This article, Part III of a 3 part series, aims to analyze the present status and potential future U.S. regulations for blockchain using the executive order signed on March 9, 2022, by President Biden (“Ensuring Responsible Development of Digital Assets”)(the “Order”) as foundational material. In Part I, we described some of the current regulatory difficulties for blockchain and analyzed the impact newly created Central Bank Digital Currencies (CBDCs) may have. We also reported on the ongoing discussion in the U.S. regarding the creation of a U.S. CBDC by the Federal Reserve. In Part II, we argued that a comprehensive set of regulations is necessary to ensure the financial stability and the market integrity of the crypto asset space. We also discussed some of the SEC’s recent enforcement actions and what steps can be taken to best align with the SEC’s current interpretation of crypto rules and regulations. In this Part III, we now discuss the SEC’s decisions to approve the tracking of cryptocurrencies by Exchanged-Traded Funds (thus creating Bitcoin ETFs, ether ETFs) and its impact. We also reflect on the last element of the Order which emphasize the need for international cooperation, notably via the IMF and the World Bank Group to guide the regulation of the metaverse currencies and the conversion of digital assets to real assets.
ETF Enhancing Market Integrity
An Exchanged-Traded Fund (“ETF”) is a type of pooled investment security traded on stock exchanges and which can hold multiple underlying assets rather than only one. Therefore, ETFs resemble mutual funds because they offer an interest in a professional managed pool of investments, however ETFs’ shares trade like stock, with a ticker symbol and their prices changing throughout the day based on market demand. ETFs started appearing in the early 1990s, but in early 2024, the SEC approved the tracking of bitcoin and ether by US-listed ETFs. The SEC approved 11 applications to do so, including from BakckRock, Fidelity, Invesco and VanEck. Practically, this approval allowed a wider pool of investors to invest in Bitcoin/ether without having to own the digital currency directly.
The approval of cryptocurrency ETFs in the United States is a significant step to ensure financial stability and market integrity, especially in the wake of the FTX bankruptcy. The legalization of these ETFs allows investors to access well-regulated and secure crypto assets or products, providing a layer of protection and legitimacy that was previously lacking in the market, thus enhancing investors’ confidence. Furthermore, the bullish trend in Bitcoin markets was boosted by the SEC's approval of Bitcoin ETFs, highlighting how regulatory endorsement can have a positive impact on market performance. This approval not only validated Bitcoin as a legitimate asset class but also paved the way for increased institutional participation, which can further stabilize the market.
Looking ahead, a key area of interest will be whether the SEC will continue extending its approval of US-listed ETFs to other cryptocurrencies, such as Toncoin (TON). Such trend would present an exciting opportunity for diversification within the crypto investment landscape and could drive further growth and innovation in the sector. Monitoring the SEC on these developments will be crucial for anticipating and understanding the future trajectory of cryptocurrency regulation and its impact on markets.
Fostering International Cooperation
The latter part of the Order highlights the global nature of digital assets and emphasizes the importance of international cooperation (i) to ensure the adoption of high international regulatory standards (notably for digital payment architectures and CBDCs) and (ii) to maintain financial stability in the metaverse. The metaverse, currently being developed by companies like Facebook, transcends national border and, therefore, will require extensive international collaboration. In the metaverse, one fundamental principle is the use of decentralized records, thus requiring all data to be recorded and publicly accessible. Assets within the metaverse, such as virtual cars and properties, may have significant value and may be able to be converted to real-world assets. However, the conversion between metaverse currencies and real-world currencies, as well as the linkage between metaverse assets and real-world assets, pose complex challenges that surpass the existing regulatory frameworks and international cooperation. When envisioning the future of the metaverse, it becomes evident that it will necessitate a significantly higher level of regulatory oversight than what is currently in place.
In light of this evolving landscape, it is crucial to consider the legal implications surrounding the metaverse. International arbitration may play a vital role in resolving disputes that arise within the metaverse. Arbitration offers a flexible and adaptable framework that can accommodate the unique aspects of metaverse-related disputes, such as ownership rights, virtual real estate, and illicit activities1 . Additionally, several legal issues require attention, including ownership and intellectual property rights associated with cryptocurrency and non-fungible tokens (NFTs), regulations for virtual real estate ownership, trespassing, and illicit activities, as well as data protection and privacy concerns arising from personal data processing2 . As the metaverse blurs the boundaries between virtual and real-world interactions, legal frameworks must be established to address these concerns. This entails defining legal personas for avatars, establishing accountability criteria, and determining jurisdictional considerations3 .
The International Monetary Fund (IMF) could indeed play a critical role in fostering international cooperation on the subject of metaverse regulation and the associated digital financial ecosystem. (e.g., overseeing the harmonization of digital payment architectures and Central Bank Digital Currencies (CBDCs)). It could also work to guide the regulation of metaverse currencies and the conversion between metaverse assets and real-world assets4 . By providing policy advice and addressing global challenges like currency substitution, the IMF could help mitigate the risk of fragmentation and maintain monetary control across the metaverse. Furthermore, the IMF's track record in providing financial assistance to countries for balance of payments adjustment and offering surveillance and technical assistance positions it well to meet the evolving needs of the global economy in the face of digital innovation5 .
Similarly, the World Bank Group, with its focus on reducing poverty and promoting sustainable development, could contribute to this issue by ensuring that the metaverse and its underlying financial systems are accessible and inclusive. By providing financing, policy advice, and technical assistance to developing countries, the World Bank Group could help these countries adopt the digital infrastructure necessary to participate effectively in the metaverse. The institutions within the World Bank Group could also help strengthen the private sector in developing countries and enhance their capacity to engage in the metaverse6 .
Given their broad member base and international standing, the IMF and World Bank Group are uniquely positioned to foster the required international collaboration and establish standards for the metaverse, helping ensure a seamless transition between the digital and physical worlds.
Conclusion
As we journey deeper into the realm of digital assets, it becomes increasingly imperative that we address the challenges that this rapidly evolving landscape presents. The unregulated nature of crypto assets, the need for robust internal and external regulatory measures, the growing metaverse, and the intricate complexities therein, all underscore the need for a comprehensive and proactive approach to regulation.
The downfall of FTX serves as a compelling reminder of the potential pitfalls in the crypto asset space, highlighting the need for robust investor protection measures, both at the institutional and industry-wide level. It serves as an urgent call for proactive measures like strict financial and operational audits, rigorous compliance procedures, and enhanced due diligence. Furthermore, the proactive engagement of platforms like Binance with regulatory bodies, a model that should be emulated industry-wide, demonstrates the need for clear, industry-specific legal compliance procedures to ensure financial stability and market integrity.
Simultaneously, the metaverse, an exciting frontier that transcends physical boundaries, presents new and unique challenges that also necessitate a harmonized global approach. The metaverse calls for a renewed commitment to international cooperation, a commitment underpinned by entities such as the IMF and the World Bank. Their mandate to ensure a fair and stable global financial system positions them to be the shepherds of this digital revolution, guiding us towards a future where digital and physical realities intertwine seamlessly.
The emergence of the metaverse, coupled with the increasingly mainstream role of cryptocurrencies, necessitates that we not only adapt our existing regulatory frameworks but also envision new ones that cater to the distinctive challenges these spaces present. It is only through such an approach that we can truly unlock the full potential of these technologies while safeguarding the rights and interests of investors and users alike.
Ultimately, the objective is to harness the power and potential of these digital revolutions in a manner that promotes innovation, ensures financial stability, protects investors, and fosters international cooperation. The road ahead may be challenging, but with concerted efforts and global collaboration, a balanced and effective regulatory framework is within our reach.
