Regulatory and Compliance Updates, Asia and Middle East — August-October 2018
Continuing our project of providing information on regulatory developments effecting blockchain and cryptocurrency, the update below covers selected news from Asia and the Middle East from August 1 through October 31.
Japan 🇯🇵
On August 6, the Japan Virtual Currency Exchange Association (JVCEA), an industry group representing 16 regulated crypto exchanges that originally registered with the Financial Services Agency (FSA) in March, applied for additional recognition as a “certified fund settlement business association.
The association reportedly submitted over 100 pages of proposed regulations for its members. The application was subject to a two-month review and received approval on October 24. This recognition allows the association to formally serve as a self-regulatory organization and legally enforce its guidance. No official rules had been issued by the JVCEA so far.
In recent months, the FSA has been launching inspections of cryptocurrency exchanges. On August 10, the FSA released the results of its probe. The report highlighted the weaknesses it found in the industry, including insufficient KYC measures, risk management, internal audits and corporate governance. More positively, the FSA indicated that it plans to begin approving new applications, which had mostly been frozen as the FSA undertook its investigations, albeit with increased scrutiny compared to the past.
In an August 23 interview with Reuters, Toshide Endo, the newly-appointed head of the FSA, made some comments about the FSA’s proposed intention for crypto regulation. While acknowledging that regulators have been tougher on the industry as a result of prominent hacks, such as the January theft of $530 million from Coincheck Inc., Endo affirmed that the FSA does not intend to excessively curb the industry, and prefers to see it grow under appropriate regulation.
The Japanese police announced on August 31 that they will budget approximately $350 thousand to develop software that can flag suspicious crypto transactions and track the individuals behind them.
Consistent with its statements from August, local media reported that the FSA had upgraded its screening requirements for exchanges applying for a licenses. Exchanges will now need to answer approximately 400 questions on their applications (up from around 100 previously) and provide records from board meetings. The FSA will also begin reviewing company shareholders to discern whether there are any links to “antisocial groups.” On September 12, the FSA announced that it plans to hire 12 additional employees to handle the growing backlog of applications (160 firms were awaiting review).
Security
The Zaif exchange was hacked on September 14, resulting in losses of $59.7 million to both users and the exchange. The FSA launched an investigation on September 21, including sending its agents to the physical site of the exchange’s parent company. On September 25, the FSA issued a third “business improvement order” to the exchange, The FSA’s order states that the exchange’s response to the hack has been inadequate, and that additional measures needed to be taken to determine the causes of the hacking incident, prevent the expansion of damage, and implement concrete and effective improvement plans. The exchange had previously received orders in March and June.
On October 18, the Japanese Tax Commission held a meeting to discuss ways to simplify the currently cumbersome process for filing taxes on cryptocurrency gains. Currently, such profits fall under a category of “miscellaneous income” that is subject to a sliding tax rate of between 15–55% depending on various factors.
The FSA announced another planned initiative on October 25 — the agency plans to institute a limit on the leverage available for crypto margin trading. Currently, many exchanges allow traders to borrow cryptocurrency in order to make purchase on the exchange, with some allowing traders to borrow as much as 25 times their deposits. Under the new regulations, if adopted, traders’ borrowing power would be limited to 2–4 times their deposits.
South Korea 🇰🇷
In a negative development for the industry, South Korea’s Ministry of Small and Medium Sized Enterprises and Startups announced a proposal under which it would no longer provide benefits to cryptocurrency exchanges that are currently available to “venture enterprises.”
Exchanges will now be classified — alongside bars and nightclubs — as businesses that are not encouraged. If enacted, the consequences of the proposal would include the loss of certain tax perks.
ICO Legalization
Meanwhile, parliamentary discussions on the country’s approach to ICOs continued in August, with committees and political parties continuing their discussions around creating guidelines on ICOs, which would replace the current blanket negative approach that South Korean regulators have taken since September 2017.
Several bills for ICO legalization have been proposed and discussions on these bills are ongoing. On October 2, the chairman of Korea’s National Policy Committee (a member of the governing Democratic party), called on parliament to legalize ICOs and put a regulatory framework in place. Discussions were also held on a proposal to designate Jeju Island as a special zone for blockchain projects.
On September 12, Coindesk Korea reported that the Financial Services Commission (FSC) and the Financial Supervisory Services have begun to send questionnaires to probe blockchain firms and determine the extent of their involvement in ICOs. Officials said that the probes were being done for informational purposes and to help authorities understand the industry, but industry participants are concerned that sanctions may be brought under the bans issued in September 2017.
Contradictory Policy
The head of the office for government policy coordination, in a question and answer session with National Assembly members on October 11, stated that the government agencies plan to come out with an updated position on ICOs at the end of November, based in part on the results of the probe.
