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Cryptocurrency What Regulators Need to Know

Cryptocurrency What Regulators Need to Know

Cryptocurrency has emerged as a disruptive force in the financial world, challenging traditional regulatory frameworks and raising important questions for regulators worldwide. As digital assets continue to gain popularity, it is crucial for regulators to understand the unique characteristics of cryptocurrencies and develop appropriate regulatory approaches. In this blog post, we will explore what regulators need to know about cryptocurrency and its implications for the financial industry.

1. Understanding Cryptocurrency:

Regulators must familiarize themselves with the fundamental concepts of cryptocurrency. Cryptocurrencies are digital assets that use cryptography for secure transactions, operate on decentralized networks known as blockchains, and are not issued or controlled by any central authority. It is important to grasp the underlying technology and its potential implications for financial systems.

Regulators play a crucial role in overseeing and managing the cryptocurrency industry. To effectively regulate cryptocurrencies, it's important for regulators to have a comprehensive understanding of the key aspects of this digital asset class. Here are some important points that regulators should know about cryptocurrencies:

1. Definition and Nature: Cryptocurrencies are digital or virtual currencies that use cryptography for security. They are decentralized and operate on distributed ledger technology, most commonly blockchain. Cryptocurrencies are not issued or controlled by any central authority, such as a government or financial institution.

2. Technology and Blockchain: Cryptocurrencies rely on blockchain technology, which is a decentralized and transparent ledger that records all transactions across a network of computers. Blockchain ensures the immutability, security, and transparency of cryptocurrency transactions.

3. Token Types: Cryptocurrencies can be broadly categorized into three types: (a) Payment Tokens, which are intended to be used as a medium of exchange; (b) Utility Tokens, which provide access to a specific product or service within a blockchain ecosystem; and (c) Security Tokens, which represent ownership in an underlying asset or entity and may be subject to securities regulations.

4. Market Participants: The cryptocurrency ecosystem consists of various participants, including cryptocurrency users, miners, exchanges, wallet providers, developers, and token issuers. Each participant has a specific role in facilitating the use, exchange, and development of cryptocurrencies.

5. Regulatory Challenges: Regulating cryptocurrencies poses several challenges due to their decentralized nature, cross-border transactions, and evolving technology. Regulators need to consider issues such as investor protection, market integrity, anti-money laundering (AML) and know-your-customer (KYC) requirements, taxation, consumer education, and cybersecurity risks.

6. Regulatory Approaches: Regulators around the world have adopted different approaches to cryptocurrency regulation. These approaches range from outright bans to embracing cryptocurrencies and implementing specific regulations to address risks. Regulators need to strike a balance between fostering innovation and protecting investors and consumers.

7. International Cooperation: Given the global nature of cryptocurrencies, international cooperation among regulators is crucial. Collaboration on issues such as AML, cross-border transactions, and regulatory standards helps prevent regulatory arbitrage and ensures a consistent approach to cryptocurrency regulation.

8. Risk Assessment and Mitigation: Regulators should conduct comprehensive risk assessments to identify potential risks and vulnerabilities associated with cryptocurrencies. They should develop appropriate regulatory frameworks to mitigate these risks, including measures to combat fraud, money laundering, terrorist financing, and market manipulation.

9. Investor Education: Educating investors about the risks and characteristics of cryptocurrencies is essential. Regulators can play a significant role in raising awareness about the risks, volatility, and potential scams associated with cryptocurrencies to protect investors and promote informed decision-making.

10. Monitoring and Compliance: Regulators need to establish mechanisms to monitor the cryptocurrency market and ensure compliance with applicable regulations. This may involve licensing and supervising cryptocurrency exchanges, enforcing AML/KYC requirements, and conducting audits to ensure transparency and market integrity.

As the cryptocurrency industry continues to evolve, regulators must stay abreast of developments, engage in ongoing dialogue with industry stakeholders, and adapt their regulatory frameworks to address emerging risks and challenges. Striking the right balance between regulation and innovation is crucial to foster a responsible and sustainable cryptocurrency ecosystem.

2. Risks and Investor Protection:

Regulators need to identify and address the risks associated with cryptocurrency. These risks include price volatility, potential for fraud and scams, market manipulation, and money laundering. Establishing investor protection mechanisms, such as disclosure requirements, consumer education initiatives, and enforcement actions against fraudulent activities, can help mitigate these risks.

