Cryptocurrency Regulation Global Update
It’s been a long year. Bitcoin is now at its lowest price of the year with many blockchain projects hitting a wall as regulators scramble to clamp down on ICOs, the primary fundraising mechanism for crypto startups. Officials worldwide are playing catch up, trying to understand the potential of blockchain technology while simultaneously shielding investors from scams and volatility.
At HedgeTrade, we understand that cryptocurrency regulations are currently in a state of flux and it’s important for investors to be kept up to date. To that end, we created this Global Update on cryptocurrency regulation. Our overview will fill you in on what’s going on, giving you a current regulatory pulse on the crypto trading environment across dozens of regions.
This is by no means an exhaustive list, but we’ve tried to narrow it down to the most pertinent or recent updates and news stories in the cryptocurrency regulation space. We start with Europe.
Cryptocurrency Regulations — European Union
In 2016, the European Union passed a motion enabling the taxation of crypto holdings and earnings. But since then, no overarching definition of cryptocurrencies has been set, leaving individual EU countries on their own to formulate regulatory laws.
While bitcoin has legal status in the EU, there exists no framework for regulatory controls. Even though the European Parliament met recently to discuss ICOs, only generalities about increasing oversight were discussed, with no real movement on crypto regulation. In spite of this, member nations are moving forward with their own regulatory efforts.
Just over 4% of ICO projects originated in Estonia during 2018. Not too bad considering that’s more than Germany and Canada combined. They’ve made it easy for businesses to relocate there with a unique e-residence program. Additionally, they’ve stepped up as the first EU nation to begin certifying ICO startups using two different types of licensure, one for exchanges and the other for wallets. So far, over 900 licenses have been issued to crypto businesses.
Estonia’s embrace of digital assets.
2018 saw the creation of two major pieces of cryptocurrency regulation by the Estonian Financial Intelligence Unit (FIU):
- Estonia Money Laundering Act
- Terrorist Prevention Act
Both of these laws attest to dedication to developing policy in the industry. Their certification is said to be a streamlined process that ensures KYC and AML procedures are in place and they monitor those businesses to make sure they’ve begun operations within six months of licensure.
Estonia really is going full circle in their acceptance of cryptocurrencies:
- Even though the EU has expressly prohibited any member nation from creating its own currency, Estonia is still considering issuing a coin that could possibly be used by participants in its e-residence program, which helps foreigners get situated in Estonia.
- Applicants are told they must wait 30 days for the approval process, but in most cases, it’s only taking 1–2 weeks for license approval.
One issue that has cropped up here, and no doubt in every region, is getting banked. Cryptocurrency businesses still have trouble getting a bank account, even in Estonia. Traditional banking services are often not available to companies dealing with crypto, forcing companies to use foreign banks and payment services. Some e-residents also face unapproved account applications at banks due to their lack of business connections with Estonia.
France has been plodding along the regulation highway, bringing the highly debated ICO issue to the front as they begin building a regulatory framework. The Autorité des Marchés Financiers (AMF) is currently looking at requiring token issuers to have something like a visa. AMF would issue this ‘visa’ to companies if they meet certification standards that include transparency and due diligence requirements with respect to investors.
If passed, the official definition of tokens will be as:
“…immaterial items, representing in digital form one or more rights, which could be issued, compiled, kept and transferred through a digital shared instrument, allowing to identify — directly or indirectly — its owner.”
And an ICO will be considered:
“…a public offer for tokens subscription, in whatever form”.
In a nutshell, France wants to create an environment that is ICO and crypto friendly. To that end, the AMF this year published a study on ICO trends, to help gain a better understanding. According to that report, there were 15 ICOs in France during 2018 raising 8.9 million Euros. The majority of these projects had already raised funds through traditional mechanisms.
ICO Encouraged with Some Caveats
AMF embraces ICOs on one hand, and on the other wants to make sure that companies holding ICOs in France submit to the taxation of profits made. Additionally, they’ll be expecting startups to have a clear plan for refunds in case the project doesn’t pan out.
Apparently, the French people are very accepting of digital currencies. Confident of the demand for bitcoin, The Fédération des Buralistes announced that they had obtained the okay from the French regulatory authority to sell bitcoin from some 4000 tobacco establishments. The bank of France has since stated they endorse no such project.
In late November 2018, the French government proposed changes to their taxation rules for crypto assets:
“Gains above €305 on the sale of crypto-assets made by private individuals on an occasional basis will be taxed at the flat rate of 30%. This tax regime which includes 12.8% income tax and 17.2% social contributions, is the standard tax regime applied to capital gains.”
