What Can We Expect from Cryptocurrency Regulation in 2023?

The crypto space had a rocky 2022, one that experts posit could lead to more regulation in 2023. Here's what the landscape looks like.

By: Jonathan McGoran | February 12, 2023

Topics: Cryptocurrency | Legal/Regulatory

Even for the tumultuous world of cryptocurrencies, 2022 was a year of great turmoil.

Amid increasing interaction between the crypto economy and the rest of the global financial system, the crash of crypto asset prices and liquidity and collapses like crypto hedge fund 3AC and centralized cryptocurrency exchange FTX have led many to wonder if 2023 will be marked by a move toward increased regulation of digital assets.

“The collapse of FTX has essentially made the regulation come sooner, especially in the U.S., and that’s the main driver for the regulations for crypto and on crypto worldwide,” said Yemu Xu, co-founder of the crypto startups ARPA and Bella Protocol, and founding partner at ZX Squared Capital, a hedge fund focusing solely on digital assets.

“What we expected to happen in the next three to five years, prior to the collapse of FTX, will come probably in the next one to two years, especially on exchanges.”

Jacob Decker, SVP and director financial institutions at Woodruff Sawyer, also sees a trend toward greater regulation.

“I do think it’s going to accelerate,” said Decker. “It will be a while before we can say the trend of more regulatory enforcement is going to flatten out or recede. I think we’re just at the part of the innovation cycle here where that’s going to continue to ramp up.”

But he anticipates more modest change.

“There are too many nuances and too much complexity that exist across different use cases for this technology,” Decker said. “I don’t see the level of innovation leveraging the underlying technologies here as lending itself to some sort of magic silver bullet.”

Where Regulation May Step In

New regulations may focus on a number of different aspects of the cryptocurrency industry, including cryptocurrency exchanges.

“They provided fiat on- an off-ramp tool or infrastructure,” said Xu. “That is the gateway to control the inflow of money into the crypto world, and that’s what the government cares about. And then the outflow of the money, meaning converting crypto to fiat and then to cash out. That is what the government is concerned about too.”

Yemu Xu, co-founder, ARPA and Bella Protocol

Xu expects much of this regulation to target Know Your Customer (KYC), Anti Money Laundering (AML) and taxation.

“As long as there’s financial activities, there’s transfer, there’s trading, and there’s depositing and withdrawing,” said Xu.

“So that means illegal activities, money laundering, can easily happen if there’s no regulations and procedures in place. So, the U.S. government will start to regulate the exchanges, especially centralized exchanges, and most likely decentralized exchanges, too, as centralized entities or centralized financial entities. That means that there will be a strict AML and KYC process in place.”

Protecting customer assets will also be a priority.

“You have to make sure a central exchange is solid, that there is enough capital to make sure it’s operating properly and that there is segregation of customer funds,” said CK Zheng, cofounder and CIO at ZX Squared Capital.

“So, a customer who is using the centralized exchange, their funds are there and cannot be tapped to do something totally different.”

Yet another regulatory focus may be mining.

“A lot of states are welcoming mining because it’s a huge tax generator for the state government,” said Xu.

“But a lot of states are opposing it because the current proof of work scheme for Bitcoin mining is very energy consuming and sometimes not environmentally friendly if you’re using unclean energy. So, there might be some regulations coming on that front.”

Counterparty risk will likely be another focus.

“When one firm defaults, it impacts the next firm, and when the next firm defaults, it impacts the following firm, so there’s clearly a lack of the counterparty risk management that would segregate this type of domino effect,” said Zheng. “There’s a lot of similarity to the traditional finance market. You have to have regulation to make sure that the traditional financial firms are solid and apply these principles to the crypto space.”

Adding in Crypto Complexity

But while there are definite similarities and overlap, cryptocurrencies are vastly different from conventional financial products in ways, most notably their technological complexity.

And that can slow the tide of regulation.

“I don’t think that our legislators are yet at a point where they understand it deeply enough or where they’ve broken down the hundreds of relevant issues that need to be clarified down into something that will be done in a big sweeping law,” said Decker.

Stablecoins in the Mix

Other regulations will focus on stablecoins, digital assets whose value is pegged to other commodities or currencies like the U.S. dollar.

“Stablecoin is one of the fundamental concepts in the crypto space and relatively straightforward, because you need a collateral of a dollar against a dollar of USDT or USDC or whatever the stablecoin is,” said Zheng. “And I think that’s relatively simple to [regulate] in a way that conceptually everybody agrees it should be done.”

Decker agrees: “I wouldn’t be surprised if there are more narrow rule updates or potential legislation to deal with who can and can’t be a sponsor or issuer of a stablecoin,” he said.

