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In our previous piece we explained why we think a fully regulated crypto market is not only necessary, but inevitable. We think this view is becoming increasingly commonplace, but exactly how we regulate is still hotly contested.
Below we outline the current state of play, covering approaches from all over the world and their strengths and weaknesses.
Today, most established regulators have some kind of blockchain strategy in place. The strategy varies, from a wait-and-see policy, all the way to outright banning it. Differences in policy often reflect differences in national attitude towards what the advantages and potential drawbacks of cryptoassets are in terms of the more general attitude of the jurisdiction towards how, and if, behaviour should be controlled.
Smaller nations like Gibraltar, Malta, the UAE, Estonia and Lithuania have promoted their Crypto-friendliness with various degrees of success, and often these smaller nations will be at the forefront in publicly embracing the new business models built on the blockchain technology. The issue for these jurisdictions is balancing a “friendly” attitude towards new technology with the need to show that they have the same credibility as the larger jurisdictions in terms of stopping bad actors. Also, being vocal about a blockchain strategy isn’t necessarily the same as being successful with the strategy. Smaller nations seldom have the opportunity to take a lead on such challenging topics.
So if we look beyond the smaller nations, and look at nations that actually can lead by example, we start seeing a more streamlined and cautious approach. Often starting off with a period of registration of your crypto business activity, which then leads to a period of licensing and then a traditional governance framework, like any other regulated business.
These three steps are often met by scrutiny by the blockchain society as well as the regulators. Both parties use the media very efficiently to voice their concern - and stand their ground. In the UK we saw the FCA very publicly scrutinizing the lack of AML understanding within the crypto industry as a whole, but at the same time inviting the various players to register and apply for a license. A tactical carrot and a stick approach.
From sticks to olive branches
In Turkey, another big market for cryptocurrencies, we saw the media making big (negative) headlines about (smaller) crypto exchanges going bust, stressing the impact on society. Then the regulator came in with a heavy hand, banning certain activities of the exchanges as well as the activities of the payment companies providing the fiat rails. The heavy handed approach was almost immediately followed up with the regulator holding out an olive branch, announcing that regulations were on their way, and outlining certain minimum expectations on the code of conduct from the players that wanted to stay in business.
In the US, the landscape is more challenging. Both because of the various States’ own regulatory directions, but also because at the federal level there are several regulatory bodies that have overlapping responsibilities. Questions such as whether a cryptoasset should be defined as a utility token vs a security token can change the regulatory landscape completely, and the distinction between these two types of cryptoassets are far from clear. To make it even more complex, the definitions used vary from one regulatory body to another. The Securities and Exchange Commission (SEC) has been trying to take a lead, and basically making sure that its presence is both heard and acknowledged by taking responsibility for the regulation of cryptoassets. However Bitcoin and Ethereum have previously been classified as commodities, meaning they might fall under the authority of the Commodity Futures Trading Commision (CFTC) and not the SEC.
The ongoing dispute with Ripple and vocal dispute with Coinbase are just two examples of high profile cases where the US regulators are making their presence felt. Furthermore, the situation has been made more challenging by last minute proposed additions to President Biden’s infrastructure bill that aim to tax crypto, which were rejected as ill conceived by the industry.
Larger nations embracing the “crypto friendly” approach
Singapore has, similar to the UK, a tradition of engaging with its target audience and adapt to the changing market conditions. Its regulator, the Monetary Authority of Singapore, has embraced blockchain and cryptocurrencies for some time. Although it is only just granting its first full crypto licences to exchanges, it has provided many exemptions that have lured cryptoasset businesses into the jurisdiction. Furthermore, the fact that Singapore has no capital gains tax makes it even more appealing to anyone investing in crypto and expecting to see returns from it.
In Europe, Switzerland stands out as having a highly guarded regulator that is well known to adapt to changing market conditions. As banking and financial services are one of the key industries in Switzerland, the Swiss regulator wants to understand, adopt and regulate any activity that can challenge traditional lines of business.
The low tax Canton of Zug has already been dubbed Crypto Valley because of its attempts to woo investors and entrepreneurs. Switzerland also rose to prominence during the Initial Coin Offering (ICO) boom of 2017, when its regulators stated that coins being issued would not be classed as securities as long as they had some utility within their related network. Even though there are not many crypto businesses operating out of Switzerland, the intent of the regulator of being “crypto friendly” will undoubtedly secure Switzerland a prominent role as a jurisdiction that will be at the forefront of the blockchain evolution.
Whilst the UK, Switzerland and Singapore are signaling to crypto companies that they are willing to engage and welcome cryptoasset firms, as long as they comply with regulatory expectations, the situation in China is trickier.
China’s conservatism
In China policy seems to have started what resembles a ‘don’t ask, don’t tell’ policy. This gradually turned into various levels of bans, but with low enforcement of the bans, to then gradually increasing the enforcement of those bans. However, the People's Bank of China (PBoC) has been very vocal about their Central Bank Digital Currency (CBDC), their take on traditional cryptoasset. The first round of “China bans crypto” news came in 2013, when banks were prohibited from processing transactions. This was followed in 2017 by a ban on investing in ICOs and then a ban on all Bitcoin mining earlier this year.
This conservative approach is particularly interesting knowing that a lot of small and medium sized businesses in China base their international trade on some level of cryptoasset involvement. When goods and services are being sold to the Middle East, Africa and LATAM, it is more than likely that the settlement has a leg that involves stablecoins or even bitcoin.
Speaking about digital currencies, there is no doubt the Chinese government is considering their role, potentially to reduce China’s dependence on the traditional USD. So one can expect a rapid transition to usage of a Chinese central bank issued digital currency once it is launched. And it will be interesting to see how the exchange between their state-issued digital currency and other non-state issued currencies will play out.
We are clearly far from global agreement when it comes to crypto regulation, but the fact that so many countries are at least attempting to find answers to these questions (even if their current approaches are more conservative than many would like) is a good sign.
In our final piece in this series, we will outline what we believe are the next steps forward in bridging the gaps in regulatory approaches and why collaboration and education will be so key to crypto’s growth.
By Dr. Ozan Özerk, Founder of OpenPayd and James Burnie, Financial Services Regulation and FinTech Partner at gunnercooke.