As part of the same series of new regulations, they proposed that ICOs who meet all legal requirements, such as KYC, AML, and escrow, can apply for an ICO Visa which if approved means they get their ICO whitelisted. If the proposed regulations get passed, French citizens will need to list their crypto asset accounts held in France as well as abroad.
Bitcoin in Germany used to be classified as a financial instrument by the Federal Financial Supervision Authority (BaFin). Just recently this status was disclaimed in a court ruling because Bitcoin does not meet the definition of a financial instrument as found in the German Banking Act. The court dismissed a criminal proceeding against a local bitcoin exchange in September 2018 because their stance is that bitcoin:
- Is not issued by a central bank.
- Does not have general recognition.
- Lacks a stable value for comparing with other goods and services.
Meanwhile, Finance Minister, Olaf Scholz, continues to express doubts that cryptocurrencies will replace fiat, though he does seem to be warming up to blockchain technologies. He has raised doubts as to whether global adoption is technologically possible and just recently brought up the Tulip craze comparison once again.
With a slightly different take on crypto, BaFin Chief, Felix Hufeld, describes the main role of cryptocurrency regulators. And it’s NOT to protect investors:
“We will not be able to protect every single investor from his fate, and that cannot be the task of state supervision. Once again, the maxim is that we must act prudently or regularly if financial stability as a whole is threatened or if consumers are systematically harmed.”
This British overseas territory has faced significant upheaval since Brexit and now even more with Spain’s continued commitment to having a say in the fate of Gibraltar. It’s apparent that both Gibraltar and Spain want to maintain Gibraltar’s membership in the EU, for which the UK recently consented.
That would certainly help Gibraltar in attracting more of the crypto business community, which is something they’ve been trying to do.
In mid-October 2018, UK’s longest running cryptocurrency exchange, Coinfloor, received the first ever DLT License under groundbreaking Gibraltar legislation (DLT stands for “Distributed Ledger Technologies).
As a British Overseas Territory, Gibraltar developed its cryptocurrency regulation policies based around nine principles, including sufficient AML (Anti-Money Laundering) and KYC (Know Your Customer) practices, robust security for protecting investor assets, and sufficient financial backing. These principles all adhered to:
3 main objectives:
- Consumer Protection
- Protecting Gibraltar’s Reputation
- Economic Benefit
The Gibraltar Financial Services Commission (GFSC) had their legal framework ready by January 1, 2018, outpacing most other regions. Their tax-friendly environment and embrace of distributed technologies are founded in the desire to encourage blockchain innovation while keeping all participants safe.
In November of 2017, Lithuania partnered with Estonia and Latvia by entering into a Memorandum of Understanding. This move solidified their commitment to developing and furthering financial markets in the region. The Financial Ministries of three Baltic nations essentially agreed to “… recognize the importance of the development of the capital market and a stronger institutional framework to handle the cross-border challenges in the Baltic States.”
Lithuania for its part has been proactive in breaching the expanse between the cryptocurrency industry and traditional finance and banking. In a recent interview regarding Lithuania’s upcoming amendments, Minister of Finance, Vilius Sapoka, spoke of his country’s efforts:
“This year, together with the Central bank of Lithuania, we have initiated dialogue between ICO community and commercial banks operating in Lithuania in order to help banks and ICOs better understand each other’s business models and to enhance cooperation between them to overcome the rising challenges. We also believe that the regulation amendments mentioned above will enhance trust between commercial banks and ICO initiators.”
– Vilius Sapoka, Minister of Finance, Republic of Lithuania
Lithuania is the also the home of Desico, a platform for security token offerings (STOs, the more ‘civilized’ version of ICOs). This project is unusual because it’s fully endorsed by the Ministries of Finance and Economics in Lithuania.
Their goal as a country is to continue its growth as a center for fintech innovation, including cryptocurrencies, paying special attention to the legalities while laying the groundwork.
Bankera was one ICO in Lithuania that ran into trouble. While that company is no longer headquartered there, the central bank initiated investigations into Bankera and one other ICO startup. They probed both companies finding improper risk assessment, fining one company and Bankera’s CEO.
The crypto friendly business atmosphere in Malta has paved the way for multiple crypto exchanges, including Binance. Their innovative and thorough approach to cryptocurrency regulation is expressed in three different pieces of legislation, the first two of which took effect on November 1, 2018.
- The Innovative Technology Arrangements Act introduced a unique way to promote transparency and accountability. Supporting blockchain businesses can go through the voluntary registration process to try and receive a ‘stamp of approval’.
