Blockchain and Cryptoassets Regulations
- October 11, 2019
- Posted by: Vikram
- Category: Financial
Cryptoassets and Blockchain technology, the platform on which they are built, have come a long way. They were once nothing but an idea that most people criticized and looked down upon. With time, their popularity grew and certain cryptoassets, and Bitcoin, in particular, became the preferred investment vehicles.
Cryptoassets have entrenched themselves in the financial system and are here to stay. Regulatory authorities have realized and accepted this, and many are working towards coming up with regulations to keep cryptoassets in check.
This article will review regulations for Blockchain technology and cryptoassets on a global and national scale. The countries to be reviewed are those that have the highest involvement with cryptoassets.
For starters, before getting to know how blockchains and cryptoassets are regulated, it is important to know how they came to be in the first place. Blockchains and cryptoassets have been around for quite some time now, but they have gained a lot of popularity over the last decade. The first attempt to create a cryptocurrency was back in the 90s with the Cypherpunks. Systems such as Beenz, Flooz, and DigiCash emerged into the market, but their use as digital currency inevitably failed. There were quite a number of reasons for their failure that include financial problems of DigiCash, fraud, and friction between different companies. The year Google was founded, 1998, DigiCash filed for Chapter 11 bankruptcy.
Not until 2009, an anonymous programmer or a group of programmers operating under the name Satoshi Nakamoto came up with the idea for Bitcoin and its digital tokens, Bitcoins. Bitcoins as the introductory white paper describes is a “peer-to-peer electronic cash system.” Fast forward to 2011 to see how Bitcoin quickly became the currency for the online black market, Silk Road and then the theft of the Mt. Goax exchange. Take us to 2017 with Bitcoin’s rise to almost $20,000, and Ethereum, Litecoin, Monero, and hundreds of other cryptoassets create an entire market capitalization at the end of 2017. Due to wider acceptance of bitcoin, different programmers have come up with different cryptocurrencies that include ethereum, NEM, ripple, Dah, Litecoin among others. There are more than 1100 cryptocurrencies today trading in the financial markets, offering various investment opportunities.
Blockchain technology is almost synonymous with cryptocurrencies as it is the platform on which they are built. However, their uses go beyond developing cryptoassets.
A Blockchain is best described as an open and transparent time-stamped ledger. No regulations are governing the usage of Blockchain technology so far. However, its efficiency as a data storage platform has seen its popularity increase so much that even big industries and governments are already using or considering the use of it.
IBM, one of the main players in the computing industry, is already using Blockchain technology and helping other companies adopt it. Even major banks such as Goldman Sachs and JP Morgan are turning to Blockchain technology for its security and efficiency. Even government agencies such as the Cook County Recorder of Deeds in Chicago are using this technology – there are over 200 government agencies in the U.S. alone which have already adopted the use of Blockchain technology.
Considering its very framework, there would be no need to regulate Blockchain technology. However, whether this happens or not depends on diverse regulatory authorities, and only time will tell whether regulations will come up.
Cryptoassets have gained a lot of popularity mainly because they have been beyond the control of traditional financial regulators. Global financial systems are yet to take regulatory actions on cryptoassets. In fact, different countries and regulatory bodies are divided on how cryptoassets should be used and whether they should exist at all.
Globally, cryptoassets such as Bitcoin are accepted as legal tenders depending on each country. A global regulator does not exist yet, but plans are underway to change this. For instance, the International Monetary Fund (IMF) has been making calls to different countries to cooperate more in regulating Bitcoin and other cryptoassets. Christine Lagarde, the Managing Director, cautioned that regulations are necessary to prevent cryptoassets from abuses such as money laundering and funding terrorism. The Financial Stability Board has also toned down individual countries’ calls to ban cryptoassets saying that they do not pose a threat to the world’s financial stability.
After analyzing what different global regulatory authorities have to say about cryptoassets, one can expected global regulations to be established in the near future. This, however, is easier said than done considering the diversity of cryptoassets, the lack of a central issuing and regulatory authority, and many other factors.