However, in a reflection of a lack of a unified approach within the government, the head of the FSC made statements expressing a negative view of ICOs in the days after the testimony and, on October 24, the FSC issued a note to investors warning them not to invest in crypto funds and that such funds are not legal investments under Korea’s Capital Markets Act.
In a development relevant to the ever-evolving relationship between blockchain companies and traditional banks, the chairman of the FSC noted that crypto exchanges should not have any issues with opening bank accounts, provided that they have adequate AML and KYC measures. This announcement could be helpful in motivating banks to conduct business with crypto entities.
North Korea 🇰🇵
A report prepared by cybersecurity experts estimates that North Korea’s hacking group, Lazarus, was responsible for at least 14 hacks on crypto exchanges since January 2017, stealing $571 million, out of a total of $882 million that were stolen from exchanges globally during that period. In addition, North Korea allegedly backed two scam altcoins.
Thailand 🇹🇭
The central bank of Thailand issued an announcement on August 1 permitting the nation’s banks to open up subsidiaries that deal with cryptocurrencies. However, banks and other financial institutions are banned from dealing directly with cryptocurrencies in their primary branches. The cryptocurrency subsidiaries are not able to service regular bank customers or retail investors and are limited to interacting with businesses that are approved by Thailand’s SEC.
In July, Thailand introduced a set of regulations for ICOs, crypto exchange and other digital asset businesses, that allow such projects to operate and raise funds legally in the country, subject to regulations set out by the Thai SEC. By early August, a total of 20 exchanges had applied for licenses and almost 50 ICO projects had expressed interest in receiving certification. On August 15, the Thai SEC announced that they had approved five cryptocurrency exchanges and two cryptocurrency dealers. ICO certification is expected to take up to five months.
In the opposite direction, the Thai SEC issued a statement warning investors against investing in nine digital tokens and ICOS that were not registered with the regulator.
Crime
Thai police arrested 27-year old actor Jiratpisit Jaravijit, among others, on August 9 for allegedly participating in a $24 million bitcoin scam. The defendants were accused of promising foreign investors that they would invest their bitcoins in companies that hold the Dragon Coin cryptocurrency. Instead of investing the funds, they allegedly appropriated it for themselves. In further developments in the case, according to an October 10 local media report, the Thai Foreign Ministry revoked the passport of Priinya Jaravijit, the actor’s brother and alleged mastermind of the plot, who was located in the United States at the time of the revocation. Interestingly, this revocation made it both illegal for the accused to stay in the United States and impossible for him to return home to Thailand to turn himself in as the police had demanded.
On September 3, the Thai anti-money laundering authority discussed the possibility that it might begin creating its own digital currency wallet to hold or confiscate funds from illegal sources. While it is not clear how effective this specific measure will be, it appears to be a move in the right direction for AML enforcement in the blockchain space. The current international AML framework relies on banks and financial institutions to identify customers, monitor financial activities and report suspicious transactions, as the regulators do not have visibility on these activities. In the context of many public blockchains, however, transactions are visible and can be accessed by anyone who chooses to run a node. As a result, authorities have the ability to leverage the transparency-enhancing features of blockchain technology to develop their own analytic approaches to tracking, recording and preventing illicit activities. This can have the benefit of both reducing the burden on participants in financial transactions and providing more useful and real-time information to authorities looking to prevent the illicit use of blockchain networks.
Philippines 🇵🇭
The Philippines’ SEC published draft rules covering ICOs on August 2, and requested comments from the public. The rules cover companies registered in the Philippines that intend to conduct an ICO, as well as any company that will conduct an ICO that targets Filipinos.
Under the rules, all tokens would be assumed to be securities unless the issuer can prove that they are not. Companies would be required to submit to the SEC various documents in advance for an initial assessment, including corporate organizational documents, proposed white paper, project description, team information and other required documents, including a legal opinion that the tokens are not securities.
The laws include detailed rules on what information is required to be included within these documents. Within 20 days, the SEC will provide a decision on whether the proposed token is a security or not. Tokens that are deemed securities are required to file a registration statement and prospectus with the SEC (with exceptions for sales to qualified institutions, to small numbers of shareholders and isolated transactions). Such tokens are also subject to ongoing reporting requirements. The rules also include prohibitions on false and deceptive advertising, and specify circumstances when ICO projects are required to give refunds to token purchasers.
Several reports in September indicated that a final version of the rules would be published soon, but there does not appear to have been a final release.
Singapore 🇸🇬
Monetary Authority of Singapore (MAS)
Damien Pang, the head of technology infrastructure at Singapore’s Money Services Authority commented at a conference on September 28 on what his agency has seen in the market during the year since Singapore issued a framework for classifying different types of tokens into three categories — security tokens, utility tokens and payment tokens. According to Pang, virtually none of the tokens the MSA had reviewed were deemed security tokens.
