2023 has seen a sharp rise in focus on digital asset regulation. Numerous legal frameworks have been put forward for consideration across the globe to boost the safety and integrity of this industry. The EU’s adoption of MiCA is arguably the most prominent case.

And yet, even though many countries have realized the importance of rules in creating a safe crypto market, we are still far from seeing wider adoption of digital assets.

Why is this the case? Let’s take a closer look.

The current state of EU regulation: how does it impact crypto adoption?

Much about crypto regulation is still at the development stage since this market is very dynamic. Many of its various sub-fields are still not understood well enough by regulators to develop clear laws. Furthermore, having clear-cut rules means that different countries need to have a uniform approach to handling crypto assets.

In the European Union, these issues are expected to be resolved by introducing the MiCA (Markets in Crypto Assets) framework, which will come into effect in 2024. Its implementation will help strengthen crypto integration with traditional finance because MICA will maintain transparency and overarching rules across various areas of the crypto industry. This will include marketing, portfolio management, user verification, token issuance, stablecoins, and more.

Introducing a unified authorization system in all EU countries through MiCA means that crypto projects will no longer need multiple licenses for different jurisdictions in this region. Meanwhile, TradFi players can see whether a crypto company has passed a regulatory check with the one authority everyone acknowledges. This means dealing with CASPs will involve fewer risks, leading to greater crypto adoption.

Challenges continue to hinder adoption despite regulatory progress

As much promise as MiCA holds, increased regulation also comes with its nuances. While the framework does aim to address issues like money laundering and user protection, it also seeks to fit everything about crypto into a centralized format. This kind of regulation will primarily have a beneficial effect on big-time market players. For decentralized services and small-scale participants, this can become a problem.

Let’s look at decentralized exchanges (DEXs), for example. The way things are now, no particular KYC/AML procedures need to be followed. But in the future, with this approach by regulators, all decentralized services that interact with EU citizens will be subject to new demands. Such a transition will be very abrupt and likely painful for these players.

Another prominent issue is the implementation of the travel rule for crypto assets. It means that when conducting transactions, a payment provider service needs to identify its clients and the recipients. In the TradFi sector, this system is aimed at counteracting illicit financial activities.

To implement the same measures in the crypto industry, European regulatory bodies must first develop the necessary mechanisms and software. Clear guidance on how crypto companies should integrate themselves into such a system will also need to be issued. However, as of now, it’s all theoretical. There is no comprehensive solution for how this would work in practice.

Regulatory and operational frameworks: a symbiotic approach is needed

In the crypto industry, you can often see a divide in perspectives regarding the role of regulations. Some argue that an excessive focus on rules can stifle innovation and hinder the growth of this sector, advocating instead for more practical developments. On the other hand, supporters of regulation believe that better rules are essential for market stability and building overall trust in cryptocurrencies.

Personally, I think that both directions are necessary. Having a comprehensive set of regulations would result in practical applications as well. Primarily because different countries would be able to develop technological solutions in a compatible manner. And to create such an environment, policymakers must work in tandem with the crypto companies that directly create this environment.

This can be done in several ways. Public consultations about implementing new rules are a common practice among UK regulators. Another way is through partnerships with exchanges and other CASPs. Create hubs and working groups and invite experts from leading crypto companies to work together.

Take Hong Kong’s example — earlier this year, the local regulator encouraged commercial banks to provide services for licensed crypto companies and support their business needs. This kind of attitude is currently pushing Hong Kong towards becoming one of the largest crypto hubs. This jurisdiction is not exactly easy to operate in, but the willingness of regulators to engage with crypto still makes it very attractive for many parties. It is, perhaps, something that other countries could strive to emulate.

The horizon still remains distant as more considerations need to be addressed

While countries worldwide are making efforts to regulate cryptocurrencies, achieving widespread adoption remains a distant goal due to several valid reasons. The crypto industry is vast and intricate, making establishing rules that apply to all participants is challenging. Most jurisdictions end up prioritizing regulation within their own borders. This way, they can tailor practices to their unique circumstances and needs.

It is important to balance creating consistent rules and introducing operational frameworks that enable companies to operate better within them. This is the only way to approach an ecosystem by encouraging innovation while maintaining necessary safeguards. Once such an ecosystem is in place, crypto adoption will become much smoother.

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• Source: https://cryptoslate.com/crypto-regulation-outlook-why-have-new-eu-rules-not-brought-us-closer-to-mass-adoption/