Crypto Regulation Review:
Crypto Regulation Review:
- What can we expect from the Regulators globally?
How Digital Assets Make an Impact to The Business Perception
In order to dive deeper into discussion of this topic, firstly we need to understand what the digital assets are and the terminology behind it. Broadly characterizing the digital asset is a term that describes any property which is considered in a digital form. Hence, crypto properties are type of digital assets that utilize the technology in the wake of cryptocurrencies. To put this into simple words – all cryptocurrencies are crypto assets, all crypto assets are digital assets. Additional, digital holdings are assets issued and transferred using distributed ledger[1] or blockchain technology. They are often referred to as crypto asset, cryptocurrency, or digital token, among other terminology[2].
As a result, uncertainty appears from the inconsistent of the use of terminology and the lack of clear definitions which brought ambiguity between both market participants and supervising agencies. In particular, the terms “digital asset” and “crypto asset” appear to be used in various contexts with contradictory. Regulators in United States (hereinafter – U.S.) and globally were not prepared by the rapid population of cryptocurrency, hereof there were no protocols, no laws implemented to govern it. Therefore, the year 2017 was the most focal point on the global level to address the growing market interest in “digital assets”. Regulators, regulatory agencies, and government bodies have requested to provide greater clarity on the treatment of digital assets by issuing guidance and paper works to classify different types of “digital tokens” and provide some clarify in the market[3].
However, as long as it easily substitutes the paper format and becomes predominant instrument in current digital world, it also brings a confusion to market participants: whether it is safe environment and does it bring any value? Is the digital asset been traded as alternative investment funds? Has it been treated the same as stock, hence can it be easily traded and bring an asset to the person? Furthermore, who has the authority to determine the value of it or classify the subscription of it? In order to recognize and answer this question the main authority lies on the Central banks – running it, central banks mandates to ascertain what is digital and the application of it[4].
Although market participants use different terms to describe them, financial regulators have stated that— regardless of what they are called—financial activities, services, and market participants must adhere to applicable laws and regulations.
The Potentiality of the Market for Financial Crime
Hence, cyber currency or cryptocurrency like bitcoin, as a substitute of currency previously did not fall under regulatory definition of money, or what is defined as a legal tender. The platforms and virtual currency usually entered market due to anonymity and unregulated marketplace thus was very popular and easy approachable. Additionally, the negative impact of the market is that it offers the huge potential for the fraud due to anonymity – illicit funds can be easily converted into virtual currency, once it is converted it can be easily transferred to any destination globally and at the particular location again redeemed for a cash. Therefore, intervention of the regulators into this newly environment, in my opinion, is very crucial. It is the tremendous money involved and the future as far as we can see will be most likely digital, as European Commission already put importance of the legislation into place, the executive arm of the European Union (hereinafter – EU), has said that “the future of finance is digital” but that it’s important to mitigate “any potential risks.”, thus it must be regulated as well as to bring transparency and protection not only to any businesses to which it is exposed to, but also to put emphasis into consumer protection laws, also prevention of terrorism and illicit money circulation. The new plan will suggest that crypto-asset companies authorized by one of the 27 EU countries will be able to provide its services across all the other member states[5]. Therefore, the main purpose I believe is achieving long-term stability and building a stronger industry on this subject matter.
Legislative Perspectives from the Regulatory Bodies
As 2020 has been a crucial year for digital assets due to pandemic, the crypto asset and decentralized finance (DeFi) worlds continue to grow rapidly, described by a heady mix of innovation, risks, and regulatory challenges. Finally, and perhaps consequently, rarely a day goes by without a news item on the steady progression towards central-bank-issued-digital currencies (CBDCs)[6].
However, the development of a more coherent and comprehensive framework of legal and regulatory perspectives with regards to digital assets continues to be behind. In part, this is due to the challenge of merging conflicting perspectives between regulators, the regulated and the associated legal bodies across multiple jurisdictions regarding asset nature and functionality. Recent publications by the Financial Action Task Force (hereinafter – FATF), the Financial Stability Board (FSB), and the EU regulatory authorities – amongst many others – have helped build an evolving consensus on these issues. However, to reach a global consensus on the subject matter remains unresolved, and the application, of digital assets continues vary from jurisdiction to jurisdiction, exposed to every market to negotiate new rules between the market players and regulators. For example, we can inevitably see that the EU is one of the most stable economic blocs in the world. It has a vibrant financial sector. In additional to that the EU wants to be a leader in blockchain technology, becoming an innovator in blockchain and a home to significant platforms, applications, and companies[7].