- For regulating ICOs, exchanges, and crypto financial services (i.e. asset managers), the Virtual Financial Assets Act sets forth the regulatory framework for the financial aspects of blockchain technologies.
- Finally, the Malta Digital Innovation Authority Act overseas promotion of blockchain development with the island nation.
With their comprehensive approach to cryptocurrency regulation, Malta has led the way in introducing innovative regulations to further along the blockchain industry.
The Capital Markets Board (CMB) in Turkey has taken an unusual hands off approach to cryptocurrency regulation. In late September 2018, they announced their official stance on ICOs, which basically stated that they do not regulate or supervise ICOs, blockchain projects or cryptocurrencies.
They also announced that secondary legislation regarding crowdfunding, something they began exploring in December 2017, is now in effect. What this means is that penalties will be charged to businesses that disguise their ICO fundraising as ‘crowdfunding’.
Even though their approach seems light when compared to other regions, Turkey officials just do not yet consider ICO projects that make vague promises to be in the same realm as securities. Instead, they make the effort to caution all investors and educate them about the speculative and risky aspects of ICO investments.
Turkey has a very avid cryptocurrency crowd. According to an ING Bank poll, 53% of Turkish residents strongly agree that Bitcoin is the future of online spending, as opposed to 31% of Americans and 35% of Europe as a whole. Their enthusiasm was noted by Vitalik Buterin in a recent viral tweet where multiple Turkish influencers invited Buterin to collaborate with them. Going forward, they will review each ICO on a case by case basis until more formal guidelines come into play.
Cryptocurrency Regulation — Non EU Nations
The Swiss have a long-standing reputation as a leader in cryptocurrency regulation. This goes all the way back to 2014 when they hosted the Ethereum ICO in the town of Zug, now often referred to as “Crypto Valley”. That same year they published a report on virtual currencies and have been creating a positive atmosphere for blockchain projects ever since.
While they may have been one of the first nations to initiate ICO regulations, they’ve done so in a way that does not stifle innovation. In fact, they’ve actually amended some existing financial regulations to remove unnecessary obstacles for blockchain startups. As for exchanges, they are able to register with the Swiss Financial Market Supervisory Authority (FINMA).
Their idea of crypto regulation while technology is still under development represents a commonsense approach. They’ve published ICO guidelines but leave the door open for flexibility and are willing to explore each ICO startup on a case-by-case basis.
The Swiss have also instituted a federally supported blockchain working group that continues to monitor technology advances in cryptocurrencies:
“The working group will work together with the Federal Ministry of Justice and FINMA and involve interested businesses. It will study the legal framework for financial sector-specific use of blockchain technology with a particular focus on ICOs and report back to the Federal Council, the Swiss government, by the end of 2018.”
While Switzerland considers cryptocurrencies to be assets, they take into account three different types of tokens:
- Payment tokens, which are not securities and which must include AML procedures.
- Utility tokens, which allow access to a product or service and are also not considered securities.
- Asset tokens, which fall strictly under Swiss securities laws.
However, the Swiss realize that there are and will be in the future many hybrid versions of these three main types of tokens. In essence, their focus is on creating a comfy environment for blockchain startups while addressing investor protections when needed. They’re recently reached out to Israel in a partnership to explore blockchain business infrastructure.
Though the UK is still officially in the EU, that is soon to be a thing of the past, so they’re listed in this section of Non-EU countries.
Over the past year, UK financial authorities have been spending a lot of time discussing and working on cryptocurrency regulation. Apparently, the more they do this, the more they realize what they are getting into. Recent estimates from HM Treasury officials regarding the formation and implementation of crypto regs are going long — 2 years at the minimum.
“Past precedents show it can take years to make relatively minor regulatory changes to the financial regulatory regime. For example, it took two and a half years from the Treasury’s original announcement (10 May 2004) for the regulation of home reversion plans to come in force (6 November 2006).” James Kaufmann, Legal Director at Reynolds Porter Chamberlain House of Commons Treasury Committee (HM Treasury)
The fact that they are still dealing with the effects of Brexit may contribute to the lag as well. Basically, they have a choice to make between setting up a brand new framework for crypto regulation or bringing it under the wing of existing financial services regulators. Once that decision is made, HM Treasury will then have three main regulatory tasks:
- Determine which crypto specific activities need regulating by performing a market study.
- Draft proposed cryptocurrency regulations which would be open to consultation.
- Once the consultation period has ended, make official the changes and create an implementation plan.
As long and drawn out as this may seem, one government official warned her counterparts about taking too long to create a usable framework for cryptocurrency regs:
“It’s unsustainable for the Government and regulators to bumble along issuing feeble warnings to potential investors, yet refrain from acting…At a minimum, regulation should address consumer protection and anti-money laundering.”
