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How does regulation impact corporate digital asset investments?
IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. Businesses should be sure to consult a professional advisor before making any investment decisions.
For businesses investing in digital assets, it is crucial to be aware of the regulatory landscape in their specific jurisdiction. Regulation can have an impact on the prices of digital assets, the taxes a company is liable to pay on any gains, and the way they off-ramp their digital assets into fiat currencies. With central banks and financial regulators across the globe beginning to pay greater attention to digital assets, it is clear regulation has arrived, and so businesses must pay heed.
For now, the regulation of digital assets across the globe remains extremely disjointed. For example, last year El Salvador passed a law to declare Bitcoin legal tender, even as China initiated a regulatory crackdown on its large community of Bitcoin miners. However, regulators in the developed world from the US Securities and Exchange Commission (SEC) to the European Commission, are increasingly turning their attention to digital assets.
But while some see this as a disadvantage for an area of the market that has always striven to remain decentralized, in many ways regulation is great news for digital asset investors. This is especially the case for businesses investing in digital assets, as it will lead to greater security, transparency, and trust in this area of the market. However, as we discuss below, not all regulatory proposals spell a positive outcome for digital asset strategies.
Preparing for regulation
Businesses allocating to digital assets must prepare for any regulatory changes to avoid any unwelcome surprises. One way they can do this is by carefully considering which wallets, corporate accounts, and exchanges they use to store, deploy, and off-ramp their digital assets. It’s important that a chosen service provider takes digital asset regulation seriously and prepares its activities accordingly.
Anyone with interest in digital assets will have heard of the issues experienced by Binance, the largest cryptocurrency exchange by trading volume, which in 2021 was forced to suspend withdrawals into fiat currencies in Pounds Sterling (GBP) and Euros (EUR). Binance was singled out by the UK regulator for non-compliance with its regulatory requirements and standards, which led to a number of its activities in the UK being banned. As the regulatory crackdown on digital assets intensifies, it is worth taking the time to research any company a business decides to entrust its money to in order to avoid being suddenly unable to off-ramp digital assets into the real world.
Stablecoins in the spotlight
Another key development to pay attention to is the potential regulation of stablecoins, which are digital assets pegged to fiat currencies, such as USD Coin (USDC) and USD Tether (USDT), both of which are pegged to the US dollar. Stablecoins have become one of the biggest attractions of decentralized finance (DeFi) investment strategies, which offer intrerest rates unheard of in traditional finance. For example, Yield App pays up to 13% in base interest on USDT and USDC, with further variable rewards available to holders of the YLD token.
Several global regulators have turned their attention to stablecoins, primarily because of the asset's perceived threat to the traditional finance ecosystem as banks continue to pay interest rates well below 1% on fiat currencies. The UK central bank, the Bank of England, proposes regulating stablecoins in the same way as the fiat money they are pegged to, while the EU has proposed Regulation on Markets in Crypto Assets (MiCA), which seeks to heavily regulate stablecoins.
Unfortunately, the proposed EU regulation could be bad news for European businesses investing in digital assets, as it proposes prohibiting the issuance of interest on stablecoins pegged to fiat currencies (which it has dubbed “e-money tokens”). If introduced at scale, this regulation could force businesses based in the EU to reconsider the way they interact with digital assets - or perhaps even seek to change jurisdiction. At this stage, it remains unclear if the proposals will go ahead in their current form with MiCA not expected to be passed into law until sometime in 2023.
However, increased regulation isn’t all bad news. It will result in increased security requirements, such as a stricter Know Your Customer (KYC) verification process, which is positive for businesses as it will increase transparency, accountability and protection. At Yield App, we have now introduced mandatory KYC level 2 verification for all users in order to comply with the highest standards and guarantee the greatest possible level of protection for our customers.
Despite understandable fears, regulation needn’t spell the demise of cryptocurrency. In fact, regulation of digital assets should be viewed positively by business owners, as it is likely to lead to a greater level of trust in the broader digital asset ecosystem over time. At Yield App, we firmly believe that companies embracing regulatory requirements and updating their policies to the highest standards will have the upper hand as digital assets become mainstream. Businesses investing in digital assets must ensure they comply with all the latest rules in their jurisdiction and will benefit from doing so.