On September 18, the MSA issued a warning that a fraudulent website was soliciting investments in bitcoins using fabricated statements attributed to the MSA chairman and Singapore’s deputy prime minister. The site asked readers to sign up for a bitcoin account and requested credit card or bank account details.
In a helpful move, the Money Authority of Singapore, the country’s central bank, indicated on October 10 that it is working to help banks and cryptocurrency startups together so that the startups can receive banking services. This initiative doesn’t mean that the regulatory standards applicable to the banks will in any way change, but the authorities do appear to be trying to help the banks and blockchain companies reach understandings that will help the banks overcome their reluctance to open and operate accounts having to do with cryptocurrency
Taiwan 🇹🇼
Jason Hsu, a Taiwanese lawmaker known to some as the “crypto congressman” introduced legislation on October 9 that would amend the country’s anti-money laundering law to cover cryptocurrencies. If adopted, the law would obligate cryptocurrency exchanges in Taiwan to comply with customer review, transaction record keeping and suspicious transaction reporting for cryptocurrency transactions.
As a further sign that the regulatory framework in Taiwan is developing, the finance regulator indicated on October 24 that the agency is developing ICO regulations and plans to issue a draft by June 2019.
On October 29, Hsu published a list of additional policy recommendations, including creating a new business category for crypto companies and a regulatory framework for security tokens.
Hong Kong 🇭🇰
The head of Hong Kong’s securities and commodities regulator stated on October 15 that the agency is working on strategies to regulate cryptocurrency platforms operating in Hong Kong and protect investors and is observing international developments with a view towards issuing its own regulations.
In a research report published on October 18, the Hong Kong Stock Exchange’s chief economist’s office argued that blockchain should be regulated under existing financial regulations, rather than under a new framework. Among the reasons brought in support of this argument were that financial regulation should be consistent, allowing fair competition between companies raising funds using traditional methods and those raising funds through digital currencies.
China 🇨🇳
August started out on a somewhat positive note for cryptocurrency in China. A Beijing court ruled in favor of a cryptocurrency exchange, Coinnice, which, due a software bug, had accidentally transferred five bitcoins to a trader in March 2017, who sold them. Coinnice brought a lawsuit against the trader demanding that he return the assets.
The trader argued that, because China had legally banned crypto trading in late 2017, Coinnice was an illegal operation to begin with and so had no standing to demand repayment. The court found that, whether or not Coinnice had violated the ban later, no legal ban had actually been in effect and, in any event, under Chinese law an individual who receives profits without legal grounds and caused losses to another is required to return the assets.
Shenzhen
An arbitration court in Shenzen published a similar decision on October 26 that bitcoin should be entitled to the same legal protections as other property. In that case, an investor had signed an agreement allowing an individual to trade and manage a pool of cryptocurrency on his behalf. The trader, however, never returned the assets.
In the arbitration, the defendant argued that China’s ICO and crypto trading ban made cryptocurrency illegal and that therefore the entire contract was invalid. The trader also argued that due to the ban, there was no available way for the funds to be returned. The arbitrator disagreed, arguing that while ICOs and trading platforms are banned in China, possession of cryptocurrencies and trades between individuals are not. Accordingly, there was a valid contract and the investor was entitled to the return of his funds, and the fact that there is no available major exchange would not prevent such return from being executed in a peer-to-peer transaction directly on the blockchain.
ICO Warning, Crypto Trading
On August 24, five different Chinese regulators issued a warning, reiterating the country’s ban on ICO fundraising and specifically warning against individuals who use foreign IP address but solicit Chinese token purchasers and use mobile and internet payment tools to facilitate crypto trading.
According to official government media reports, the financial authorities have identified 124 trading platforms that it would target for blocking under China’s “Great Firewall” that blocks internet access to websites that the government finds problematic.
Among the responses was an announcement by WeChat and Alibaba that they would no longer allow cryptocurrency trading on their payment applications and would monitor to prevent such payments. Baidu followed suit a few days later.
Continuing the full-court press against crypto trading, on August 28 a financial self-regulatory organization founded by the People’s Bank of China added “token sales” as an option on its portal that allows individuals to file complaints regarding suspicious financial activities. This allows Chinese residents to report various forms of virtual currency-related activities, which the organization then transfers to the relevant law enforcement agencies. The next day, the local authorities in Guangzhou development district declared a prohibition on commercial venues hosting crypto-related events.
Chinese police also continued their enforcement actions, arresting three hackers accused of stealing $87 million in crypto on August 20.
Things appeared to calm down somewhat in September and early October. On September 7, China’s supreme court ruled that evidence authenticated with blockchain technology is binding in court (similar to the status granted to notarized documents).
