Crypto Regulations Over the Years
Note: For the purpose of this article, the term ‘cryptocurrency’ is used to refer to any kind of coins, tokens, other units of virtual, digital or e-currency, such as bitcoin, ethereum, litecoin and so on.
From a visionary invention to a much loved, and hated concept, cryptocurrencies backed by Blockchain technology, have cruised around the market, hitting tremendous highs and swooping down to brain-numbing lows.
Mobile was Internet 2.0. It changed everything. Crypto is Internet 3.0.
-Gil Penchina
Through its exciting journey, cryptocurrencies have been studied, worked around and scrutinized for its validity in the world’s current economic scenario.
In the very beginning, the innocent emergence of cryptocurrencies was looked upon as just a new trend, but it suddenly sunk its hooks into a huge audience, alarming the industries it threatened, especially banks because of its unique ability to verify transactions and maintain a ledger without the need for human intervention.
Bitcoin was the first cryptocurrency in existence and still remains quite a powerful part of the cryptocurrency market.
The existence of Cryptocurrencies using Blockchain Technology originated because ‘While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model’ and ‘Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.’(Bitcoin White Paper, Satoshi Nakamoto)
In recent times, companies have turned to cryptocurrencies to raise money through ICO’s i.e. Initial Coin Offering.
This, unfortunately has led to a regulatory backlash in many countries. Some authorities have issued a total ban while some have taken an observational stance. The observational jurisdiction is unfavourable to entrepreneurs as they deal with each instance ‘case by case’, out of which only a few pass through the fine sieve.
Many authorities have issued warnings to consumers about the characteristics of both, cryptocurrencies and ICOs, on them being volatile, having high risk to fraud and lacking investor protection.
A large number of illegal activities, frauds and scams, backed by blockchain and the trade of cryptocurrencies sent many authorities into a panic mode, deeming crypto trading unfit for usage by the common man. A large part of the audience is illiterate in terms of the Blockchain technology, and thus, out of fear, mistrust has seeped into their mentality. This large population back the authorities in their quest to make such crypto trading is eradicated.
Here is an overview of how some of the popular countries dealt with cryptocurrencies and how their regulations came to be over time.
Japan
Over 2016 and 2017, Japanese FSA recognised Bitcoin as a legal tender. 11 companies were authorised to operate cryptocurrency exchanges, some of which handled coins like Bitcoin, Ether and Litecoin.
On the 27th of October 2017, the FSA stated that ICOs, depending on their structure, may lie within the scope of the APSA i.e. the Payment Services act, and/or the Financial Instruments and Exchange Act. Some ICO issued cryptocurrencies will be deemed as ‘virtual currencies’.
In 2018, Japan is winning the rat race to accumulating the best from the cryptocurrency Industry in Asia. Their government has been the most welcoming when it comes to welcoming cryptocurrencies than most of the countries in Asia.
On January 2016, a Japanese exchange was hacked, and a loss off $530 million worth of NEM coins caused a backlash from the community and a closer oversight from FSA (Financial Services Agency).
United States of America
CFTC, in 2015, stated that they intended to treat cryptocurrencies, including Bitcoin, as commodities.
In July 2017, the SEC issued a contrasting report that summarized it’s cryptocurrency findings, issued by the DAO (Decentralized Autonomous Organisation. With this ICO in mind, the SEC stated that cryptocurrency has the characteristics of security. No action was taken against DAO. In the case where the cryptocurrencies were determined to be a security, or if the cryptocurrencies were traded on any exchange, the ICO, the exchange and any parties involved would have to be registered under the SEC.
The Uniform Law Commission circulated a draft legislation for regulating cryptocurrency transactions as those in financial assets.
In January 2018, The United States of America has no coherent direction in the regulation of cryptocurrencies. The SEC warned investors on the risks of investing, halted ICOs and hinted that there was a need for better regulation.
On Jan 12, 2018 Steve Mnuchin, Secretary of the Treasury, indicated his preference for fiat currency over any type of cryptocurrencies and warned others that cryptocurrencies could be used in money-laundering. He hoped to work with G20 to prevent cryptocurrencies from becoming the digital equivalent of the ‘Swiss Bank Account’
United Kingdom
FCA issued a statement on the 12th of September 2018, warning the consumers and traders of cryptocurrencies, of the risks associated with it, and commented that a lot of ICOs would fall outside the regulated space. Each ICO would be dealt with by the FCA on a case by case basis.