Some countries are not sitting around waiting for the IMF and other regulators to act. Following are insights into how different countries regulate cryptoassets.
United States of America
The United States accounts for the second-largest volume of cryptoassets with a particular focus on Bitcoin. However, cryptoassets are not considered as legal tenders in the U.S. according to the Financial Crimes Enforcement Network. The Security and Exchange Commission, however, considers them as security.
Different regulators in the U.S. have varying opinions of cryptoassets. For instance, the Commodity Futures Trading Commission considers Bitcoin as a commodity. The IRS, on the other hand, has stated several times that cryptocurrencies do not qualify as currencies in the U.S. – However, it views them as property that should be taxed just like any other property. The treasury is outright opposed to cryptocurrencies and has warned about the ability to aid criminal and terrorist activities several times.
However, in spite of the differences in different regulators’ opinions, analysts are optimistic that the U.S. will regulate cryptoassets with time. The SEC has already started doing this by policing ICOs (initial coin offerings) using subpoenas.
As much as the Federal government has its own regulation on blockchains and cryptoassets, different states have also been given the mandate to make their own regulation. Here are some of the states and their regulation rules.
The State of New York was among the first states in the U.S to legalize the use of cryptocurrency back in 2015. The New York State Department of Financial Services came up with a comprehensive regulatory framework for cryptocurrency known as “BitLicense.” The regulation framework required any operations done in the state that relates to cryptocurrency to obtain a state license. Before the state can grant the license, the applicant is required to have strict compliance and supervisory policies in place. This includes policies such as cybersecurity programs and anti-money laundering programs.
Since 2015 when the state enacted this law, it has received much criticism from different stakeholders resulting in some businesses fleeing the state. Critics said that the cost of obtaining the BitLicense was too high and there were so many barriers to obtaining the license. In 2016, a Bitcoin entrepreneur known as Theo Chin filled a petition in court challenging the state’s department of financial services. Theo Chin said that the department is only using cryptocurrency entrepreneurs as guinea pigs to test the new banking regulations.
Apart from New York, Washington is another State that has emerged as one of the most regulated states for blockchains and cryptocurrency industry. All the businesses operating in the digital currency service sector are required to follow the new set of rules. In its Uniform Money Act 2013, the state includes cryptocurrency within its definition of money transmission. Virtual currency exchange operators have been placed under the state money transmitter rules. They are all required to comply with the same rules that apply to the traditional money transmitters. These regulations have also received much criticism from the operators resulting in some popular operators such as Bitfinex, Bitstamp, and Kraken to leave the state. Operators are complaining that the cost of compliance in the state is too high.
Certain cryptoassets, including Bitcoin, qualify as legal tenders in Japan. Japan has by far the most sophisticated regulations on Bitcoin and other cryptoassets – in fact, it accounts for the largest volume of global cryptoassets transactions.
It is safe to argue that Japan was obligated to regulate cryptoassets after emerging as the world’s hub of cryptocurrencies. Several cryptoassets exchanges based in Japan have come under attack from hackers over the past decade, and it has resulted in losses numbering in the hundreds of millions of dollars. For instance, Coincheck, one of the most popular crypto exchanges in the world, lost over $530 million to hackers before regulations kicked in.
Japan requires cryptoassets exchanges to register with the Japanese Financial Services Agency to operate in the country. It has also been cracking down on foreign exchanges such as Binance which are operating illegally in the country.
China has perhaps one of the sternest approaches to cryptoassets and Bitcoin in particular. Cryptoassets are not only unrecognized as legal tenders in the country but also illegal.
China has been making several regulations against cryptoassets over the past few years. In 2017, the government passed laws outlawing ICOs – ICOs were growing in popularity as fundraising vehicles for new businesses, and the frenzy was getting out of hand. A few months later, the government moved to shut down all cryptoassets exchanges – this forced some exchanges such as Binance to move to Japan and South Korea. Recently, senior figures in the government have been calling for the banning and closure of individuals and businesses that relate to cryptocurrencies in any way.