– Treasury Committee Chair, Nicky Morgan
Cryptocurrency Regulation — The Middle East
In many parts of the Middle East such as Iraq and Qatar, cryptocurrencies are seen more as a threat than a innovative technology and are thus completely banned.
Qatar made it illegal for banks to deal with digital assets in any way. The central bank explained that in order to ensure the safety of the financial and banking system, all banks operating in the country would be prohibited from dealing in any way with cryptocurrencies or exchanges.
Saudi Arabia’s official stance is that cryptocurrencies are basically a get rich quick scheme and considered illegal. While Iran has banned crypto, they are looking into a national digital currency to deal with imposed sanctions, increased inflation, and the lack of Visa and Mastercard services.
However, while Iran, Saudi Arabia, Egypt, and Qatar currently consider cryptocurrencies illegal, they are open to exploring blockchain technology for state and domestic purposes.
Then there are nations like the United Arab Emirates (UAE) and Bahrain, who are more welcoming to crypto businesses, with their governments committed to researching blockchain technologies and regulatory concerns.
There’s been a lot of confusion as to crypto regulation in Israel. They definitely are embracing the technology and moving forward but clear guidelines have yet to be confirmed.
To start out the year, in January 2018, Israel’s government met to discuss the cryptocurrency phenomenon, concluding that bitcoin and other coins were assets and not currencies. Their main concern was the risks that these unregulated assets could pose to banks (in the form of compliance) and their clients.
Around the same time, public complaints emerged from bank customers unable to buy bitcoin using their bank accounts. Meanwhile, it was suggested that all companies whose main business was in digital assets, be banned from the Tel Aviv Stock Exchange.
But a lot has happened since then. Israel is now working side by side with one of crypto’s main players, Switzerland, to devise blockchain regulations. Part of this initiative is to help the Swiss access Israeli banks since Switzerland’s banking industry has been less than welcoming to digital asset-based business.
In the spring, Israeli regulators drafted legislation surrounding money laundering which was mainly directed at the illegal gambling industry but also covered digital currencies. The proposed rules were set to take effect May 31, 2018. At that point, banks thought they had the green light to service cryptocurrency businesses. Much to the chagrin of all involved, this was postponed for four months to the end of October, leaving everyone hanging.
The legislation they proposed was said to be breaking new ground but some are complaining about different parts, like the limit of $1400 per crypto transaction allowable in banks before a flag is raised (similar to the $10,000 limit in USD).
The regs will also require cryptocurrency financial service providers to keep certain records:
- Customer ID’s
- Public keys
- IP addresses of customers
Many touted Israel’s new (proposed) regs to be a unique, all-inclusive approach. But no one is sure if they are actually in effect right now or not.
All in all, a high percentage of Israelis are already using cryptocurrencies. The government has even pondered a switch to a national, digital currency. But until they nail down regulations, crypto business can only stagnate.
The United Arab Emirates have a definite forward-leaning view of cryptocurrencies. For the last few years, they’ve called for tougher international regulations on digital currencies and to this day are collaborating on a global scale. One of their major focuses is on decreasing the risk so crypto’s image as an asset can improve.
In recent years, low oil prices and weak equity markets in UAE have restricted IPOs. Legislation is in the works attempting to rectify the IPO issue. Until then, reining in and legalizing ICOs is one way the government plans to spark the creation of new business in the region.
Last year, they classified tokens from ICOs as “special investments” to be treated like other ‘special’ assets in their current financial regulatory structure. In October 2018, the board of the Emirates Securities and Commodities Authority (ASCA) announced it was done drafting ICO regulations that would legalize ICOs beginning in 2019, officially naming ICOs as securities. They’re expecting to have regulations firmed up and rolled out during the first half of 2019.
Cryptocurrency Regulation — Africa
“There are still African countries cut off from international commerce online.
Bitcoin is technology that allows financial inclusion”
– Tim Akinbo, Founder of Nigerian exchange, Tanjalo.
Nigeria is still reeling from a devastating recession where its national currency (the Naira), lost 85% of its value over a span of two years going into 2016. This had two different effects when it comes to blockchain technologies:
- First, it caused the government to be extra cautionary about risk, leading it to go very slowly and carefully with cryptocurrency regulation.
- But secondly, it caused many Nigerian citizens to continue and even strengthen their embrace of peer to peer payments using bitcoin and other digital assets. Now Nigerians represent the third largest holder of bitcoin, as a percentage of GDP, in the world.