Regulators play a critical role in protecting investors and ensuring the integrity of the cryptocurrency market. As cryptocurrencies continue to gain popularity, it is important for regulators to be aware of the risks involved and implement measures to safeguard investors. Here are some key risks and investor protection considerations that regulators should be familiar with:

1. Market Volatility: Cryptocurrencies are known for their price volatility, which can lead to significant gains or losses for investors. Regulators should educate investors about the inherent risks of investing in volatile assets and encourage them to make informed investment decisions based on their risk tolerance.

2. Lack of Regulation and Oversight: The decentralized and global nature of cryptocurrencies presents challenges for regulation and oversight. Regulators need to establish clear frameworks to address investor protection, market integrity, and consumer rights while fostering innovation and maintaining market efficiency.

3. Fraud and Scams: The cryptocurrency market is vulnerable to fraud and scams, including Ponzi schemes, fake initial coin offerings (ICOs), and phishing attacks. Regulators should actively monitor and investigate fraudulent activities, provide warnings to investors, and take enforcement actions against those engaging in fraudulent practices.

4. Cybersecurity Risks: Cryptocurrency exchanges and wallets are prime targets for cyberattacks due to the value and digital nature of the assets. Regulators should encourage robust cybersecurity practices among market participants, promote the use of secure wallet solutions, and establish guidelines for incident reporting and response.

5. Market Manipulation: Cryptocurrency markets can be susceptible to market manipulation, including pump-and-dump schemes, insider trading, and wash trading. Regulators should implement surveillance mechanisms and enforcement actions to detect and deter market manipulation, ensuring fair and transparent trading practices.

6. Investor Education: Regulators should prioritize investor education initiatives to enhance public awareness and understanding of cryptocurrencies. This includes educating investors about the risks, volatility, and potential scams associated with cryptocurrencies, as well as providing guidance on how to safely store and manage digital assets.

7. AML and KYC Compliance: Cryptocurrencies can be used for illicit activities such as money laundering and terrorist financing. Regulators should require cryptocurrency exchanges and other market participants to implement robust anti-money laundering (AML) and know-your-customer (KYC) procedures to prevent illicit activities and promote transparency.

8. Investor Redress: In cases of fraud or misconduct, regulators should have mechanisms in place to facilitate investor redress. This may involve establishing investor compensation funds or working with law enforcement agencies to pursue legal action against wrongdoers.

9. International Cooperation: Cryptocurrencies operate on a global scale, making international cooperation crucial for effective regulation and investor protection. Regulators should collaborate with their counterparts in other jurisdictions to share information, coordinate enforcement efforts, and develop consistent regulatory approaches.

10. Continuous Monitoring and Adaptation: The cryptocurrency market is dynamic and rapidly evolving. Regulators should continuously monitor market developments, assess emerging risks, and adapt their regulatory frameworks accordingly. Regular dialogue with industry stakeholders, including exchanges, custodians, and investors, can help regulators stay informed and address evolving challenges.

By addressing these risks and implementing appropriate regulatory measures, regulators can help foster a secure and investor-friendly environment for cryptocurrencies. Balancing innovation and investor protection is essential for the long-term sustainability and growth of the cryptocurrency industry.

3. Regulatory Frameworks:

Regulators should consider developing clear and comprehensive regulatory frameworks for cryptocurrencies. These frameworks should address issues such as registration requirements for cryptocurrency exchanges, anti-money laundering (AML) and know-your-customer (KYC) procedures, taxation policies, and consumer protection measures. Collaborative efforts among regulators at the international level may also be necessary to ensure consistent regulations across borders.

Regulatory frameworks play a crucial role in governing the use of cryptocurrencies and ensuring the protection of investors and the stability of financial systems. Here are some key considerations for regulators when developing regulatory frameworks for cryptocurrencies:

1. Clarity and Legal Recognition: Regulators should provide clear definitions and legal recognition of cryptocurrencies within existing regulatory frameworks. This includes determining whether cryptocurrencies should be classified as securities, commodities, currencies, or a new asset class altogether.

