World Economic Forum Thinks it Knows How to Fix Crypto Policy

The World Eco­nom­ic Forum (WEF) has tak­en a stab at pre­sent­ing solu­tions to glob­al cryp­to pol­i­cy, which it warns is too patch­work to prop­er­ly pro­tect mar­kets and investors.

In a fresh white paper, “Path­ways to the Reg­u­la­tion of Cryp­to-Assets,” the glob­al body rea­soned that pro­tec­tions baked into tra­di­tion­al finance might not ful­ly extend to cryp­to due to its decen­tral­iza­tion. Address­ing its “bor­der­less nature” would help bridge the gap.

“At their cur­rent lev­el, cryp­to assets rep­re­sent a small por­tion of the over­all glob­al finan­cial sys­tem,” WEF said, echo­ing sen­ti­ment from Europe’s sys­temic risk board.

“Even so, the lack of reg­u­la­tion in some juris­dic­tions and the absence of a har­mo­nized reg­u­la­to­ry frame­work is rais­ing con­cerns as to whether this mar­ket could pose a threat to glob­al finan­cial stability.”

WEF tar­get­ed its rec­om­men­da­tions at three major stake­hold­ers cat­e­gories: inter­na­tion­al orga­ni­za­tions, region­al or nation­al reg­u­la­tors and the indus­try as a whole.

1. Estab­lish best prac­tices for cryp­to (inter­na­tion­als organizations)
2. Har­mo­nize ter­mi­nol­o­gy and def­i­n­i­tions (inter­na­tion­als organizations)
3. Fos­ter cross sec­tor coor­di­na­tion among reg­u­la­tors (reg­u­la­tors)
4. Coor­di­nate efforts to estab­lish inter­op­er­a­ble tech­ni­cal stan­dards (reg­u­la­tors)
5. Share best prac­tices for address­ing oper­a­tional and cyber­se­cu­ri­ty risks (indus­try)
6. Inno­vate “respon­si­bly” and engage with pol­i­cy­mak­ers and reg­u­la­tors (indus­try)

Lax stan­dard­iza­tion of cryp­to reg­u­la­tions, poli­cies and def­i­n­i­tions are hold­ing back progress for suf­fi­cient over­sight, WEF said. 

A light touch approach in some juris­dic­tions, includ­ing those con­sid­ered cryp­to hubs like Sin­ga­pore or Hong Kong, are “lead­ing to prob­lems of reg­u­la­to­ry arbitrage.”

WEF is an inter­na­tion­al non-gov­ern­men­tal orga­ni­za­tion famous­ly known for its annu­al Davos con­fer­ences, which play host to world and busi­ness lead­ers intent on influ­enc­ing glob­al con­ver­sa­tions and agendas. 

The body said it built its cryp­to pol­i­cy report with con­tri­bu­tions from pol­i­cy­mak­ers, reg­u­la­tors and indus­try figures.

Dante Dis­parte, chief strat­e­gy offi­cer and head of Glob­al Pol­i­cy at Cir­cle, as cit­ed in the white paper, said the WEF’s “vital work,” in col­lab­o­ra­tion with the Dig­i­tal Cur­ren­cy Con­sor­tium, offered an acces­si­ble blue­print for juris­dic­tions to work with.

“The advent of cryp­to-assets and blockchain-based finan­cial ser­vices is prov­ing to be more about con­ver­gence than dis­rup­tion of the tra­di­tion­al econ­o­my, bank­ing and finance,” he said. “This should be encouraged.”

World Economic Forum warns of Ethereum ‘concentration risk’

WEF flagged areas of the cryp­to indus­try which could suf­fer from con­cen­tra­tion risk, includ­ing sta­ble­coins (a hand­ful of issuers dom­i­nate the mar­ket) and cryp­to exchanges (FTX con­ta­gion was widespread).

The ecosys­tem could suf­fer with­out clear reg­u­la­to­ry frame­works to han­dle mar­ket abus­es, com­pe­ti­tion poli­cies and con­flicts of inter­est, the report said.

But WEF also cit­ed Ethereum’s dom­i­nance as a poten­tial risk: “There are sev­er­al decen­tral­ized appli­ca­tions pow­er­ing the cryp­to asset ecosys­tem, but the under­ly­ing tech­nol­o­gy is dom­i­nat­ed by Ethereum, one of the most decen­tral­ized blockchains.”

Oth­er layer‑1 pro­to­cols oper­ate with­in the sec­tor, but “most are based on Ethereum tech­nol­o­gy,” WEF said, adding that lay­er-2s such as Opti­misim, Arbi­trum and Poly­gon are address­ing some con­cen­tra­tion risks.

“More­over, a trend towards more EVM-com­pat­i­ble chains that do not depend on Ethereum for con­sen­sus, such as Avalanche, can fur­ther cre­ate com­pet­i­tive net­works that share the same devel­op­er sup­port,” WEF said.

Ethereum aside, world­wide agen­cies are voic­ing sim­i­lar con­cerns. Dubai’s Finan­cial Ser­vices Author­i­ty this week called for reg­u­la­tors to come togeth­er in a bid to curb exploita­tion of reg­u­la­to­ry loopholes.

The Dubai watch­dog took griev­ance with the com­plex nature of many glob­al cryp­to firms, which oper­ate across mul­ti­ple juris­dic­tions under a sin­gle umbrel­la organization.

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