Although cryptocurrency’s goal is to reach consensus, we have yet to reach it when it comes to regulation. While people are eagerly awaiting new legislation across the world, views on formalised guidelines remain quite divided.
Let’s look at where we are, starting from the east…
China: Supporting blockchain with financial stability
Blockchain and cryptocurrency regulation is arguably one of the most controversial topics in China – an economic powerhouse that appears fraught with confusion on how to handle this high-growth technology. The government is predicated on maintaining control over business and operations, which is a bit contrary to the basis of blockchain being decentralised.
According to Finance Magnates, mainland China dominated the industry as “an eye-popping 95% of all BTC trading took place in the country”. That changed in 2017 when the government cracked down on ICOs and domestic crypto exchanges.
However, all hope is not lost since the country seems to be supportive of blockchain and was described by President Xi Jinping as being part of a wave of technological revolution that also includes AI, quantum computing, the internet of things, and mobile communication. They are exploring ways to regulate the industry and it is partly the job of the community to educate government officials on its massive potential as China is undeniably becoming a “hotbed for innovation”.
Just last week, the Cyberspace Administration of China (CAC) released a draft of a policy that would require users of any blockchain service to register with their real names and national ID numbers. While many believe this might be a setback for the industry, it very well could be a positive move forward to achieving security with greater transparency. It comes as no surprise that the government is steadfast on financial stability and it will do everything in its power to ensure its citizens are protected.
On the flipside, Hong Kong’s Securities and Futures Commission (SFC) believes that an outright exchange ban is not the solution. The SFC and BitMEX, a Hong Kong-based exchange will collaborate to put together clearer regulation that “is comparable to that of a licensed trading venue.”
Japan: Differentiating between virtual currencies
Meanwhile, Japan has already put Fund Settlement Law and the amended Payment Services Act in place, which went into effect in April last year. According to Bitcoin.com, the former defines “virtual currencies,” which include cryptocurrencies, as a means of payment and exempts them from consumption tax. The latter requires cryptocurrency exchange operators to register with the Financial Services Agency (FSA).
To that end, they have begun evaluating different types of coins that have emerged in the industry like stable coins. In their view, “stable coins pegged by legal currencies do not fall into the category of ‘virtual currencies’ based on the Payment Services Act.” However, it remains to be seen how they will approach other types of stablecoins like algo-backed, crypto-backed, or collateral-backed stablecoins.
South Korea: General, yet inviting
South Korea, a booming crypto space, takes a more “black and white” approach as they believe that cryptocurrency funds do not meet the requirements of the country’s Capital Markets Act. It therefore encourages investors to consult with the relevant authorities before investing.
UK: Steady as she goes with formalising regulation
Probably the most divided of all regions is Europe as there seems to a variety of different viewpoints from each country. In the UK, the FCA is considering a ban on the sale of crypto-based derivatives due to its risky nature, as they move forward with more formalised regulation. The government Taskforce’s newly-published report proposed “a three-fold framework for cryptoassets, depending on whether they are used as a means of exchange, for investment, or to support capital raising and the development of decentralised networks through ICOs”. This is a promising step forward for the UK which has previously taken a more casual approach to regulation, as they take more progressive measures to move the industry forward.
Malta: Formalised regulation is on the horizon
Malta seems to be the most innovative and action-oriented of the European nations with ongoing discussion at UN forums on the institutionalisation of blockchain on a global scale. This month, Malta will be passing two bills:
- The Virtual Financial Assets Act (VFA) – addresses the procedures and requirements that ICOs will have to follow. An important feature of this law is that companies launching ICOs will have to disclose their financial history.
- The Innovative Technology Arrangement and Services Act (ITAS) – provides the legislative foundation for the regulation of the cryptocurrency and blockchain industry.
US: Carefully evaluating valuation and liquidity
This brings us to the US. Since the enactment of the Howey Test, there hasn’t been any additional conclusive regulation from the SEC or the CFTC. However, the authorities are not sitting around idle. The SEC recently launched a FinHub, which will serve as a resource for public engagement on the SEC’s FinTech-related issues and initiatives.
The hot ticket item that everyone is waiting on is when there will be approval for a crypto ETF, like the VanEck SolidX Bitcoin ETF which is still pending. Kara Stein, SEC Commissioner, spoke on a recently released letter to staff indicating some of the critical issues they will be looking at, which include valuation, liquidity (especially in a 40 Act fund context), custody, and making sure that firms are thinking through how they are going to deal with all of those issues.
While there is some movement on approvals on a regional level in the US, there are still open-ended concerns that government authorities are still grappling with as it relates to the acceptance of digital currencies.
According to the Financial Stability Board (FSB), which makes recommendations about the global financial system, some concerns include “low liquidity” and the “use of leverage” in crypto trading.
Based on panel discussions around the conference circuit, the SEC is planning on implementing a streamlined one-page document that should clarify these issues by the end of the year.
In short, blockchain is going to revolutionise our lives whether we like it or not. The genie can’t be put back in the bottle, but it can be tamed, and harnessed to reach its full potential. While there are still many issues to resolve, the industry will only continue to gain momentum and regulators need to keep pace.
Stewie Zhu, Founder and CEO of Distributed Credit Chain