DIGITAL FINANCIAL ASSETS MARKET: REGULATION OF RISKS

Abstract

The objective of this article is to explore avenues for improving the state regulation of the digital financial assets market. The author proposes a set of principles essential for formulating a regulatory framework for the digital financial assets market in Ukraine. These principles include: a) recognizing the impracticality of banning the circulation of digital financial assets and especially cryptocurrencies within national markets; b) advocating for comprehensive regulation involving all financial market regulators, fiscal bodies, and financial monitoring entities; c) establishing a specialized process for the conversion of crypto-assets to fiat currencies and vice versa; d) facilitating global data exchange among regulators; e) implementing licensing requirements for services facilitating the exchange of crypto-assets for fiat currencies; g) instituting specific regulations governing operations with digital financial assets conducted by financial intermediaries; h) implementing balanced regulations and taxation for operations involving digital financial assets, considering their global nature and minimizing the risk of transactions by Ukrainian residents moving beyond national borders. The article highlights the adverse impact of cryptocurrencies circulating in "gray" jurisdictions on the efficacy of regulating operations within national financial markets. Market participants often intertwine cryptocurrency transactions with activities conducted through non-public offshore entities. To address this challenge, the author proposes two solutions. Firstly, central banks should expedite the development of their own digital currencies (CBDC). However, the author notes the slow progress in this regard, with only three jurisdictions—namely the Bahamas, Jamaica, and Nigeria—having issued CBDC at the time of the study. While anticipating that the implementation of CBDC will gradually displace loosely regulated cryptocurrencies, the author cautions against their potential negative use, such as evading sanctions. Secondly, the author suggests the need for the FATF to introduce a global procedure for regulating the circulation of cryptocurrencies, establishing unified rules applicable to all countries. Simultaneously pursuing both the development of CBDC and a global regulatory framework through FATF is seen as a strategy to enhance the security of the cryptocurrency market and substantially mitigate national security risks.