If you compare bitcoin transaction growth in Nigeria to the of the rest of the world, it’s apparent that the bear market hardly slowed the usage of cryptocurrencies in this country.
Source: Coin Dance
So while the government has in the past been cautionary and slow to regulate cryptocurrencies, there is hope that this will soon change. Atiku Abubakar, former Vice President and candidate in Nigeria’s upcoming presidential elections, has integrated blockchain technology into his official “Get Nigeria Working Again” campaign policy statement.
“My mission is to ensure that Nigeria’s economy is responsive to the challenges of the 21st-century knowledge economy by keeping with the amazingly dynamic technological pace.”
– Atiku Abubakar
Even if he’s not elected, the Central Bank of Nigeria is already developing regulation policies, as a bank official explained:
“We are restructuring the licensing regime to accommodate risks that fintech present in the system and how they can work with banks to mitigate those risks. Fintechs are coming up with products and technology that is unmatched with banks, this also needs to be addressed.”
-Musa Jimoh, Central Bank of Nigeria
In a country that is all too familiar with Ponzi and pyramid schemes, a problem they have dealt with for years, it was natural that unregulated cryptocurrencies would be an additional tool for scammers to use.
Chair of the Blockchain Association of Uganda, Kwame Rugunda, told ETHNews in November 2018 that, “Ugandans are familiar with these, and now the Ponzi schemes are either using cryptocurrencies or purporting to be crypto businesses and the Central Bank has warned society about them.”
In response to concerns expressed by members of Parliament, Uganda’s State Finance Minister David Bahati sent assurances that government regulations are coming that will cover cryptocurrencies and pyramid schemes. Just recently, a National Payment System Bill was approved and will be applied to all forms of digital currencies.
In late October 2018, Binance Uganda announced it had enabled full KYC procedures and would begin accepting deposits of Ugandan Shillings on October 17. Binance is one of the world’s top exchanges and clearly explained their reasons for opening in Uganda:
“We believe that for us to serve the greater purpose of spreading the freedom of money around the world, we need to build more bridges to reach as many people as possible. So we meet our users where they are, through avenues that are most convenient to them, while staying true to our values and principles.”
Cryptocurrency Regulation — Russia
Vladamir Putin instructed the Russian government to lay the foundation for cryptocurrency regulation, giving a July 2018 deadline for legislation. Fears about securities violations, risks to investors and loss of governmental control have collided with a business landscape ready to embrace blockchain technology and people already heavily engaged in trading digital assets.
Leading up the July 1 deadline, Putin made a statement claiming that, “Russia cannot have its own cryptocurrency, as cryptocurrency “by definition” cannot be owned by a centralized state since it “goes beyond borders.”
Needless to say, the July deadline came and went without formal legislation. The new date for getting laws into place was pushed to October, disappointing the crypto-eager business community. December is upon us now without the formal regulation so ordered by Putin at the start of the year. Recently the date got pushed further into 2019.
Part of the problem lies in the different positions held by the agencies involved:
- The Central Bank of Russia along with the Finance Ministry tend to tow a more conservative line. Their ideas for cryptocurrency regulation center on maintaining government control and treating digital assets very much the same as other securities. Using crypto as a means of payment makes both these bodies of government quite squeamish, or so it seems.
- On the other side is the Ministry of Economic Development, which as you can imagine, wants to bring blockchain startups to Russia and support Russian projects as well.
Amidst this friction, two state cryptocurrencies have been discussed. One, a national cryptocurrency named the “CryptoRuble”, a state-backed stablecoin to be issued by the Central Bank. The second is a more localized use case, Moscowcoin, which could be used in an active citizens’ portal linking them to city services.
In an August 2018 poll of 1500 Russians age 18 and up, it was determined that 13% of Russian people have good knowledge of cryptocurrencies, which is a high figure when compared to other countries. The willingness of the Russian people and the business community to embrace blockchain tech have pressured the government to enact legislation to help legalize blockchain startups and ICOs.
“For Russia especially, blockchain must be a compromise between autonomy and control, which is already taken care of by the president.” — Coinswitch
Cryptocurrency Regulation — India
Back in April of 2018, the Reserve Bank of India (RBI) ordered Indian banks to cease its servicing of crypto exchanges. One such exchange was Zebpay, which was the biggest bitcoin exchange in India. They have since moved to Malta due to the negative atmosphere surrounding virtual currencies in their own country.
The good news is that some of these exchanges filed petitions against the RBI, saying that the crypto exchange industry was being unnecessarily stifled due to lack of proper regulations. The Indian Supreme Court released a counter affidavit ordering regulations to be drafted beginning in December 2018 and to be implemented by March 2019.