However, China is not exactly cryptocurrency-free. Individuals and businesses can still go around the stern laws by mining Bitcoin for the purpose of reselling it via covert channels. However, the government is looking into ways to curb mining and bring those who engage in it to justice.
South Korea is fast coming up as the new hub of cryptoassets after Japan, and the U.S. – cryptoassets transactions in South Korea account for 4% of the global volume. Nevertheless, cryptoassets are not a legal tender in the country – exchanges, however, are legal and highly regulated.
The South Korean government has been formulation regulations to monitor the use and exchange of cryptoassets. For instance, the country’s Financial Services Commission banned local financial institutions from dealing in any cryptoassets transactions in 2017. This law was followed shortly by another law banning the use of anonymous bank accounts to transact Bitcoin and other cryptocurrencies.
Recent measures taken by the South Korean government have revealed that the authorities are against cryptoassets. For instance, the government was considering shutting down cryptoexchange platforms earlier this year and even issued a statement to this effect – however, this did not happen following a popular petition against the move. The government is still coming up with stricter regulations and has openly stated that it is considering banning futures and ICOs.
Singapore is emerging as the next hub for cryptocurrencies in Asia as China and South Korea crack down on cryptoassets. However, the government itself has a neutral view on cryptoassets and related factors.
Cryptoassets do not quality as legal tenders in Singapore. However, the government has come up with regulations to govern how cryptoassets exchanges operate, and all exchanges are required to register with the Monetary Authority of Singapore. Individuals in diverse financial regulatory bodies in the country have also been issuing warnings about the risks associated with cryptoassets and urged the public to take great caution when transacting cryptocurrencies.
The interesting thing about cryptoassets in Singapore is that the country has been increasingly taking on the role of their birthplace – two of the largest ICOs in the world were held in Singapore thanks to its friendly laws and regulations.
The use and regulation of cryptoassets in the European Union is complicated by the union’s laws as well as the geopolitical makeup. For starters, cryptoassets cannot qualify as legal tenders as individual countries in the EU are forbidden from introducing their own currencies. However, some countries do recognize and accept the use of cryptoassets.
Different countries in the EU have varying cryptoassets regulations, and almost all of them are taking measures to curb the use and exchange of cryptoassets. Collectively, EU financial regulators have been voicing their concerns about the risks associated with cryptoassets. For instance, Valdis Dombrovskis, the Vice President of the EU, moved a motion to put wallet providers and virtual exchanges under the Anti-Money Laundering Directive. He also voiced his concern over the ability to manipulate Bitcoin and other cryptocurrencies to launder money and even fund criminal activities.
Major players in the EU have been taking measures to curb the use of cryptoassets. For instance, France has some of the friendliest cryptoassets regulations, but it too is planning to crack down on a majority of the cryptocurrency exchange platforms in the country.
The United Kingdom broke away from the European Union, but its stance on cryptoassets does not differ from the EU’s by much. For starters, only the Sterling Pound can be used as a legal tender in the UK. Additionally, regulators have an unfavorable view of cryptoassets.
The Financial Conduct Authority has repeatedly issued warnings about the risks associated with Bitcoin and other cryptoassets. Most of the regulators consider cryptoassets as failures when weighed under the conventional financial standards. They argue that cryptoassets cannot be used as measures of value as they lack consistency and reliability. However, the government does not ban the use of cryptoassets. In fact, it requires al cryptoassets exchange platforms to register with the Financial Conduct Authority to operate in the country – exchanges are also required to meet all the requirements of anti-money laundering and counter-terrorism standards.
Cryptoassets seem to have a sure future in the United Kingdom, but they will be required to conform to all the standards of conventional currencies before this happens. This will not be easy and may take years considering everything the government has to deal with at the moment.