On October 19, China’s internet censorship agency published a draft policy on regulating internet access for blockchain related-service providers. The proposed rules would cover nodes and other entities that provide information services to the public using blockchain technology. Such service providers would be required to register with the agency, including providing server addresses, and would also be subject to annual reviews. These rules could have an impact on supernodes of certain blockchain networks. The public had until November 2 to provide feedback before further steps are taken.
India 🇮🇳
On August 21, Indian police arrested Divyesh Darji, the alleged leader of BitConnect, a defunct bitcoin exchange that used multi-level marketing practices and was accused of breaching securities laws and engaging in fraud by regulators in Texas and North Carolina.
Individuals connected with BitConnect also allegedly were involved in kidnapping, police corruption and extortion. Investors also allegedly staged their own kidnappings in an effort to recover their investments. On September 11, the U.S. states of Arizona and Illinois asked the Indian authorities to seize the property of BitConnect promoters.
The lawsuit, discussed in several of our previous updates, between several crypto exchanges and the Reserve Bank of India (RBI), the country’s central bank, continued throughout this period. The RBI issued an order back in April that barred local banks from doing business with crypto exchanges and other related services; the crypto exchanges brought cases to block the order. The case is now in front of India’s Supreme Court.
In a September hearing, the RBI explained its reasoning behind the ban, which include claims that cryptocurrencies are not “valid” or “true” currencies, and, furthermore, are not even valid payment systems because they are not controlled by a service provider. Additional petitions (which were reported to be the last ones) were collected on September 25, but soon after the final decision was postponed and on October 26, the Supreme Court requested that the nation’s government clarify view on cryptocurrency and the case. The government had two weeks to respond to the court’s request.
In a bad sign for that review, senior government officials held a meeting on October 31 in which they reportedly discussed the possibility of banning “private crypto currencies” in India.
Whatever the court decides, the ban has already had a large impact on the crypto industry in India. On September 28, Zebpay, which had formally been the largest exchange by volume in India, announced that it was halting its trading services and cancelling all unexecuted and new orders. The exchange will continue to operate its wallet services.
Another exchange, Unocoin, tried to circumvent the ban by setting up an ATM where its users could deposit and withdraw fiat currency to their accounts with the exchange. However, weeks later, the police seized the ATM, two laptops, other equipment and $2,500 worth of rupees, claiming that the exchange was not authorized to operate the ATM.
However, other developments occurred in India during the same period that contrast with the above and point in a more hopeful direction.
According to an August 27 report in local media, the RBI has created a unit to research and draft rules to supervise blockchain and other emerging technologies. Previously, the central bank’s involvement in the crypto space was more negative, involving warnings to investors about the dangers of crypto and the order blocking the nation’s banks to from dealing with clients who were involved in the space.
However, the RBI later denied that there was a formal unit was formed (although an RBI report issued August 24 did indicate that an inter-departmental working group on fintech was also dealing with regulatory issues related to virtual currency). On September 3, India’s Securities and Exchange Board sent its officials to Japan and Switzerland to study cryptocurrency.
Malaysia 🇲🇾
On September 5, Malaysia’s securities regulator ordered a halt to all promotional activity for the ICO of “Lavidacoin”, a cryptocurrency backed by a beauty guru.
The ICO was purportedly intended to raise money for, among other things, an online entertainment channel, a payment gateway and a non-profit mosque.
Saudi Arabia 🇸🇦
Saudi Arabia joined the list of nations who have taken a broad negative stance against cryptocurrency, with the Saudi Arabian Monetary Authority declaring on August 13 that it is illegal to trade bitcoin in the country. However, the SAMA is still working on its own custom cryptocurrency.
United Arab Emirates 🇦🇪
In contrast to their Saudi neighbors, the United Arab Emirates approved draft regulations governing ICOs, according to local media reports from September 9. Later news reports on October 8 indicated that the regulations should be completed and take effect sometime during the first half of 2019. The UAE is also adopting plans for a regulatory sandbox for FinTech companies. In addition, regulators from Abu Dhabi called for an internationally effort to coordinate regulation of cryptocurrencies at a September 19 event.
Iran 🇮🇷
In Iran, the Supreme Cyberspace Council announced on September 5 that the government has accepted crypto mining as an industry. The authorities will also reportedly develop a regulatory framework for crypto mining and are considering creating a national cryptocurrency.
Uzbekistan 🇺🇿
On September 6, the government of Uzbekistan issued an order offering tax benefits, as well as exemptions from foreign currency regulations and securities laws to cryptocurrency exchanges operating in the country. In order to receive these benefits, exchanges need to set up a subsidiary or other entity in Uzbekistan. The order also offers to miners, including offering opportunities to purchase land, without the usually required public auction, to those using a certain amount of power in their mining operations.
This update has been prepared by the Orbs Ltd. legal team for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact legal counsel licensed in their jurisdiction. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Orbs Ltd. in response to this update.
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