“There’s plenty of legislation that’s been proposed. It’s a little bit easier to wrap your head around and think about.”

Other Factors to Consider

It remains to be seen whether new regulations will entail expansions of existing financial industry or digital asset industry regulations or entirely new ones.

Decker anticipates an iterative evolution of existing regulations.

“My only prediction related to regulation is that over time there will be tweaks to existing laws that are appropriate and deal with the appropriate nuance that comes with a digital asset as opposed to the traditional form. But they will be more incremental clarifications of existing rules,” he said.

Xu is not so sure: “It can be a mixture of everything,” he said. “For example, to include the crypto activities into the existing legal framework, which is a set of frameworks that was essentially set up decades ago to regulate the financial giants in the traditional sense. Or they could have a brand new set of regulations that’s called blockchain- or crypto-focused regulation framework that’s regulating such activities in a more systematic and holistic manner. It can be both.”

Decker also sees enforcement playing an increasingly central role.

“The current trend of increasing enforcement actions, I expect to continue with potentially more severe penalties. In the near term, it’s not really a change, but rather an acceleration of the existing trend. Certain areas such as AML, KYC or sanction violations are good examples,” Decker said.

“While this type of enforcement is not limited to digital assets firms, many operators in crypto either don’t have mature compliance programs or have unique technological challenges related to conducting AML/KYC/sanctions compliance that put them in the crosshairs.”

Increased enforcement will also mean a growing body of case law that can serve as a de facto regulatory framework, especially regarding what is and isn’t a security — an important and thorny question in the world of digital assets.

Jacob Decker, SVP and director financial institutions, Woodruff Sawyer

Industry groups may also play a growing role in creating standards and best practices.

“There are industry groups that are doing that around stablecoins, industry groups that are doing that around custody. And there are overlapping issues,” Decker said.

“The leaders in the digital asset space already participate heavily in what I would call self-regulatory organization-type activity. They realize that the credibility of the whole industry is at stake, so continued advocacy for smart regulation is critical to their long-term success. We want to create standards and a level of transparency that allows for the legitimate community within this space to operate and continue to grow.”

Not everyone will be happy about a more robust regulatory environment.

“Short term, a lot of entrepreneurs don’t want to deal with regulations because it’s costly in terms of time and capital and energy,” said Xu.

“They will naturally flow to the jurisdiction where there is less regulation or there is less strict regulations in place.”

But many others will embrace it.

“The positive side will be that a lot of investors will use the US-regulated entities, like Coinbase,” said Zheng. “It’s regulated in the U.S., and if there’s solid regulation people may trust them a lot more than an offshore exchange. I think that will be a net benefit to the U.S.”

And some results of regulation will be welcomed by everyone.

“I think the regulation definitely will boost investors’ confidence, especially after the chaos from FTX and other failures of 2022,” said Zheng. “I think that’s definitely something everybody will be looking for.”&

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected].

A Dangerous Job

Dr. Latha Brubaker, Senior Vice President Medical Operations at Concentra

To understand the physical and mental health threats firefighters face, it’s important to examine how firefighting exposes them to a number of different risks. Their job is physically taxing. They must wear heavy gear to protect them from high-temperature exposure while rescuing people and pets. They have to climb ladders and stairs during rescue operations. Although wearing masks to limit these exposures, firefighters can inhale smoke and be exposed to harmful chemicals and environmental toxins, increasing their risk of certain cancers.

“Firefighters have to climb ladders and stairs, all the while hauling very heavy and unruly fire hoses and wearing very heavy equipment and PPE,” Brubaker said.

While completing these physically demanding tasks, firefighters can inhale smoke and other environmental toxins, increasing their risks of certain cancers. A study of 30,000 firefighters spanning from 1950 to 2009 found that firefighters were 9% more likely to be diagnosed with cancer and 14% more likely to die from the disease than the general population.

Outside of the physically taxing elements, firefighters often work in distressing circumstances. There may be thoughts of the personal risks taken to save others. They witness significant injuries and loss of life.

All of these situations have the potential to be emotionally distressing for firefighters. That’s why a number of states — including California, Tennessee, Florida and Georgia — have passed or are considering passing laws that include PTSD benefits under workers’ comp coverage for firefighters.

“We’ve really doubled down on our commitment to behavioral health, and we’ve gone so far as to partner with some third-party resources that have expanded our ability to provide behavioral health support,” said Chris Studebaker, senior director of onsite preventive services at Concentra.

Protecting Firefighter Health

Chris Studebaker, Senior Director of Onsite Preventive Services at Concentra

Unlike in other professions, it’s hard to reduce the number of physical and environmental hazards a firefighter faces on the job. Yes, PPE can go a long way in protecting firefighters from burns and other injuries, but the physical demands are also extreme. Firefighters are wrangling heavy fire hoses to stop the damage. In addition, they are often lifting people and maneuvering in confined or challenging spaces.