USA v EU; Which Jurisdiction Implements the Robust Measures
If we look particularly to U.S. Jurisdictional Authorities, we have a debate taking place already within the same jurisdiction among 3 Regulatory Bodies – Treasury, OFAC, CFTC[8], they don’t agree on what digital asset is, whether the asset is a security or commodity[9]. For example, bitcoin is a different than any crypto asset, and each of them fall under different categories from the regulatory perspective.
However, many digital assets are not securities. In general, a security is “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”[10]
Therefore, various financial bodies like banks, asset management facilities, custodians, broker dealers, investment managers, all deferential entities, fall under different jurisdiction theoretically, or their activities of what they are doing in this area, potentially are subject to different regulators. Regulatory reach of digital assets is enormous, therefore, to reach a consensus will be particularly complicated.
Hence, the European market is far beyond U.S. and has develop significant legislations towards this. As if the regulators are not willing to make the environment more friendly and comfortable with the new technology and new market players, as China lost the market players, it will face the rapid decrease and the technology will choose more friendly environment to adhere to and which will offer their solutions.
Furthermore, the U.S. urged to pay attention into newly emerging business arrangements – FinCEN and OCC Regulation of Virtual Assets/Crypto assets, issued interpretive letters[11] which clarified of national banks and federal savings associations to provide cryptocurrency custody services for customers, as the OCC has jurisdiction to regulate these areas.
Consequently, Europe has proposed Markets in Crypto-Assets Regulation (MiCA). MiCA capture all crypto-assets not subject to other regulations such as the Electronic Money Regulations 2011 (EMR), the second Electronic Money Directive (EMD), or Markets in financial Instruments Directive (MiFID II). The first legislation on fund transfers where at some stage the money is moved electronically the legislation was adopted by the EU relevant legislation, the Funds Transfer Regulation (Regulation (EU) 2015/847 of the European Parliament and of the Council on information accompanying transfers of funds) in June 2015.
Regulatory Efforts Globally
On June 21, 2019, the FATF, a multi-national, inter-governmental body established in 1989 “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system,” issued its Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (hereinafter – VASP), virtual currency and virtual currency platforms.
Subsequently, in 2019 the FATF proposed the recommendation 15: Mitigating Risks from Virtual assets, the endorsement that all VASP should be licensed either registered, and any transfers of the funds over 1,000 would be registered. The introduction of the guidance put an emphasis for a Risk-Based approach to virtual asset service providers, virtual currency, and virtual currency platforms. Therefore, the FATF urges to pay attention to new emerging types of business, developed new products and business due to pandemic situation, all revise Recommendation 15 to explicitly clarify the definition on virtual currency reading as: “Virtual Asset” as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.
Hence, in 2019 the FATF formally adopted the proposals from 2018 guidance and incorporated them into FATF 40 recommendations specifically as an amendment to recommendation 16 on wire transfers (the Travel Rule). Therefore, all the member nations of the association of FATF will begin the procedure of establishing regulations aimed to put together the FATF recommendations practically in domestic jurisdictions.
Canada, Singapore, and Australia have also established framework for the digital asset management:
Published regulatory guidance in Canada related to trading platforms.
The monetary Authority of Singapore has been and early adopter with the enactment of the Payment Services Act of 2019 and has welcomed the crypto industry.
In Australia, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has implemented robust cryptocurrency exchange regulations.
Thus, to conclude from this, we can see the efforts from the regulatory bodies to prepare the relevant legislation to facilitate the businesses to operate in this ambitious industry. Moreover, there is a clear urgency for monitoring crypto: digital asset trading, preclearance, monitoring and certification of digital assets transactions. Although the digital market is trying to be more unregulated, it definitely requires regulation for AML purposes in order to prevent illicit money circulation. Regulators are willing to be more involved in this space as there is much money involved, disruptive, transformative, and it must be handled properly, therefore I believe we will see more robust legislation proposals in future.
[2] Board of the International Organization of Securities Commissions, Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms, May 2019, at https://www.iosco.org/library/pubdocs/pdf/ IOSCOPD627.pdf.
[3] 2020-ccaf-legal-regulatory-considerations-report.pdf (cam.ac.uk)
[4] Webinar Replay – Diving Into Crypto Regulation (mycomplianceoffice.com)
[5] The EU announces its first ever plan to regulate cryptocurrencies (cnbc.com)
[6] 2020-ccaf-legal-regulatory-considerations-report.pdf (cam.ac.uk)
[7] Blockchain Strategy | Shaping Europe’s digital future (europa.eu)
[8] Webinar: The FinCEN Travel Rule: A Deep Dive – Alessa (tier1fin.com)
[9] Who’s in charge? an overview of U.S. digital asset regulation | Reuters
[10] For more details, see SEC, Framework for “Investment Contract” Analysis of Digital Assets, April 3, 2019, at https://www.sec.gov/files/dlt-framework.pdf.
Inga Vaitkunskaite
Senior Compliance Officer