More than 130 countries have at least some form of regulatory frameworks for blockchain and cryptocurrency. While most countries have independent laws, some ‘blocs’ follow guidelines set by regional regulatory agencies.
The European Union is a perfect example for this case, given that the members mostly follow EU guidelines with each individual country having personalized additions and laws.
Asia is another important place as it is one of the largest financial centers in the world. Combined with the effect China has on cryptocurrencies such as Bitcoin, we can deduce that Asia is at least the second most influential market, if not the first. Here, there is no unified structure for regulatory frameworks as each country proposes its own solution. Japan and China may be the earliest ones to impose and work on regulatory frameworks.
Singapore has been regarded as one of the most open global financial centre and FinTech hub, with The Monetary Authority of Singapore (MAS) recently pouring $182M to accelerate growth in the fintech sector. MAS has a balanced approach towards the two sectors, seeking to protect investors while fostering innovation at the same time.
At the moment, cryptocurrencies are defined to not be a legal tender issued by the government, and that they are encouraged to be used as a method of payment for anyone willing to accept them. Moreover, the MAS does not recognize cryptocurrencies as a store of value, but that they can be assets and personal property. Essentially, assets such as Bitcoin are treated as goods, therefore a Goods and Services Tax is applied.
The MAS has a soft stance towards cryptocurrency exchanges. At the same time, the regulatory agencies noted a need to monitor transactions and take the necessary legislative steps to prevent money laundering and terrorist financing. These measures were noted by the Fintech chief at MAS Sopnendu Mohanty in 2018.
Singapore progressed far with its regulatory framework in 2020 with the expansion of two legal frameworks. First, the Payment Services Act (PSA) came into effect in January 2020, which required companies dealing with cryptocurrencies to obtain a license from the agency and meet the necessary AML and CFT requirements.
Secondly, the MAS proposed a new group of regulations in July 2020 that would affect cryptocurrencies. These regulations would implement the power to issue prohibit orders, add to existing AML/CFT regulations, and impose requirements on technology risk management.
Japan was essentially forced to be the first country to focus on cryptocurrencies as its journey began in 2014 when the Tokyo-based Mt. Gox exchange was hacked. The Japanese Financial Services Agency (JFSA) quickly created a workgroup that would settle the operation of digital payments in Japan, which ended its work a year later. At the time, the group submitted their final report to the JFSA noting three novelties:
- A unique registration system for virtual currency exchange businesses
- Ensuring transactions are compliant with AML laws
- The creation of a system that protects cryptocurrency users
In 2016 Japan already deemed Bitcoin as a legal tender on local markets and a year later they urged exchanges to register and obtain a license. Following the hacks of Coincheck and Zaif, the country decided to implement a new and stricter approach. With new standards, the regulatory entity implemented new legislation and restarted registrations.
The most recent update came in 2020 when the JFSA enforced new PSA/FIEA licenses. Moreover, the Japan Security Token offering Association (JSTOA) was created, with the intention to regulate STO and ICO projects.
China took a friendly approach to blockchain technology while being against the use of cryptocurrencies. In 2014, the People’s Bank of China created a research group that would investigate the benefits of a digital yuan. Since then, the nation’s Central bank has progressed far with its digital currency. Six years later, China is close to launching a Central Bank Digital Currency (CBDC). By doing so, China would be the first global power to digitalize its currency on a blockchain network.
But while the country almost entirely adopted blockchain technology, regulative restrictions for cryptocurrencies still remain. Previously, we mentioned that China was one of the first countries to ban ICOs. If its CBDC became a strong alternative for payments, the PBoC could potentially track all transactions. As a result, the Central bank would have more power over the flow of money, granting them the power to potentially ban cryptocurrencies.
On the same macro level, we see that the EU’s administrative bodies acted several times in the past five years. In 2015, the European Court of Justice (ECJ) decided to exempt the selling and buying of virtual currencies from VAT in the entire EU. The next year, the European Commission implemented custodian wallet providers and virtual currency exchange platforms into their Fourth Anti-Money Laundering Directive (AMLD). In 2018, the European Supervisory Authorities for securities (ESMA) gave out several warnings to consumers willing to invest in ‘highly risky and unregulated products.’
2018 was also the start of a renewed interest in regulating cryptocurrencies and blockchain. The European Commission presented an Action Plan in 2018 regarding how FinTech, blockchain, AI, and cloud services could be utilized. But at the same time, ECB president Mario Draghi warned that digital currencies are very risky assets. Moreover, he added that while they are not currently under a specific supervisory approach, digital currencies are to be added in a Single Supervisory Mechanism in the future.
Individual European countries
Outside the EU but still within Europe, there are three major agencies that regulate the use of cryptocurrencies. Switzerland and Malta are the most progressive and liberal countries towards digital assets, given their relaxed approach.
For example, the Swiss Financial Market Supervisory Authority (FINMA) was very strict on AML factors but it still provided free room for Virtual Asset Service Providers (VASP) to grow. In 2019, the agency granted licenses to two VASPs, Seba Crypto AG and Sygnum AG.