Subhash Chandra Garg is heading up the Finance Ministry’s panel in overseeing the legislative process. The panel is tasked with drafting a framework for virtual currencies and laying the groundwork for distributed ledger technologies within the financial system.
Though many crypto businesses were encouraged by the news that regulations were in the works, panel leader Garg has been quoted displaying a marked dislike for bitcoin:
“Cryptocurrencies like Bitcoins are neither currency nor coin. Not legal tender in India at all. Trade in these currencies has assumed the character of classical Ponzi schemes. Limited supply and uninformed demand make every new investor assume a higher risk. No underlying real value.”
With regulations in the works, this is certainly a better atmosphere for crypto businesses than in 2017, when consumers were cautioned to stop trading and exchanges were driven out of business. Yet the acceptance of crypto by government officials still seems a long way off.
Cryptocurrency Regulation — Asia-Pacific
At this point in time, we’ve researched and written about over fifteen countries across the globe in regards to the cryptocurrency regulatory environment. None of them have come close to the succinctly positive and common sense approach that Australia has embraced.
Named “The Cryptocurrency Continent” by CoinTelegraph, Australia continues to develop a vibrant blockchain community in which technical innovation and response to threats are the priorities. The main regulatory body governing the crypto space is the Australian Securities and Investments Commission (ASIC), headed up by Chair, James Shipton.
Part of their regulatory mission, as laid out by ASIC’s corporate plan, is to, “…help Australians to be in control of their financial lives,” a theme that correlates nicely with decentralization.
Cybersecurity and data breaches are the major focus in protecting Australians. To that end, blockchain and fintech businesses will come under the microscope, especially those “firms that provide critical infrastructures e.g. exchanges and payment systems — to mitigate systemic vulnerabilities.”
Between April and September 2018, ASIC took action to bar six different ICO’s. Five of the startups involved went on to restructure their operations to come under compliance. The last, Global Tech Exchange, was shut down. The primary issues found by ASIC officials included:
- Misleading or deceptive statements used in marketing materials
- Illegally operating an unregistered managed investment scheme
- Providing financial services without an Australian license
Again, the regulatory framework put into place is one that is beneficial to the investor and not as restrictive to businesses as seen in some countries.
The Australians openly accept that innovations in blockchain are headed their way. They expect this technology to positively affect local business processes including settlements and data reconciliation. In fact, the Australian Securities Exchange itself will be replacing its own clearing house with a distributed ledger in the near future.
Overall, Australia has emerged as a world leader in regulation technologies and plans to assist and collaborate internationally as developments continue to evolve.
The Chinese government has banned everything to do with cryptocurrencies. Except for blockchain technology, to which it’s thrown over $3 billion to develop. Maybe the repression of all things cryptocurrency in China will cause it to be the hotbed of invention, as people under the most severe restrictions can sometimes be the most innovative by necessity. Or maybe the government will “succeed” in its quest to centralize and control one blockchain to rule and track all its people.
With its reputation as a non-interventionist when it comes to business regulation, Hong Kong has thus far treated bitcoin and other cryptocurrencies quite differently than other nations. Bitcoin is not considered money and has been labeled as a “virtual commodity” instead of any type of currency.
In its regulatory guiding document, “Basic Law” Hong Kong’s unique position in relation to world currencies is evident, even including cryptocurrencies:
Carlson Tong Ka-shing, outgoing chairman of Hong Kong’s regulatory body, the Securities and Futures Commission (SFC), has openly recognized the futility of banning cryptos:
“Even if we were to ban them, transactions can still be easily conducted via platforms in overseas markets.” — Carlson Tong Ka-shing.
The chairman has also acknowledged that virtual commodities, “…do not fit in the custodian, audit or valuation requirements, for instance, normally expected under the Securities and Futures Ordinance.”
During the 4th quarter of 2018, Hong Kong announced the development of several regulatory initiatives to hold things over until more specific regulations could be developed and implemented. One is a sandbox arrangement for crypto exchanges, which allows them to behave as though they hold a securities license without actually holding one. This and other initiatives take target mostly at fund managers with the regulatory tone in Hong Kong aimed primarily at fund managers, requiring them to service only accredited investors for instance.
All virtual asset business are currently required to:
- Obtain and maintain customer data
- Track the type of business relationship
- Know the source of funds
- Monitor all of the above and report suspicious activity
As it is now, all virtual “currencies” in Hong Kong are lumped in together, including both security and utility tokens. The main goal of regulation development here is to limit the exposure of funds to only accredited investors, something that may remind some of Hong Kong’s monopolistic real estate market.