As of March 2018, their view on Bitcoin, as stated by Carney, is that the exponential gains in cryptocurrency trading is a speculative mania and that Sterling is the only legal tender in the United Kingdom.
Exchanges are legal but need to be registered with the Financial Conduct Authority.
Carney feels like the digital currency has only failed us thus far and that the crypto-asset ecosystem should be held at the same standards as the rest of the financial system.
Germany
BaFin, the German Financial Services Authority, confirmed that the mere usage of cryptocurrencies as cash or deposit money doesn’t require any authorization and that service providers may accept cryptocurrencies as payment for their goods / services without carrying out financial services or banking business. Mining also doesn’t require any authorization unless, a mining pool offers shares in the proceeds or provides any additional services that results in the creation or the maintenance of a market. It is only then that the authorization would be required.
Cryptocurrencies used in broking services or the like are, however, subject to authorisation by BaFin, according to a guidance provided by them.
On Nov 2017, ESMA issued a statement reminding companies that are considering to have an ICO, to have regard for the regulatory requirements that are applicable.
In 2018, their stance on the matter hasn’t change much.
UAE
In UAE, cryptocurrencies had a slightly unclear status in 2017. Regulations were promised to be due in January 2018, which appeared to be superseded by the Central Banks statement to provide new regulations and guidance for the same. Different approaches were being taken in different centres within the UAE.
Dubai created the world’s first sharia-compliant crypto-coin. DFSA did not regulate either cryptocurrencies or ICOs.
Abu Dhabi followed a similar approach to the UK by adopting a case to case approach for the regulation of cryptocurrencies. In a broad sense, wherever a cryptocurrency has the characteristics of a security, the regulations would be such as of Abu Dhabi and the United Kingdom.
Developing Jurisdictions
Many jurisdictions are trying to better their reputation in the cryptocurrency industry. No statements have been made on the regulatory status of these jurisdictions on cryptocurrencies and ICOs. They have instead suggested that the adoption of a friendly approach to seek and create partnerships with the cryptocurrency industry stakeholders, to help develop a strong infrastructure would work in their favour.
A great example to support this statement is that of Kazakhstan. The activity on ICOs and cryptocurrencies are unregulated. This was done to help the country be at the forefront for the Fintech Market.
Banned Jurisdictions
The newest banned Jurisdiction on the list is India. Having announced its annoyance and distrust in cryptocurrencies and ICOs, RBI (Reserve Bank of India) has announced a ban on the conversion of cryptocurrencies into fiat currency to all the Indian bank accounts. They have announced a 2 month period wherein transactions can be made before the ban comes into action. However, a lot of people are still holding on to their cryptocurrency as the market stooped extremely low during this period of time, which is still ongoing.
The raising of funds through an ICO platform has been banned in China as they declared that cryptocurrencies do not have the characteristics of money and should not be given the legal status equivalent to that of money. It should thus not be used or circulated in the market as money.
Conclusions
2017 was a point of inflection.
There was a shift from the general public getting familiar with the idea of cryptocurrencies, to them actually putting their dollars to work — the shift from education to action that seemed to be getting cryptocurrency popular for investments and trading. The market cap figure grew over 4000%.
The end of the year heard headlines about its volatility, but the prices rose up by 1500%.
Cryptocurrencies, the trade and possession of which, started gaining more traction and it developed a diverse group of ardent followers, especially Bitcoin, From early adopters, to crypto centric companies, individual traders, individuals of high net-worth and small groups of institutional traders — these were the constituents of the followers of Bitcoin.
However, with the scams that have been run in the form of ICOs, people and governments have become quite strict about the regulations.
When (not if) regulators start looking at ICO deals they might want to investigate, they will likely start with the ones that exhibit weaknesses. — William Mougayar
We can thus conclude that there is an increasing interest seen among regulators concerning ICOs and cryptocurrencies. Trends can already be seen developing among the various jurisdictions: those that seek to ban activity until further developments, those whose approach is a pragmatic “case by case” one, and those who have sought not to comment as yet about it. It is likely that other regulators, more specifically, the Russian Central Bank and the Gibraltar Financial Services Commission will be issuing statements in the near future.
Contradictions among regulators is a risk, due to their different approaches, in a situation where a company offers cryptocurrency/ICO to multiple jurisdictions. Stakeholders need to keep in mind these differences between jurisdictions and calculate their future moves.
https://www.youtube.com/watch?v=-skgMx5Q6qA
This being said, for all the people who have decided to hang on to their assets or continue investing in cryptocurrencies and ICOs, hold on — it is going to be quite a ride!