2. Licensing and Registration: Regulators may require cryptocurrency exchanges, wallet providers, and other service providers to obtain licenses or register with appropriate regulatory bodies. This helps ensure that these entities comply with regulatory standards, including anti-money laundering (AML) and know-your-customer (KYC) requirements.

3. Consumer Protection: Regulators should establish rules and guidelines to protect consumers who engage in cryptocurrency transactions. This may include disclosure requirements, dispute resolution mechanisms, and measures to prevent fraud and scams.

4. Market Integrity: Regulators should implement measures to maintain fair and transparent markets. This may involve monitoring and surveillance of cryptocurrency exchanges to detect market manipulation, insider trading, and other fraudulent activities.

5. Anti-Money Laundering and Counter-Terrorist Financing: Regulators should require cryptocurrency businesses to implement robust AML and KYC procedures to prevent money laundering, terrorist financing, and other illicit activities. This includes verifying the identity of customers, reporting suspicious transactions, and complying with international AML standards.

6. Investor Education: Regulators should promote investor education and awareness about the risks and benefits of cryptocurrencies. This includes providing information about the volatility of cryptocurrency markets, the potential for loss, and the importance of conducting thorough due diligence before investing.

7. Cross-Border Transactions and Jurisdictional Challenges: Cryptocurrencies operate across borders, making international cooperation and coordination among regulators essential. Regulators should work together to address jurisdictional challenges, share information, and harmonize regulatory approaches to prevent regulatory arbitrage.

8. Innovation and Sandbox Approaches: Regulators may consider implementing sandbox environments or regulatory sandboxes to foster innovation in the cryptocurrency space. This allows businesses to test new products and services under regulatory supervision, enabling regulators to understand emerging technologies while managing associated risks.

9. Data Protection and Privacy: Regulators should address the privacy implications of cryptocurrency transactions and ensure that personal data is protected in accordance with applicable data protection laws. This may include establishing guidelines for the collection, storage, and use of personal information by cryptocurrency businesses.

10. International Standards and Collaboration: Regulators should engage in international forums and collaborate with other jurisdictions to develop consistent regulatory standards for cryptocurrencies. This helps create a level playing field and reduces regulatory arbitrage.

It is important for regulators to strike a balance between fostering innovation and protecting investors and the integrity of financial systems. Flexibility in regulatory frameworks is necessary to adapt to the rapidly evolving cryptocurrency landscape while addressing potential risks. Regular review and updates to regulations are essential to ensure they remain effective in a dynamic and evolving industry.

4. Innovation and Technology:

Regulators should recognize the innovative potential of cryptocurrencies and the underlying blockchain technology. Embracing technological advancements can foster innovation while protecting the integrity of the financial system. Regulators should encourage research and development in areas such as decentralized finance (DeFi) and stablecoins, while also monitoring potential risks associated with new technologies.

Innovation and technology are at the core of cryptocurrencies, and regulators need to understand the unique aspects of these technologies when formulating regulations. Here are some key considerations for regulators regarding innovation and technology in the cryptocurrency space:

1. Distributed Ledger Technology (DLT): Cryptocurrencies are typically built on DLT, commonly known as blockchain. Regulators should familiarize themselves with the underlying technology to understand its potential benefits, such as transparency, security, and efficiency. This knowledge can help regulators design appropriate regulations that harness the advantages of DLT.

2. Smart Contracts: Cryptocurrencies often employ smart contracts, which are self-executing contracts with predefined rules and conditions. Regulators should understand the capabilities and limitations of smart contracts to ensure that relevant regulations can be applied effectively. This includes considerations around legal enforceability and potential risks associated with coding vulnerabilities or contract automation.

3. Decentralization: Cryptocurrencies operate in decentralized networks, where transactions and governance are distributed among participants. Regulators need to appreciate the decentralized nature of cryptocurrencies and understand the implications for traditional regulatory frameworks. This may require adapting regulations to account for decentralized governance models and distributed decision-making processes.

4. Tokenization and Asset Digitization: Cryptocurrencies enable the tokenization and digitization of assets, including securities, real estate, and intellectual property. Regulators should understand the implications of asset tokenization, such as fractional ownership and increased liquidity, and develop frameworks that address the unique characteristics of these digital assets.

5. Interoperability and Standards: The cryptocurrency ecosystem is comprised of various protocols, platforms, and tokens. Regulators should consider the interoperability and standardization of these technologies to promote compatibility, reduce fragmentation, and facilitate innovation. Collaboration with international standard-setting organizations and industry stakeholders can help establish common frameworks and best practices.

