Cryptocurrencies and regulations- Part 1
2018 began on a bullish note with Bitcoin and major altcoins recording all-time highs. Even the prudent investor threw caution to the wind and was raking in profits well and above the traditional 3–5%(If you really must know, we are talking up to 200% gains). The crypto-populace was seeing green. Believe me, Lamborghinis, and Ferraris were in the pipeline!
The average investor, on the other hand, gripped by FOMO, was now turning towards ICOs. The market was flooded with ICOs that were launching at what seemed an hourly basis. The general sentiment was, “The earning potential was real and Bitcoin had become too expensive.”
Fun fact: Next to Apple, ICOs were the most prominent ads on my YouTube in 2018. Do not invest right away. DYOR(Do You Own Research)
At ThroughBit, we have always said, “If you are buying at the peak of hype, you are already late”, as is true in any market. The inevitable bubble burst and the cryptocurrency market plummeted by over 80% leaving many with a distaste for cryptocurrencies while several governments across the world were singing the “I-told-you-so” hymns.
Clearly, the number of retail investors getting involved in cryptocurrencies were growing and so were the large corporations implementing blockchain technology. Regulators across the world could no longer brush aside the growing technology. In 2018, they had 3 key areas to address:-
- Mining activities(generation), Exchanges(distribution), and the trading of cryptocurrencies(market)
- ICOs and crowdfunding.
- Crypto-specific financial products like Bitcoin ETFs
In this potentially multi-part article, we highlight some of the key events surrounding cryptocurrency regulations that took place across major jurisdictions.
China(Illegal)
On December 6th, 2013 the first regulatory intervention on cryptocurrencies was released by the People’s Bank of China(PBOC) in a public statement. Over half a decade since, Chinese regulators have become increasingly severe in their stance on cryptocurrency activities. China, once accounting for about 90% of the world’s crypto transactions have since fallen to just 1% as of 2017. The plummet can be attributed to the PBoC’s joint announcement with the country’s leading regulatory bodies on September 4th, 2017 explicitly banning ICOs. Several cryptocurrency trading platforms that facilitate user-participation in these tokens were shut down following the announcement.
2018 began with speculations of another imminent ban after a leaked memo sent by China’s leading body responsible for Internet Financial Risks Remediation to the PBoC was leaked. The memo reportedly advised that Bitcoin miners should be instructed to make an “orderly exit” from the country. PBoC would later deny this rumour claiming that no such decision had been made but local reports suggested that the government may withdraw preferential tax and utility benefits available to these mining organizations.
On 22nd August 2018 in a stark measure, access to major exchanges such as Coinbase, Bitfinex, Binance, etc. was cut-off by the “Great Firewall of China”. The ban was following the identification of 124 trading platforms with an overseas IP address by the China National Fintech Risk Rectification Office(CNFRRO). The CNFRRO, a government agency, was authorized in 2016 to protect investors against financial risks involved in p2p and cryptocurrency trading activities. Two days after the incident the government issued a renewed high alert notice warning people to be wary of fraud blockchain entities. These entities work outside the law to raise money under the pretense of raising funds for blockchain-based cryptocurrency projects. The warning stated that these projects were not really based on blockchain projects but rather fraud pyramid schemes with false blockchain claims. The notice reiterated that the authorities would crack down on fraud and illegal ICOs.
While cryptocurrencies were being subjected to Draconian laws, arguably for the protection of the lay-investor, Blockchain was growing in popularity as a promising technology. On May 11th, 2018, the government announced an initiative to issue an independent monthly analysis of Crypto & Blockchain projects in association with the China Center for Information Industry Development (CCID) and Ministry of Industry and Information Technology(MIIT). The Chinese government remains confident that the new technology is one to watch out for and expect the initiative to provide an independent review for them to consider cryptocurrencies & blockchain projects that offer value. Cryptocurrency projects were taking solace in the fact that backed by valuable usability that could be proven, they could gain access to the largest market in the world. The CCID & MIIT released a Global Public Chain Assessment index initially placing Ethereum as the number one contender. On June 25th, an updated public blockchain assessment index placing EOS in front, just two weeks after the EOS mainnet went live. knocking Ethereum off the top spot.
