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Crypto Regulation around the World, Part I
2019 was a year of recovery for crypto. We saw the end of the long, cold crypto winter, with an increase in crypto prices and a far more mature industry. From the bird’s eye view of early 2020, which opened with an extraordinary hike in crypto prices, it seems that 2019 may have just been a prelude to the new decade. We are now faced with an extraordinary hike in crypto prices and many intriguing questions about the next steps in the world of digitised, decentralised and globalised currencies and tokens. One of the major issues that will determine the market this year and in the years to come, is the relationship between crypto and governments: Will the crypto industry continue to advance? Will governments accept them with greater openness and create better frameworks and regulations regarding the assets? Or could they stay out of the game completely?
In the crypto market, there is an inherent duality vis-à-vis governmental regulation: on the one hand, a lack of regulation can lead to uncertainty and a lack of stability — resulting in difficulties in establishing businesses, opening bank accounts and communicating with customers; on the other, the crypto market can enjoy the freedom of less governmental intervention, enabling it to express its fully decentralised and censorship-resistant nature.
The regulators themselves find themselves in a kind of dilemma: the crypto arena is accelerating at a dizzying pace, with prices peaking, increased interest from the public, growing involvement by big businesses and even the academic world. However, financial regulators are acting in their usual conservative and cautious way, afraid of taking risks, and focusing on defending investors based on their own specific experience.
One approach by regulators would be to ban crypto activity completely, but most countries are careful not to actually block technological and financial innovations. Another approach is risk management, which is the route that most countries take. Both regulators and countries block unwanted activity and let the market move at its own pace. There are only a few jurisdictions that allow cryptocurrencies as a tool for payments, but most of them allow, explicitly or implicitly, the use of cryptocurrencies, albeit with certain restrictions. A report by the US Library of Congress in 2018 emphasized that some countries have already recognised the innovative potential of crypto and the opportunity it represents to attract investment. Despite the warnings about the risks in investing in cryptocurrency and the dangers of money laundering and terrorism funding, this has prompted many governments to change their laws accordingly.
The crypto world is subject to frequent changes in law and regulation. Crypto businesses are learning to function under these conditions, and several are flourishing, despite the inherent limitations. In the sections that follow, we will review the current regulatory status quo for crypto in various countries.
In the US, crypto policy is a combination of well-publicised raids on crypto businesses, restrictions on exchange and fund activity; and frequent warnings about the risks in the market — while continuously advancing the crypto industry. As the largest economy in the world, which also has the largest crypto market, each step taken by the US has a very noticeable global ripple effect. It is reasonable to estimate that any policy adopted in the US will also be later adopted in many other countries.
The distribution of power among various US authorities — including federal and state governments — hinder the creation of a uniform regulatory policy. It also seems likely that regulators prefer to advance slowly and carefully. Meanwhile, they hold regular discussions on the issue, and according to recent reports, are planning to introduce a crypto bill that will add stability and clarity to the field. When? That’s a good question.
Seats of Influence
The major regulators involved in the field are the Securities and Exchange Committee (SEC), the Commodities and Futures Trading Committee (CFTC), the Federal Trade Commission (FTC) and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Among the many disputes, it is still unclear which cryptocurrencies should be regulated as securities (by the SEC), as commodities (by the CFTC) or as payment tools (by FinCEN). Another seat of influence is the US Congress, which has held several intriguing discussions regarding the cryptosphere, including public investigations of the SEC and the CFTC managers about their policies, and of Facebook’s CEO, Mark Zuckerberg, regarding the Libra project.
One of the SEC’s significant actions in the field was the battle against Initial Coin Offerings (ICOs), when they became more prevalent in 2017-2018. Following a few investigations of projects that were suspected to be fraudulent, most of the ICOs were viewed as securities offerings. This meant that they would be kept on a “tight leash” and subsequently, the SEC practically dried out this market worldwide. However, at the same time, the SEC declared that currencies that are already in wide circulation as a medium of exchange, such as Bitcoin and Ethereum, could be exempted from being classified as securities – granting them huge support.
CFTC’s most notable move was to allow the issue of crypto derivatives on both crypto and non-crypto exchanges. Yet many requests for the issue of Exchange Traded Funds (ETFs) of Bitcoin or other cryptocurrencies, which could bring major financial institutions into the market, have been rejected. The regulators are still highly cautious about creating an gateway for the ordinary “investor on the street” into the world of crypto.
Independently Operating States
Some US states enjoy a wide range of independent operations. Wyoming in particular seems to take the most crypto-friendly attitude. In moves unprecedented worldwide, Wyoming has passed more than a dozen laws in the last few years related to crypto. It has separated the crypto assets into three groups: Virtual currencies (such as Bitcoin and Ethereum), digital securities, and digital consumer assets. The laws aim to facilitate the issue, ownership and trading of cryptoassets, and even defines the structure of a crypto bank. Wyoming has not yet attracted significant commercial activity, and may turn out to be more influential in establishing the guidelines for regulations in other places.
Other US states are more restrictive, most notably New York State, which, being a giant financial hub, is especially dominant. Under tight regulations, New York was a pioneer in introducing a framework for crypto activity, when it introduced BitLicence as early as 2015. Since then, 25 crypto enterprises have started operating in the city. Recently opened was Bakkt, a new crypto exchange owned by the New York Stock Exchange (NYSE).
Switzerland is probably the most welcoming country among strong western economies for crypto and blockchain business, and has already attained a proven record in this. Its current policy on crypto continues its long tradition of supporting the financial establishment and giving priority to property rights and confidentiality. These moves have clinched Switzerland’s reputation as “ the ultimate tax haven for the richest people in the world.” Today, crypto and blockchain have become a legitimate part of the financial industry — which is quite unusual compared to other countries.
As far back as 2014, when most countries were not even considering a policy formulation regarding crypto, the Swiss federal government had already published a report on virtual currencies, describing them as a “digital representation of a value which can be traded on the Internet.” This precedent-setting report also made a statement in the prolonged debate regarding the classification of cryptocurrencies, stating that they are not money, nor legal tender, and should therefore be defined as “assets.”
Since then, Switzerland has taken yet further steps towards constructing an official framework for the crypto market. While it has not created any special laws regarding cryptocurrencies, it has defined relatively clearly how to act within the existing laws and continues to develop this framework. One example is that it has exempted small and medium businesses in the crypto field from having to secure banking licences.
The supervising regulator in Switzerland is the Swiss Financial Market Supervisory Authority (FINMA), which requires that the relevant businesses comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. FINMA divides the crypto market into three categories: Payment coins, such as Bitcoin or Ethereum, which are intended to be used for money transfers; Utility tokens, which are used for gaining access to services; and Asset tokens which are attached to specific assets such as real estate, commodities or stocks.
The Swiss National Bank has recently joined a global group of central banks to explore the pluses and minuses of issuing Central Bank Digital Currency (CBDC). The group includes the Bank for International Settlements (BIS), which is located in Basel, and is considered the “central bank of all banks” . Taxation for individuals is based on wealth tax regulations, and for entities, on capital gain tax. In specific cases, income taxes are collected from individuals dealing in cryptocurrencies.
Zug (one of 26 Swiss cantons and the name of the town) is focusing on becoming a local and global hub for crypto and blockchain, and could even be nicknamed “Crypto Valley.” It has already attracted a number of businesses in the field and offers convenient conditions, and a wide range of relevant financial and juridical services. While crypto and blockchain have received a warm welcome in Switzerland, the general conservative environment and relatively high costs in the country are considered deterrent factors for many enterprises.
Coming Soon in Part Two: Crypto regulations in Southeast Asia.