By: Akber Datoo, CEO and Founder, and Jason de Mink, Head of Digital Assets, at D2 Legal Technology.

Cryptoassets, digital financial assets that have quickly gained prominence since first emerging in the aftermath of the 2008 financial crisis, now sit crucially at the intersection of financial innovation, consumer risk, and regulatory authority. Following high-profile failures such as the Terra/Luna stablecoin collapse and the bankruptcy of crypto exchange FTX, political and public pressure to impose outright bans on cryptoassets has intensified. Yet the instinct to prohibit crypto activity entirely risks misunderstanding the reality of crypto market behaviour.

While cryptoassets have introduced new technological features that are not widely understood, the economic functions they perform (namely, capital formation, trading, custody, leverage, and payments) are intimately familiar to financial professionals around the world. The debate has therefore increasingly shifted toward the appropriate regulatory response, with policymakers around the world pursuing very different approaches, some more effective than others.

The nature of cryptoasset risk

Since the high-profile collapse of FTX in November 2022, regulators have come to recognise that crypto markets replicate many of the vulnerabilities of traditional finance, including leverage, liquidity mismatches, opacity, and interconnectedness. In some cases, these risks, when applied in the cryptoasset context, are even magnified by its inherent traits, such as technology-driven speed, global reach, and fragmented accountability.

Because these risks share structural similarities with regulated financial sectors, excluding cryptoassets entirely from regulatory jurisdiction is liable to heighten those systemic vulnerabilities. Yet, despite the fact that cryptoasset markets have continued to grow, regulators remain divided on whether the appropriate response is to integrate crypto markets into existing regulatory frameworks or attempt to eliminate them.

There are three dominant strategies that have arisen across global policy practice, which can be summarised as: ban, contain, or regulate. While often presented as equally viable options, their effectiveness varies significantly.

The case for banning

At the most restrictive end of the policy spectrum are outright bans, where governments seek to suppress or eliminate crypto activity within their jurisdictions. China is perhaps the most prominent example of this approach, having implemented a near-total ban on mining, trading, and other related services.

Bans are sometimes justified when social harm clearly outweighs private benefit, or where the activity is incompatible with sovereign public policy goals. In the crypto context, advocates for such bans would typically advance several common arguments.

First, given the prevalence of fraud, market collapses, and irreversible transaction errors, they argue that bans are needed simply to protect consumers. Other arguments point to the use of crypto in illicit finance, including ransomware, sanctions evasion, and darknet markets, particularly where enforcement capacity is limited. Some governments also view crypto as a threat to monetary sovereignty, fearing capital flight or competition with state currencies. Environmental concerns have further strengthened calls for a ban, with critics pointing to the significant electricity usage of some crypto networks.

Despite these arguments, evidence shows that a ban does not achieve intended outcomes, often causing less resilient, less liquid, and more volatile markets. The specific harms have not been eliminated – only relocated – and investors remain exposed via foreign platforms or decentralised underground networks. Markets are able to adapt quickly, and as capital migrates, the banned activity will simply continue beyond the reach of domestic regulators. 

The case for containment

Slightly less restrictive on the policy-choice spectrum is what is known as containment. Containment (or isolation) strategies do not restrict crypto markets outright, but instead seek to insulate the real economy and minimise spill overs to systemically important financial institutions.

In practice, this may involve restricting the flow of funds into and out of crypto, limiting exposure among banks and other critical financial institutions, imposing higher capital requirements, and ring-fencing custody risks. Some jurisdictions may also restrict the use of cryptoassets as a means of payment for goods and services or limit connections between crypto markets and tokenised real-world assets.

No matter which strategies are implemented, containment is most effective where crypto’s systemic importance is low and where the objective is stabilisation.  It has limited value as a policy and is usually only really used as a placeholder until the next major policy step, such as a ban or regulatory reform, can be determined.

The case for regulation

At the least restrictive end of the policy spectrum is regulation, where governments seek to bring crypto activity within existing legal and supervisory frameworks.

Instead of attempting to eliminate crypto markets, this approach focuses on overseeing them through licensing requirements, consumer protection rules, AML/CFT obligations, and prudential standards. In practice, regulation allows authorities to monitor crypto markets while still encouraging innovation and new product development.

Having regulatory clarity also encourages responsible investment by allowing firms to design products that comply with supervisory expectations from the outset.

There are several examples which illustrate the success of regulating cryptoassets. The European Union’s MiCA framework, for example, has created a unified passporting and oversight regime for crypto issuers and service providers. In the UK, crypto is being integrated into its Financial Services and Markets Act (FSMA)-based regulatory architecture under the principle of “same risk, same regulation”. In the United States, crypto regulation is still quite fragmented, but it is slowly converging, with securities, commodities, and stablecoin rules being clarified over time through legislation and market demands. Finally, Hong Kong, which operates outside of China under the “One Country, Two Systems” framework, has illustrated how controlled experimentation can coexist with broadened financial stability objectives, while preserving regulatory oversight.

This push away from prohibition and towards more structured regulation exhibited by many of these major economies is largely driven by recognition that cryptoassets are unlikely to disappear and are already intertwined within our financial system.

Rather than pushing activity offshore or underground, regulation allows authorities to preserve space for innovation.

Toward effective crypto regulation

Cryptoassets present novel risks, but perform familiar economic functions. Outright bans may seem like the safest choice, but they also risk being the exact opposite, leading to risk in other areas and long-term global limitations.

Conversely, risk-aligned regulation, combined with robust supervision and containment where necessary, offers a more sustainable path. It maintains consumer agency, mitigates harms, preserves monitoring capabilities and channels activity into structures where policy goals (such as stability, inclusion, and innovation) can be reconciled.

With many major economies already moving decisively toward regulating cryptoassets, the focus should be on promoting greater consistency in implementation in order to strengthen enforcement practices and reduce the risks of regulatory arbitrage.

Our experience advising regulators globally on digital asset rulemaking has shown that the answer is not prohibition, but disciplined regulatory evolution. Banning cryptoassets may offer the appearance of certainty, yet it rarely delivers control; it displaces activity, obscures risk, and weakens the supervisory visibility on which effective regulation depends. The better course is to regulate with both humility and ambition: recognising that this is a new technological environment, but not a new universe of risk. As our understanding deepens, so too must the regulatory architecture – calibrated to financial stability, market integrity, consumer protection, financial crime prevention, and responsible innovation. The responsibility of a regulator is not to deny this new world, but to govern it with sufficient clarity, discipline, and foresight so that innovation can mature within the boundaries of public trust.