In what is quite likely the biggest regulation news for 2018, Japan in late October 2018 approved self-regulation for the cryptocurrency industry. In essence, a body of industry experts will be tasked with governing digital assets as opposed to governmental regulations. The announcement formally granted an association of exchanges the accreditation needed to regulate the industry:
“The Financial Services Agency (FSA) on Wednesday approved the Japan Virtual Currency Exchange Association (JVCEA), a body comprised of all 16 licensed domestic cryptocurrency exchanges, to become a ‘certified fund settlement business association.”
In seeking approval by the FSA, the JVCEA drafted a 100-page proposal which includes bans on insider trading and privacy coins.
Japan as a nation was truly an ‘early adopter’ of bitcoin. At the start of 2017, the country began allowing businesses to accept bitcoin as legal tender, while at the same time creating one of the most positive ecosystems for crypto exchanges.
Even with several high profiles and massive hacks on its domestic exchanges, Japan has continued to move ahead at breakneck speed when it comes to cryptocurrency regulation.
South Korea continues to hold its ban on ICOs, contrary to rumors that have circulated social media. But the government does seem to be listening to its crypto friendly population. This is an improvement from an earlier view that all things crypto were bad and only blockchain tech was good. Which doesn’t make a whole lot of sense because how do you have one without the other?
One cannot blame government officials for exerting caution when considering the major hacks that have taken place on South Korean crypto exchanges. Yet despite these thefts, and quite possibly in reaction to them, progress is being made in South Korea when it comes to cryptocurrency regulation.
Some of South Korea’s many crypto exchanges have fallen under regulatory supervision, and in a few cases operations were paused until they instituted KYC and AML. But just recently, the first ever Information Security Management System (ISMS) license was issued to crypto exchange, Upbit, the largest exchange by volume in South Korea. Just about six months prior to this, Upbit underwent a police investigation that rocked markets in May 2018. So the fact that Upbit now is licensed reflects substantial progress in regulation.
Singapore has taken a very business minded, commonsense approach to cryptocurrency regulation. The Monetary Authority of Singapore (MAS) has quite clearly spelled out the difference in token types. This is something many other countries have failed to do, opting instead for a lumping them in all together for lack of better direction. Not only that, the MAS may be one of the few regulatory bodies that recognize a utility token for its true purpose.
In an update to their current policies, MAS in late November 2018 published their Guide to Digital Currencies. Part of it emphasized that if the token acts as a security, it will be regulated like one. As far as making distinctions between types of tokens, the Guide clearly separates out those tokens which can be regulated, including those they consider to be capital markets products, such as:
To be more specific, if a token acts in any of the following ways, MAS will consider it a security:
- Confers or represents an ownership interest in a corporation
- Represents liability of the token holder in the corporation
- Represents mutual covenants with other token holders in the corporation
- Acts as a debenture, where it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder
- Is a unit in a business trust
- Confers or represents an ownership interest in the trust property of a business trust
- Is a securities-based derivatives contract
On the other hand, MAS, which is both the regulatory body and Singapore’s central bank, sets aside utility tokens as products that don’t need a lot of control and oversight.
Another major area of financial regulation that Singapore has focused on is banking, more specifically debit card and loan services. This path is part of its efforts to bridge banks with crypto projects so that they’re able to operate and have banking services. Crypto.com has chosen Singapore as its first market in which to roll out is debit card service, which is now live.
Cryptocurrency Regulation — The Americas
The popularity of cryptocurrencies in Brazil has grown tremendously despite the lack of clear regulations. However, the use of bitcoin, even though it’s considered an electronic currency, is not smiled upon by the government and policies have not been set for its use, only warnings.
But the fact is, there are more Brazilian users on crypto exchanges than there are on B3, the Brazilian Stock Exchange. Brazilians have shown their preference for digital currencies and the government has now responded by attempting to tax it all. In early November 2018, the Department of Federal Revenue (RFB) published a document outlining the taxation of crypto businesses and individuals. They are primarily looking to:
- Require crypto exchanges in Brazil to send them monthly reports including
- Transaction amounts
- Customer identities
- Require business and individuals to report monthly all transactions on crypto exchanges if over 10,000 R$ (2700 USD).
Fines for failing to report have also been drafted.
In the fall of 2018, several major Brazilian banks were reported to have closed some crypto related accounts, merely because they dealt in crypto. This lead to a probe instigated by the Blockchain and Cryptocurrency Association (ABCB), who petitioned Brazil’s antitrust agency, CADE, to investigate. As a result, in October 2018, Brazil’s federal district court forced the banks to reopen the closed accounts, citing consumer rights violations.