In the meantime, the Maltese government marketed the country as the ‘Blockchain Island.’ The Malta Financial Services Authority (MFSA) introduced its first regulatory framework in 2018 with the Virtual Financial Assets Act (VFA Act). The framework resulted in 14 crypto assets agents gaining licenses to conduct business in Malta. Moreover, the MFSA decided to introduce 0% taxes on any capital gained through cryptocurrency investing.
Last but not least we have the UK Financial Conduct Authority (FCA), the second strongest regulatory agency in the region. Controversial for its latest ban of cryptocurrency derivative trading, the agency is mostly restrictive towards digital assets. Investors are free to participate in crypto markets. However, the FCA still warns retail investors regarding the danger of trading digital assets. In January 2020, new regulatory powers were introduced which help the FCA regulate AML and CFT laws in the crypto sphere.
The United States
In North America, the United States is the leading regulatory power. Legislative focus has been put on cryptocurrencies on both the level of states and the federal government. On the federal level, regulatory agencies such as the SEC and CFTC lead the ‘fight.’ Notably, the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) are also notable factors.
It is worth noting that all of the listed regulatory agencies interacted with the cryptocurrency and blockchain market to some degree. However, they have not introduced any formal laws. The CFTC and SEC have so far worked on a ‘per-need’ basis. For example, the SEC only targeted individual entities that held unregistered ICOs, mostly because they affected investors based in the U.S. Otherwise, there is no universal definition or law for digital assets inside the country.
However, news indicate that the situation may change in 2020. Several crypto-related news platforms claim that 49 U.S. states may propose a unified regulatory framework on cryptocurrency and blockchain companies.
Recent Regulatory Bans, Charges, and Events
Historically, not much has changed in the regulatory landscapes of most countries. Aside from Japan and the EU, there does not seem to be any ‘hurry’ to implement legislative frameworks regarding cryptocurrencies. However, several agencies ‘intruded’ the sector on a per-need basis. On that account, there were several controversial decisions recently that affected the ecosystem. The most important one appears to be the CFTC charge against BitMEX.
On the 1st of October, the CFTC filed a charge against leading cryptocurrency derivatives exchange BitMEX. Specifically, the agency filed a civil enforcement action within the Southern District of New York against 5 entities that operate BitMEX.
The reason behind the charge is the fact that BitMEX failed to implement the necessary AML procedures. The CFTC names the three co-founders Arthur Hayes, Samuel Reed, and Ben Delo in the lawsuit, stating that they control the exchange through a ‘maze of corporate entities.’
Within the defendants are the 100x Group, HDR Global Trading Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services Limited. Moreover, the charge also targets the involved entities for violating the Bank Secrecy Act.
Another recent event includes the UK FCA banning cryptocurrency derivatives. On the 6th of October, the regulator announced that retail investors in the UK will no longer have access to crypto derivatives and exchange-traded notes (ETNs). The FCA argues that it made the decisions as these products are ‘ill-suited for retail consumers.’
Moreover, the regulator claims that the underlying assets of these derivative contracts have no reliable basis for valuation. There is a history of market abuse and financial crime related to derivatives and they are marked by extreme volatility, notes the FCA. At the same time, a recently published policy report revealed that the regulator ignored 97% of its consultation respondents, who were against the ban.
The proposed expansion of the Singaporean 2019 MAS Payment Services Act is another recent move which aims to further regulate the sector. Proposed in July 2020, the new group of regulations seeks to enable the MAS with several new powers. First, the regulatory agency would take a ‘harmonised and expanded power to issue prohibition orders.’ This includes orders that restrict individuals from conducting certain activities or holding roles in FIs.
Another important part of the expanded framework includes a focus on regulating AML and CTF laws. This would force VASPs to take higher measures to monitor transactions and criminal activity. Last but not least, the third major aspect would be to impose requirements on technology risk management. The proposal means that technological systems would have a better focus on security to safeguard investor and user confidence in the Singaporean financial sector.
The growing blockchain regulatory landscape
Regulators all over the world have acknowledged blockchain technology, Bitcoin, and cryptocurrencies as far as 2013. However, only warnings were issued at the very beginning. We can see that it took the biggest exchange hack in crypto history for Japan to start working on a regulatory framework in 2014.
On the other hand, the rest of the world lagged behind with regulations. Some nations such as the U.S. still to this day have not implemented any formal legislation. Instead, entities like the SEC and CFTC make their decisions and regulatory enforcement on a case-by-case basis. While this is a positive thing for innovation, the protection of investors is not guaranteed. Moreover, a lack of response at the current moment may indicate harsher reactions in the future.
Countries in the Southeast Asia region like Singapore have taken a proactive approach. In this case, the country made sure to not stifle innovation while at the same time protecting local investors. With the proposed new regulatory framework, it appears that the country’s regulatory agency wishes to take a step further by ensuring that technological security systems are secure and customers are protected.
Thus far, the European Union, Japan, and Singapore have been the most proactive in working on regulations. They have proven their intentions to regulate both the blockchain industry and cryptocurrency markets over the past few years while not stifling growth in the blockchain sector. If successful, these three key-players could prove themselves as one of the best regions for the growth of the blockchain technology landscape.