Russia’s stance on cryptoassets can best be defined as undecided following the conflicting messages that it has sent over the past few years. Financial regulatory agencies termed cryptoassets as legal at the start of 2016. One year later, the Central Bank’s governor went back on earlier sentiments and essentially outlawed cryptoassets and their exchange platforms – cryptocurrencies were designated as currency surrogates and banned, and so were exchanged platforms.
Today, however, the Russian government is working on policies designed to legalize and regulate cryptoassets. This latest move has been seen as a response to the fact that Russian tech companies and entrepreneurs have been instrumental in the development and growth of cryptoassets.
India has been increasingly taking stern measures against cryptoassets just like China. Cryptoassets are not recognized as legal tenders in the country, and cryptocurrrency exchanges are not regulated. Having said that, it is important to note that cryptoassets and exchanges have not been banned either – anyone can own or transact cryptoassets as long as their use does not break the law.
India is one of the main markets for cryptoassets, and this may be one of the main reasons for concern within the Indian government. According to experts, the government took note of the significance of cryptoassets after $3.5 billion worth of cryptocurrencies was transacted over a 17-months period – this was of such great concern that the tax department sent notices to taxpayers about the risks of investing in cryptoassets.
The Indian government is assessing measures to curb the use of cryptoassets in the country’s main financial system. According to the country’s finance minister, the government will soon pass laws that will limit the use of Bitcoin and other cryptocurrencies in the main financial system as well as for criminal purposes such as money laundering.
Switzerland, like Japan, has friendly policies towards Bitcoin and other cryptoassets. For starters, it recognizes Bitcoin as a legal tender, and other cryptoassets may be following suit. Cryptoassets exchange platforms are also legal and required to register with the Swiss Financial Market Supervisory Authority.
Thomas Jordan, the Swiss National Bank Chairman, has severally said that Bitcoin and other cryptoassets are ideal investment vehicles, but also warned that they do not qualify for use as currencies. The government has also come up with several regulations that govern the use of cryptoassets, and they are some of the most relaxed in the world. Many of the main players in the cryptoassets industry have taken note, and Switzerland has been steadily growing as a cryptocurrency hub.
According to the PwC, Switzerland is one of the favorite ICO hubs – four of ten of the biggest ICO offerings have been held in the country. The country is also home to some of the biggest Blockchain companies including the Etherum Foundation and Cardano, which are set up in Zug in the south of Zurich.
New Zealand also has relatively friendly views of cryptoassets compared to most other countries. Cryptoassets are not recognized as legal tenders, but they have been categorized as securities by the New Zealand Financial Market Authority. ICOs and tokens are also considered as securities as long as they meet certain requirements.
The government, through the FMA, has come up with broad regulations that govern the use of cryptoassets. These regulations outline guidelines for Blockchain and cryptocurrency startups. And, unlike other countries that seek to frustrate the use of cryptoassets, New Zealand is making regulations designed to make them easy and convenient to use.
Surprisingly, Australia also has a positive view of cryptoassets. In fact, certain cryptoassets are recognized as legal tenders in the country. To this end, there are numerous detailed regulations designed to keep the use of cryptoassets in check – there are even taxation guidelines for cryptocurrencies. Anyone can use cryptoassets for investment and transaction purposes as long as their transactions are within the set regulations.
Canada has one of the most interesting regulations on cryptoassets. They are not considered as legal tenders or securities, but they qualify as barter goods. To this end, it is legal to use cryptoassets for transaction and investment purposes. However, the Canadian government has been taking measures to regulate cryptoassets considering the risks involved. For instance, the government has been coming up with policies designed to regulate cryptocurrency exchange platforms. It is also expected to introduce regulations for cryptocurrencies and may even ban certain coins, tokens, and exchange platforms altogether.
Blockchain technology and cryptoassets are here to stay. They stand apart from regular currencies owing to the lack of a central regulatory authority. However, they will eventually have to conform to financial regulatory standards or take a back seat. More and more countries are recognizing and regulating cryptoassets with varying approaches and results, and global regulation may be several years away under the current standards.