Canada has postponed the release of its final regulations for cryptocurrency and blockchain companies. Originally due in the fall of 2018, the government now is saying it will be closer to late 2019 before official regulations are published. Quite possibly, the delay has to do with upcoming elections. But the government also received a massive amount of responses and supporting documentation after releasing its June 2018 draft regulation document and opening it up to inquires.
In the meantime, the rules and guidelines as set forth in their June 2018 draft will continue to be used as guidance. This delay, however, may hinder businesses setting up cryptocurrency businesses now in Canada, as they may in the future have to face the cost of complying with new rules. Many view this as a setback, especially in light of the fact that so many other countries have advanced further in their cryptocurrency regulations.
The Cayman Islands have not yet enacted specific cryptocurrency regulations, but existing fintech regulations are covering the bases.
As a British Overseas Territory, the Cayman Islands have for years been a leading financial center, creating a positive business environment suited ideally for tech businesses. They currently are host to about 130 fintech businesses, with 30% of those being-blockchain based companies. Additionally, Cayman Islands Enterprise City is a unique economic zone that offers a tax-exempt environment and an expedited work permit process.
This doesn’t mean they are without regulations on cryptocurrencies. On the contrary, they already have strict AML and “Proceeds of Crime” laws that require businesses providing financial services to maintain and collect customer data. Their current regulatory framework goes a long way to covering the crypto space. Even with many startups choosing the Cayman Islands to launch their ICO, strict AML laws are in place to prevent crime. And financial services regulations carry over to digital assets for the most part.
It’s been a busy year for US regulators and we’re seeing an increasing amount of developments in regulation news around the country.
At the start of November, the SEC published their annual enforcement report, which covered extensively their progress in the crypto market. It was reported that the Commission had brought 20 cases against different businesses who had held an ICO during the last two years. In a nutshell, the report emphasized that “…reducing ICO-related fraud is among their top priorities.”
Many of the ICOs sued by the SEC were fraudulent in some way, or outright scams. For instance, in October, the SEC dealt with Blockvest, a company who had purportedly misled investors into believing they were SEC approved. The SEC obtained an emergency court order to shut down the Blockvest ICO, immediately freezing all assets.
Things started to swing a little bit when the SEC took aim at ICOs that were not scams, but simply had not complied. On November 16, 2018, the SEC announced it was forcing two ICO companies into compliance. These crypto startups now must return investors’ money, pay a $250,000 fine, and register and comply with the SEC from here on out.
These were the first instances where the SEC brought ICOs into compliance for a simple lack of SEC registration. Neither company (Paragon and Airfox) was labeled as a scam or fraud. The reason they attracted the attention of the SEC is that they did not register and comply with the SEC, pure and simple.
In a somewhat jarring statement, Stephen Palley, a lawyer with DC-based Anderson Kill, surmised that the SEC actions, “…would appear to apply to about 95% of all the token sales in the last two years”.
Some folks theorize that this revelation was one of the major reasons behind the recent fall in cryptocurrency prices.The general sentiment regarding the SEC orders is that they are signaling an end to the wild west of ICO-mania, routing out the bad actors. But how far will they go?
Meanwhile, individual states are also delving into cryptocurrency regulation. In one area that was not too long ago the actual wild west, the state of Colorado has officially signed orders to shut down 18 ICOs because they were operating as unregistered securities.
Alternatively, Ohio just became the first state to accept Bitcoin for state treasury payments, including sales tax and withholding taxes and using a 3rd party payment processor OhioCrypto.com. However, the State Treasurer, Josh Mandel, is soon stepping down. His replacement Rep. Robert Sprague while approving of the idea of the pilot program, plans to review it fully before moving ahead. While state officials recognize the risk with taking payments in digital currencies, they want to be seen as progressive and business-friendly, something many other states are struggling with now.
Update — On December 20, 2018, two US Congressmen, Warren Davidson (R) of Ohio and Darren Soto (D) from Florida, introduced the Token Taxonomy Act of 2018, to:
…amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.
Essentially this landmark legislation would end the policy of lumping digital assets together with traditional investment vehicles. Trading between cryptocurrencies would no longer cause capital gains taxation and cryptocurrencies would no longer be considered securities. If enacted, this could put the US at the forefront of the crypto trading industry.
Cryptocurrency regulation, as you can see, is a work in progress. Some may think that by the time policies are actually put in place, self-regulating entities within the space will have things under control. In a decentralized way. Stay tuned to learn more about that in an upcoming self-regulation update.