consolidated its growth as a result of having a solid base on which to innovate. Indeed, this directive is often used to highlight and better understand the benefits to be had from the proposed Regulation on Markets in Crypto-Assets (MiCA), which seeks to regulate cryptoasset markets.

Having harmonised cryptoasset rules across the EU (which could very well be copied by other regions) would enable the Central European ecosystem to follow in the footsteps of the world of APIs. Indeed, Switzerland’s Distributed Ledger Technology (DLT) has been in force since 2021. Better known as the ‘Blockchain Act’, it has served to attract talent from around the world.

Regulation means attracting startups and talent

A startup is looking for a home for its business. Where in the world will its idea take root? Most likely in the one that offers the most guarantees for its assets, goods and business model. As far as cryptocurrencies are concerned, Switzerland is the benchmark nation for attracting innovation owing to its regulatory framework, which has seen it become a hub out of sheer inertia.

What is the advantage of having a local, regulated hub? Any company that sets up in Switzerland to work in cryptocurrencies increases the country’s value in terms of future startups, triggering as it does a Metcalfe network effect (according to which value is measured as the square of the users, in this case companies), not to mention the density innovation effect this in turn inspires.

In other words, any company that sets up in Switzerland to work in cryptocurrencies increases the possibility of innovation arising in an increasingly denser ecosystem. Why? Because possibilities increase, as does the amount of collaboration, competition, diversity and access to talent, among other key factors.

Crypto regulation will contribute to the adopting of cryptocurrencies, which are blockchain based systems, while also favouring innovation in this technology. Moreover, it will serve to drive those regions that are the first to establish a working framework to endow the sector with confidence.