6. Scalability and Performance: As the adoption of cryptocurrencies grows, regulators should understand the scalability and performance challenges associated with processing a high volume of transactions on blockchain networks. Collaborating with technology experts and industry participants can help address these challenges while ensuring regulatory objectives are met.

7. Privacy and Anonymity: Cryptocurrencies offer varying degrees of privacy and anonymity. Regulators should recognize the importance of privacy while balancing it with the need to prevent illicit activities, such as money laundering and terrorism financing. Understanding the privacy features of different cryptocurrencies can inform the development of regulations that strike the right balance.

8. Technological Risks and Cybersecurity: Cryptocurrencies are not immune to technological risks and cybersecurity threats. Regulators should be aware of potential vulnerabilities in blockchain networks, exchanges, and wallets and work with relevant stakeholders to establish robust cybersecurity measures. This includes promoting industry best practices, conducting audits, and fostering information-sharing initiatives.

9. Innovation Sandboxes and Regulatory Sandboxes: Regulators may consider establishing innovation sandboxes or regulatory sandboxes to encourage responsible innovation in the cryptocurrency sector. These sandboxes provide a controlled environment for startups and businesses to test new technologies and business models while being supervised by regulators. This fosters innovation while allowing regulators to monitor and understand emerging risks.

10. Continuous Learning and Collaboration: Cryptocurrency technologies are rapidly evolving, and regulators need to stay updated on the latest developments. This requires continuous learning and collaboration with industry participants, technology experts, academia, and other regulators. Regular dialogue and information-sharing can help regulators adapt their understanding and regulatory frameworks to the evolving cryptocurrency landscape.

Regulators need to strike a balance between supporting innovation and safeguarding investor protection, market integrity, and financial stability. By fostering a conducive regulatory environment, regulators can encourage responsible innovation while mitigating potential risks associated with emerging technologies in the cryptocurrency space.

5. Collaboration with Industry:

Regulators should engage in constructive dialogue with cryptocurrency industry stakeholders, including exchanges, wallet providers, and other service providers. Collaboration with industry players can facilitate the development of best practices, self-regulatory initiatives, and information sharing arrangements. This approach can lead to a more effective and balanced regulatory environment.

Collaboration with the cryptocurrency industry is crucial for regulators to effectively understand and regulate the rapidly evolving landscape. Here are some key considerations for regulators regarding collaboration with the industry:

1. Stakeholder Engagement: Regulators should actively engage with various stakeholders in the cryptocurrency industry, including exchanges, wallet providers, technology developers, industry associations, and market participants. This engagement can provide regulators with valuable insights into industry practices, emerging trends, and potential risks.

2. Industry Self-Regulatory Organizations: Regulators can encourage the establishment of self-regulatory organizations (SROs) within the cryptocurrency industry. SROs can develop and enforce industry standards, codes of conduct, and best practices. By collaborating with SROs, regulators can leverage industry expertise to enhance regulatory oversight.

3. Regulatory Sandboxes: Regulators may consider establishing regulatory sandboxes or innovation hubs where cryptocurrency companies can operate under controlled conditions while engaging with regulators. These sandboxes allow regulators to closely monitor and understand new business models and technologies while providing companies with the flexibility to innovate within defined boundaries.

4. Information-Sharing Initiatives: Regulators should encourage information-sharing initiatives between themselves and the industry. This includes sharing regulatory updates, guidelines, and best practices, as well as seeking feedback from industry participants. Open and transparent communication channels can foster a collaborative environment and improve regulatory outcomes.

5. Joint Task Forces and Working Groups: Regulators can form joint task forces or working groups with industry representatives to address specific regulatory challenges or emerging issues. These collaborative efforts can facilitate in-depth discussions, knowledge sharing, and the development of effective regulatory solutions that consider industry perspectives.

6. Regulatory Impact Assessments: When formulating new regulations or making significant changes to existing ones, regulators should seek input from the industry through consultations and regulatory impact assessments. This process allows industry participants to provide feedback on the potential impact of regulations, identify unintended consequences, and propose alternative approaches.