Cryptocurrencies are the quintessence of decentralization and an ideological paradox to the existing politico-economic system of the country. The possibility of an open, frictionless circulation of value, threaten the strict capital controls set by the government and are presumably a predominant factor in the country’s attempt to cloak citizens from the global crypto space(akin to the infamous Google Ban in 2010).
The rate at which cryptocurrencies are fostering technological innovations across industries, and the eagerness of Chinese crypto traders to trade by all means necessary- VPNs and OTC platforms- could open a new chapter for cryptocurrencies in China. 2019 may very well be an important year for China and subsequently the global cryptocurrency market.
South Korea(Regulated)
One of the most promising markets for Blockchain technology in the world, South Korea accounted for over 10% of the global Bitcoin transactions at the end of 2017. The Korean Won (KRW) was reportedly second only to the US Dollar(USD) in terms of fiat currency used for trading virtual currencies. Despite being among the top economies to influence early cryptocurrency adoption and holding a high reputation for their technological line-up, Korean authorities have been unable to put forth a cohesive strategy on regulating cryptocurrencies.
Much of the regulatory actions pertaining to cryptocurrency picked steam at the end of 2017. In December 2017, rumors emerged that the government was proposing a ban on cryptocurrency trading in the country. The ban never materialized and authorities were quick to condemn the rumors as false. Cryptocurrency exchanges in the country were now preparing to offer Bitcoin Futures following the steps of Chicago Board Options Exchange(CBOE), the Chicago Mercantile Exchange(CME) in the US and Japan’s Tokyo Financial Exchange(TFX) that were laying foundations for offering futures contracts. Securities firms Shinhan Financial Investment Co. and eBest Investment & Securities Co. were quick to offer seminars on Bitcoin Futures for investors. On December 5th, just days before the first planned seminar, they were dealt a blow when Korea’s top financial regulator and watchdog, the Financial Services Commission(FSC) issued a directive banning securities firms from participating in futures contracts. The government, following an emergency meeting that was held on December 14th, released measures focusing on cryptocurrencies, that both exchanges and investors had to take note of.
The new year began on a shaky note, when the FSC chief said in an announcement on January 25th, 2018 that the government was considering an outright ban on virtual currency trading platforms or at the very least, the ones violating the laws. On January 30th, 2018, softening their stance, the government introduced a rule that allowed citizens to trade in cryptocurrency from a real-name bank account. In accordance with the law, trading platforms must have contracts concerning the cryptocurrency transaction set prior with the banks.
On 30th May 2018, the supreme court ruled that cryptocurrencies are assets with economic value. The ruling came following a verdict to confiscate 191 Bitcoin that was earned by the operator of an illegal pornographic website. This was the beginning of a positive outlook for cryptocurrencies in the country. In July 2018, a new draft was released reclassifying cryptocurrency exchanges “crypto asset exchange and brokerage” from “vendors” making them a regulated financial institution. A huge move that put South Korea back on the map of crypto-friendly countries, albeit under strict regulations. Following the move, The Blockchain Law Society was launched in August with a clear directive to implement a regulatory framework for blockchain technologies and the underlying cryptocurrencies.
On October 30th, 2018, FSC chairman, Choi Jong-Ku clarified that banks are cleared to work with trading platforms in the country and should face no concerns with regards to banking provisions upon ensuring apt AML safeguards and relevant KYC checks. UpBit became the 1st trading platform in the country to receive approval from KISA(Korean Internet & Security Act), on 27th November 2018. They were in praise of the exchange for the security protocols that were put into place. UpBit is now a government approved and compliant exchange and have obtained the aforementioned ISMS license.
South Korea has swiftly changed their stance from a looming outright ban to actively bringing about regulations to ensure continued growth and adoption of blockchain and cryptocurrencies in the country. 2019 could see the further improvements in regulations as South Korea looks to compete with the likes of US, and Japan, to grab a larger share of the crypto-ecosystem.
This is part one of a two-part series on crypto regulations across the world. Part 2 will be available on 12th January, stay tuned.
