“What we don’t understand, we fear. What we fear, we judge as evil. What we judge as evil, we attempt to control. And what we cannot control…we attack” – Unknown
Cryptocurrencies offer the promise of a financial system free from a centralized authority and third party control. The idea of a cryptographically secure transactions that put the control of your assets in your hands is not a recent one; but it was fairly unexplored before the advent of bitcoin in 2009 (and even less popularly before ecash in 1983). However, the meteoric rise of crypto prices towards the end of 2017, followed by a sharp fall next year have renewed the global focus on these digital assets. Governments and financial authorities that were earlier dismissive of this “fad” are now having to sit up and take notice. And in apprehension of this new asset class that was born out of notions of crypto-anarchism, many official bodies have gone the downward spiral of fear, evil, control and attack. But as knowledge and awareness of cryptocurrencies gain ground, several forward-thinking nations and states have gone ahead with positive regulations as well.
[Legal status of bitcoin by country as on 4-Mar-2019 (source)]
The current landscape of cryptocurrency regulations could be divided on the lines of economic development. While cryptocurrencies are broadly legal (as digital assets) in the EU, United States, Australia and other developed nations like Singapore and Japan, their legality is a matter of debate in developing economies. The uncertainty regarding crypto regulations stems from the fact that cryptocurrencies can’t be classified as an investment contract defined by the Howey Test. Axpire advisor John Fenton says that there has to be a carte blanche standard across the crypto industry. It is hard to have a borderless technology adhere to bordered laws. While governments will always look towards protecting their citizens, crypto regulation has to have global acceptance.
Here’s a brief snapshot of the current legal framework for crypto in across major nations:
The United States has been grappling over the subject of how to deal with crypto as an asset class for a long time now. Regulations in the US cannot be looked at with a blanket view since some states have been more welcoming to crypto than others. The SEC, on its part, has been cautious and at times tough on crypto. However, a series of class action lawsuits and precedent-setting trials (to weed out scams) are slowly paving the way for more progressive regulations. Legal eagle Morvareed Salehpour says that the US is taking a measured approach in the right direction. Projects which are seeking to move to countries with seemingly more liberal crypto regulations don’t realize that many nations usually follow suit on US legal precedent.
China has effectively outlawed trading cryptocurrencies, while India has blocked banks from providing banking services to crypto firms (including exchanges) while not expressly outlawing crypto. Both nations have a blockchain-before-crypto stance. The issue in India has now come to the point where the Supreme Court has directed authorities to come up with clear regulations in 4 weeks. China, on its part, has expressed support for a global regulatory push.
Japan and South Korea have comparatively friendlier regulations when dealing with crypto. While Japan treats crypto as property and the FSA (Financial Services Agency) has given self-regulatory status to the industry, South Korea is still a bit lagging on this front. South Korea’s Financial Services Commission (FSC) has revealed that a number of crypto bills have recently been submitted to its National Assembly for consideration. These bills are aimed at protecting the rights of crypto owners and ensuring robustness and security of crypto transactions.
Singapore, Switzerland and Malta are the most progressive in terms of regulations, leading to many projects shifting base to these nations. Trading and exchanges are legal in these jurisdictions, and cryptocurrencies are considered as goods, assets or medium of exchange. As per John Fenton, Malta is going to be one of the forerunners with respect to regulation. “Malta will be the benchmark and every other country will follow”.
[Bitcoin ATM in Zug, Switzerland (source)]
Where do we go from here?
While the crypto space continues to see massive growth both in the scope of use-cases and technologies as well as the number of projects, regulations have not been able to keep pace. The Brookings Institution notes that the confusion around crypto has been complicated by different governments having divergent views. On top of this, as Morvareed Salehpour states, decentralized systems raise issues of jurisdiction, liability and enforcement. Our current legal framework is not in sync with a true public blockchain. So it is but natural that governments don't tend to favor truly decentralized blockchains. Private blockchains and centralized actors are more acceptable. But as a multitude of crypto-specific cases make their way up the courts, case law is starting to build up. And the case for truly decentralized systems is gaining ground.
Authorities the world over already appreciate the merits of blockchain and most agree that over-regulation could kill innovation. Therefore, a lot of regulatory focus has now shifted towards consumer protection, fighting fraud and stronger custodial solutions. In line with this, robust protocols have to be put in place by regulators. Just like equity traders don’t have to worry about their stocks being stolen, the same has to be ensured for this new kind of digital asset. Moreover, another recurring theme is the call for trans-national regulations. The European Banking Authority (EBA) already accepts that there is a need for “standardized regulations for cryptocurrency operations within the EU”.
As a result, these regulatory movements are now starting to affect technological trends as well. Consumer-focused regulations would lead many tokens/coins to be deemed as securities in the future. Consequently, one of the overarching trends for 2019 is the emergence of Security Token Offerings (or STOs), and projects like CoinBX are already looking to capitalize on this by building simpler on-ramps for conducting STOs while being fully compliant with current laws. It is expected that there will be more instances of technology mimicking regulatory movements.
In the longer run, we have always seen that law embraces innovation. No matter how long it takes. Legal precedents are already being set the world over in such cases as Blockvest, Bithumb, Bitcoininfo, and so on. It is only a matter of time before we start to see more level-headed regulations globally. An effectively regulated market leads to lesser instances of fraud and greater consumer protection, while at the same time encouraging FinTech innovation. And by the signs of it, we are moving firmly in that direction.
About the Authors:
Rohit Chatterjee is an Analog Design Engineer working at Texas Instruments. Abhijoy Sarkar is a banker-turned-entrepreneur. They are high school friends who lost contact years ago. They reunited over crypto in early 2018 and have been investing through mutual research and shared knowledge.
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