7. Technological Expertise: Regulators should build and maintain a pool of technological expertise within their organizations or seek external expertise to understand the intricacies of cryptocurrency technologies. Collaboration with technology experts, academic institutions, and research organizations can help regulators stay updated on technological advancements and assess their implications for regulation.

8. International Cooperation: Given the global nature of cryptocurrencies, regulators should actively participate in international forums and collaborate with their counterparts in other jurisdictions. Sharing experiences, best practices, and regulatory approaches can help foster consistency and coordination in global regulatory efforts.

9. Continuous Dialogue: Regulators should establish regular channels for dialogue with the industry, such as industry roundtables, workshops, and conferences. These platforms provide opportunities for regulators to engage directly with industry stakeholders, address concerns, and gain insights into emerging trends and technologies.

10. Regulatory Flexibility: As the cryptocurrency industry evolves, regulators should maintain a flexible regulatory approach that can adapt to technological advancements and changing market dynamics. This flexibility can foster innovation and ensure that regulations remain effective in achieving regulatory objectives without stifling legitimate industry growth.

By actively collaborating with the cryptocurrency industry, regulators can better understand the complexities of the sector, mitigate risks, and develop regulatory frameworks that balance innovation, investor protection, market integrity, and financial stability. A collaborative approach can foster a healthy and sustainable ecosystem for cryptocurrencies while addressing regulatory concerns.

6. International Cooperation:

Cryptocurrencies operate across borders, making international cooperation crucial. Regulators should collaborate with their counterparts in other jurisdictions to establish consistent global standards for cryptocurrency regulation. Sharing information and best practices can help address challenges related to cross-border transactions, money laundering, and terrorist financing.

International cooperation is essential for regulators to effectively address the challenges and opportunities presented by cryptocurrencies. Here are some key aspects of international cooperation that regulators need to consider:

1. Information Sharing: Regulators should establish channels for sharing information and best practices with their counterparts in other jurisdictions. This includes sharing regulatory frameworks, guidelines, and enforcement actions. By exchanging information, regulators can enhance their understanding of the global cryptocurrency landscape and stay updated on emerging trends and risks.

2. Harmonization of Standards: Collaborative efforts should be made to harmonize regulatory standards and approaches across jurisdictions. Consistency in regulatory requirements can reduce regulatory arbitrage and promote a level playing field for market participants. International standards-setting bodies, such as the Financial Action Task Force (FATF) and the International Organization of Securities Commissions (IOSCO), play a crucial role in facilitating this harmonization process.

3. Regulatory Coordination: Regulators should coordinate their efforts to address cross-border issues and ensure consistent enforcement actions. This coordination can involve sharing intelligence on suspicious activities, coordinating investigations, and conducting joint regulatory actions when necessary. Collaborative platforms, such as the Joint Money Laundering Intelligence Taskforce (JMLIT) and the International Organization of Securities Commissions' (IOSCO) Multilateral Memorandum of Understanding (MMoU), facilitate such coordination.

4. Cross-Border Regulatory Challenges: Cryptocurrencies operate across borders, making it important for regulators to address cross-border regulatory challenges. Regulators should collaborate on issues such as cross-border payments, customer protection, anti-money laundering (AML) and combating the financing of terrorism (CFT), and investor education. This collaboration can help develop effective regulatory frameworks that account for the global nature of cryptocurrencies.

5. Regulatory Sandbox Cooperation: Regulators should share experiences and best practices related to regulatory sandboxes or innovation hubs. These sandboxes allow companies to test new products and services in a controlled environment. By sharing insights and lessons learned, regulators can enhance their sandbox frameworks and promote innovation while safeguarding investor protection and market integrity.

6. International Policy Coordination: Regulators should actively participate in international policy discussions on cryptocurrencies and contribute to the development of global policy frameworks. International organizations, such as the Financial Stability Board (FSB) and the International Monetary Fund (IMF), provide platforms for such discussions. By engaging in policy coordination, regulators can contribute to the development of coherent and effective regulatory approaches.

7. Technological Collaboration: Given the global nature of cryptocurrencies, regulators should collaborate on technological advancements and research. This collaboration can involve sharing insights on blockchain technology, cybersecurity best practices, and technological solutions for regulatory challenges. Joint research projects, academic partnerships, and technology-focused forums can facilitate this collaboration.