In order to make sure firefighters are up to the task, many departments conduct annual physical health assessments so that they can be certain their firefighters are physically and mentally prepared for the job. Medical personnel follow the guidelines provided by the National Fire Protection Association (NFPA) Standard 1582 on Comprehensive Occupational Medicine Programs for Fire Departments which helps them determine if there is a condition present that may prevent a firefighter from performing their essential job functions.

The Joint Labor Management Wellness-Fitness Initiative, comprised of two major fire service organizations, worked to develop a comprehensive wellness-fitness program. Based on this initiative, NFPA developed standards regulating these programs. This resulted in the suggestion of adding cancer screening, fitness assessments, and behavioral health screening to the periodic health assessments of firefighters.

“Some fire departments are now asking us to perform cancer screening,” Brubaker said. “Cancer screening recommendations are made by the US Preventive Services Task Force, for example, and are based on a systematic review of scientific evidence published in peer-reviewed journals. When determining the appropriate screening tests, it is important to review the USPSTF recommendations with the understanding of the potential additional risks amongst firefighters for certain cancers.

Sleep health is another area of issue in the fire service due to the 24 or 48-hour shift schedule and the mental strain and stress of the job.

Beyond screenings, firehouses can opt to partner with providers of on-site health services, including physical therapists who can work collaboratively with employers to develop and implement injury-prevention programs. Known as “tactical athlete programs” because their rigor is like that of the training a pro athlete would undergo, these solutions can help catch injuries before they become severe and help keep firefighters’ bodies functioning optimally to enable them to perform their job.

Wearable technologies, too, are likely to play a role in keeping firefighters safe in the future: “We’re seeing the use of wearable tech sensors that look at environmental exposures and heat. And now the technologies can even track their sleep health” Studebaker said. “I think the future of wearable tech is going to shift away from discrete individual devices and more towards garment-based sensors.”

A Trusted Partner for Firefighter Physicals

The physical rigor required to fight fires combined with the emotional stressors present in the job mean that employers need to put extra care into guarding firefighters’ health and safety. Firefighters should undergo regular physical exams, and Concentra is just the partner they need to conduct these physicals.

Concentra clinicians perform examinations, imaging, and lab tests that meet the National Fire Protection Association standards.

Firefighters who undergo these examinations will complete a physical fitness test that assesses their lifting, pushing, pulling, carrying, climbing and other abilities. These kinds of assessments can guard against musculoskeletal injuries common in the industry.

Should an injury occur, the clinician utilizes a conservative treatment approach, with an emphasis on active rehabilitation. Since firefighters are in safety sensitive positions, opioids are usually avoided.

“Musculoskeletal injuries can be managed without the use of opioids,” Brubaker said. “Our approach is a conservative one with the use of physical therapy, when appropriate, and anti-inflammatory medication, if needed. We try to avoid prescribing opioids. Opioids are typically unnecessary.”

A Concentra clinician will perform lab tests including a complete blood count, comprehensive metabolic panel, lipid panel, and urinalysis as well as TB tests. They will do alcohol and drug tests. They will perform audiograms, pulmonary function tests, chest X-rays and EKGs. They will complete a cardiovascular risk assessment and depending on age and the level of risks, a stress test will be performed either at the onsite clinic or a cardiology office.

“It’s important for us to make sure in the first place that they’re healthy from a cardiovascular perspective, that they’re healthy from a respiratory perspective,” Studebaker said.

Behavioral health screening and cancer screening can be performed at Concentra Onsite Health clinics. Clinicians can conduct screenings for six cancers firefighters are at elevated risk for: colorectal, prostate, skin, blood, thyroid and bladder.

Concentra Onsite Health clinicians assess firefighters’ health holistically — something that is essential for a job that is both physically and emotionally taxing. By providing whole-person care, Concentra Onsite Health aims to guard firefighters’ health so that they can come home to their families after a day of protecting others.

“Most firefighters are very passionate about the work they do. They are vital members of their community and take risks every day to keep these communities safe. The work of a firefighter can have an adverse impact on their long-term health and well-being. It is equally vital that we take care of our firefighters and do what we can to improve their overall health.”

To learn more, visit: https://www.concentra.com/

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Concentra. The editorial staff of Risk & Insurance had no role in its preparation.

Concentra® is America’s leading provider of occupational medicine, delivering work-related injury care, physical therapy, and workforce health services from nearly 520 Concentra medical centers and more than 150 onsite clinics at employer locations nationwide.