Crypto regulation intensified throughout the world in 2023 as policymakers ramped up efforts to better safeguard investors in the wake of the FTX collapse. 

One regulatory measure governments have maintained however are licence clearances for crypto companies to apply for to receive the the greenlight to run their operations within the country, and these often get confused with EMIs.

Uldis Tēraudkalns, CEO of Nexpay, shared his views on the blurred lines between a licenced crypto operator and an EMI, and went into greater detail on the parameters we may see in 2024. 

The convergence of regulation for EMIs (Electronic Money Institutions) and crypto issuers and service providers is changing the landscape of digital finance. As the two sectors start to realise they are operating on common ground, a number of important changes will start to emerge in 2024.  

Convergence of EMI and crypto regulation

The trajectory of regulation is towards greater oversight of crypto. Regulators are imposing rules to protect consumers and financial systems, very much in line with existing regulations for e-money.  

As fiat-crypto interchange increases, harmonised requirements make sense. Seamless fiat-to-crypto payment flows, and stablecoins pegged to fiat, necessitate consistent consumer protection, transparency, reserves management, and risk control guardrails. 

It’s already happening. The Financial Stability Board (FSB), which makes recommendations to all G20 major economies and the European Commission, expects national authorities to implement regulatory frameworks for digital assets comparable to those already in place for traditional finance.

As a result, licensing and reporting are expanding in crypto. An increasing number of jurisdictions, including Hong Kong, Estonia and Mauritius (with Singapore and New Zealand moving in the same direction), now require licences and compliance reports (additional to AML requirements) from sizable crypto companies, just like with EMIs. 

Recent crypto regulations in some jurisdictions already require entity capital reserves, custody protections, organised governance, and risk control processes that are aligned to those faced by EMIs. 

The EU’s Markets in Crypto-Assets (MiCA) Regulation regulates crypto-asset issuers and crypto-assets service providers and requires disclosures around reserve funds and internal control systems, one of the first attempts by any regulator at comprehensive crypto regulation. 

And there are overlapping AML, KYC, audit, reporting, and operational resilience expectations.

New rules for crypto asset businesses by the UK’s Financial Conduct Authority (FCA) came into effect on October 8, 2023. The new rules require firms to demonstrate they have the right expertise for their promotions, and they also require crypto asset businesses to register with the FCA and comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Implications for digital finance

Where is all this heading?

EMI and crypto regulation convergence is likely to lead to greater standardisation and interoperability in digital finance. That’s going to be good news for consumers and businesses alike, by making it easier to transfer funds across borders and reducing transaction costs. 

As far as the impacts on EMIs and crypto asset businesses are concerned:

  • Increased competition. On the one hand, as crypto companies adhere to similar licensing and regulatory requirements, EMIs will face more competition providing digital financial services from these new entrants.
  • Level playing field. On the other, as crypto regulation aligns with existing EMI requirements, EMIs will be on a more equal footing in creating digital money products and attracting consumers from crypto businesses. The differing rules previously gave crypto firms some competitive advantages.
  • Talent transfer opportunities. Knowledge and skills transfers across sectors could be a useful source of fresh talent and insights regarding operational resilience, risk governance, IT security, and other areas, across both crypto firms and EMIs.
  • Consolidation of related services. As services and customer bases converge, EMIs may see this as an opening to consolidate or offer integrated payment flows and wallets encompassing both fiat and crypto rails.
  • Increased barriers to entry. Smaller crypto businesses may not be able to meet the heightened requirements, leading to increased barriers to entry in this space. Consequently, there could be a consolidation of players, not only services, as smaller firms might struggle to compete or comply with these new standards.

Overall, maturation of cryptocurrency regulation towards EMI standards increases legitimacy and market reach for EMIs into the new arena of digital assets and currencies. While also introducing competition, it sustains the role of EMIs as management of all digital monies gets more aligned. This presents some key opportunities for EMIs to capitalise upon as well.

The opportunity ahead

EMIs can leverage deep experience managing electronic money and payments flows to guide the design of integrated services spanning both fiat currencies and cryptocurrencies. This capacity to oversee comprehensive digital money services positions EMIs to shape the architecture and direction of converging ecosystems.

Combining EMIs’ robust risk control frameworks with crypto innovators’ pioneering models creates the optimal blend of institutional stability and next-generation advances. Crypto partners inject agility, customisation and the exploration of emerging technologies, like smart contracts.  EMIs bring the rigour of battle-tested systems, compliance infrastructure, and operational resilience.

Commercial partnerships could also be a potent mix – fusing EMIs’ customer trust and reach with crypto firms’ trailblazing services.

The end game? 

The convergence of EMI and crypto regulation is a complex and rapidly evolving issue, but it is one that has the potential to transform the digital finance industry in profound ways. 

Essentially the opportunities span thought leadership – moulding the architecture for converging ecosystems – strategically fusing the strengths of different players through partnerships, and proactively shaping prudent policy frameworks for the future.

Looking even further ahead, these converging spheres have the potential to reshape global finance. Currently constituting a fraction of world trade and payments flows, widespread adoption of digital assets and products would result in them becoming a pillar within future economies. Their programmable, borderless nature could even address persistent inefficiencies in cross-border commerce and financial inclusion. 

Crypto innovation fused with institutional stability could position EMIs and forward-thinking policymakers to lead the charge into an economy where digital values transfer and storage are commonplace.