8. Crisis Response and Contingency Planning: In the event of a cryptocurrency-related crisis or systemic risk, regulators should establish protocols for swift communication and coordination. This includes sharing critical information, coordinating response measures, and ensuring effective crisis management. Collaboration in crisis response can help mitigate the impact of crises and safeguard financial stability.

International cooperation among regulators is vital for addressing the cross-border nature of cryptocurrencies, promoting regulatory consistency, and effectively managing risks. By collaborating with their counterparts in other jurisdictions, regulators can enhance their regulatory frameworks, share knowledge, and contribute to the development of a sustainable and well-regulated global cryptocurrency ecosystem.

7. Flexibility and Adaptability:

Regulators must be flexible and adaptable in their approach to cryptocurrency regulation. The cryptocurrency landscape is evolving rapidly, and regulations should be able to accommodate new developments while ensuring market integrity and investor protection. Regular review and revision of regulatory frameworks may be necessary to keep pace with technological advancements and changing market dynamics.

Flexibility and adaptability are crucial for regulators when dealing with cryptocurrencies. Here's why:

1. Evolving Technology: Cryptocurrencies and the underlying blockchain technology are rapidly evolving. Regulators need to stay updated on technological advancements and understand their implications for the regulatory landscape. By being flexible, regulators can adapt their approaches to accommodate new technologies and ensure effective oversight without stifling innovation.

2. Regulatory Sandboxes: Regulators can leverage regulatory sandboxes or innovation hubs to create a controlled environment where new cryptocurrency-related products and services can be tested. These sandboxes allow regulators to observe the market in real-time, understand emerging risks, and fine-tune regulatory frameworks accordingly. Flexibility is crucial in designing sandbox frameworks that strike a balance between fostering innovation and protecting consumer interests.

3. Iterative Approach: The cryptocurrency market is dynamic, and regulatory frameworks may require iterative adjustments over time. Regulators should adopt an iterative approach that allows them to assess the effectiveness of regulations and make necessary revisions based on market developments, risks, and stakeholder feedback. Flexibility enables regulators to respond to emerging challenges and adapt their regulatory frameworks accordingly.

4. Risk-Based Approach: Cryptocurrencies come with unique risks, including money laundering, terrorist financing, consumer protection, and market integrity. Regulators need to adopt a risk-based approach that focuses resources on high-risk areas while avoiding undue burdens on low-risk activities. This approach requires flexibility in setting risk thresholds, conducting risk assessments, and implementing targeted regulatory measures.

5. International Coordination: Flexibility is essential for regulators to engage in international coordination and harmonization efforts. Regulators should actively participate in international forums, collaborate with their counterparts, and contribute to the development of global standards and best practices. By remaining flexible, regulators can align their frameworks with international norms and ensure consistency in cross-border regulation.

6. Proactive Monitoring: The cryptocurrency market is prone to rapid changes, including the emergence of new types of digital assets, innovative financial instruments, and evolving market structures. Regulators need to proactively monitor market developments, including new trends, products, and services, to identify potential risks and gaps in the regulatory framework. Flexibility allows regulators to respond quickly to emerging risks and take necessary measures to protect investors and maintain market integrity.

7. Regulatory Experimentation: In some cases, regulators may need to experiment with new regulatory approaches to address the unique challenges posed by cryptocurrencies. This experimentation requires a flexible mindset and the willingness to pilot new regulatory models. By embracing regulatory experimentation, regulators can learn from real-world experiences and refine their approaches based on empirical evidence.

Flexibility and adaptability are essential for regulators to effectively address the complexities of cryptocurrencies while striking a balance between innovation, investor protection, and market integrity. By embracing these qualities, regulators can navigate the evolving landscape of cryptocurrencies and contribute to the development of a robust regulatory framework that fosters innovation, protects consumers, and mitigates risks.


As cryptocurrencies continue to gain traction, regulators have a vital role to play in ensuring the stability and integrity of financial systems. Understanding the unique characteristics of cryptocurrencies, addressing risks, developing comprehensive regulatory frameworks, fostering innovation, and collaborating with industry and international partners are essential for effective cryptocurrency regulation. By striking the right balance between oversight and innovation, regulators can help harness the potential of cryptocurrencies while safeguarding the interests of investors and the broader financial ecosystem.

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