Anyone who follows American politics will know that Joe Biden has taken a cautious approach to cryptocurrency, focusing on consumer and investor protection. In 2022, he signed Executive Order 14067, ‘Ensuring Responsible Development of Digital Assets’, a strategy to address the risks of and regulate all digital assets. And, as a last hurrah, as he prepares to leave office, his administration has proposed legislation that firmly puts responsibility for any fraudulent or unauthorised transactions onto wallet providers.
The proposed legislation treats digital wallets like banks by categorising them as financial institutions under the Electronic Funds Transfer Act. This reflects the new wave of crypto investors, who, despite ever-present risk warnings, expect the same protections when holding crypto that traditional finance offers on their bank accounts. On the other hand, longer-standing participants in the crypto industry have adopted an ethos that it’s down to the user to keep themselves safe.
It would be churlish and damaging to the industry not to acknowledge any move towards protecting crypto consumers and investors. TradFi has a well-established regulatory environment and has introduced several other layers of protection, like 3D Secure and biometric authentication, and increasingly, the regulatory onus is on banks and other financial institutions to assume liability for fraudulent transactions on their platforms.
Currently, however, crypto regulation is primarily focused on anti-money laundering (AML) rather than consumer protection. In the UK, for example, to become regulated, a crypto service provider must implement AML/CFT policies and ensure ongoing compliance with regulations, including ongoing audits.
The move towards requiring organisations to actively protect their end users is coming. In the European Union, the introduction of the Markets in Crypto-Assets Regulation (MiCA) and the Digital Operational Resilience Act (DORA) was driven by consumer and investor protection. However, the crypto industry is fundamentally designed to be decentralised, which poses significant challenges to introducing centralised functions (such as 3D Secure is in the card payments space) to keep all users safe.
The other reality is that the priority for exchanges and wallet providers is protecting their own funds and wallets, rather than those of their end-users. While everyone is talking about how, as an industry, we should improve consumer protection, there aren’t many tools out there - like CoinCover's Transaction Protection - that can deliver the protection they need, let alone get investors the value of their crypto back if it’s stolen or lost to fraud.
And while Biden’s main focus is on the movement of funds, his regulation neglects other crypto industry-specific activities, like smart contracts. Regulators must involve the industry in creating any framework, so they genuinely understand what protection consumers need rather than shoehorning in existing TradFi regulations.
CoinCover welcomes regulations that protect crypto users. Not only will it build trust and confidence in the industry, it will promote its growth. Growth has always been at the top of the industry's agenda, and the industry's primary focus has long been on getting more people to enter the market. Now, Biden’s bid for stronger consumer protection will elevate the importance of that, and that’s no bad thing.
But what about the incoming administration? Are they likely to follow Biden’s lead and recognise the value in end-user protection? Trump’s stance on crypto has changed significantly from the days he called Bitcoin a scam and pointed out its potential for facilitating criminal activities. Now, he is more supportive of crypto – and its industry leaders. He’s promised to create a friendlier regulatory environment, contrasting with Biden’s more traditional approach. He also indicated he would address the SEC’s mainly negative approach to the industry and appoint crypto-positive staff in key regulatory positions.
Whether Trump keeps the regulation Biden has proposed or not, protecting consumers and investors in the industry is the right thing to do. We all have a stake in industry growth, and the next billion users are within reach if we get this right. The 15% increase in losses due to hacks and scams in 2024 compared to 2023 proves that we've got much work to do. However, having regulators in place who understand crypto and are willing to listen to the industry will significantly help us mature, and by providing retail investors with the protections they expect, will drive adoption.