Crypto-Currency Regulations in the US, EU & Asia: A Comparative Approach.
As virtual currency trading platforms are becoming more popular worldwide, there is a call for global regulation. The trend appears to be that nations around the world are slowly beginning to accept virtual currency trading and mirroring their legislations to this effect. In particular, the United States, Malta, Cyprus, Japan, and Singapore have issued regulations and guidelines on how to treat cryptocurrencies (which is a type of virtual currency) and whether or not licenses are required for exchanges consisting of trading virtual currencies.
Under U.S. law, cryptocurrencies are regulated as both currencies and securities. Within the U.S., there are both Federal and State laws to consider for securities regulations (the latter being "Blue Sky laws"). Many U.S. states have already issued their own laws regulating blockchain and cryptocurrencies. For example, Arizona passed the Arizona House Bill 2417 in 2017, regulating blockchain and smart contracts. In addition, on a Federal level, the Uniform Law Commission drafted the Uniform Regulation of Virtual-Currency Business Act (URVCBA) on October 9, 2017. The URVCBA serves as a guidance to the state regulators in passing regulations. More specifically, the URVCBA is a statutory structure that addresses "virtual currency business activity" which encompasses:
the exchange of virtual currencies for cash, bank deposits, or other virtual currencies; the transfer from one customer to another person of virtual currencies; or certain custodial or fiduciary services in which the property or assets under the custodian's control or under management include property or assets recognized as "virtual currency."
This includes cryptocurrencies. In the US, regulations may apply to cryptocurrencies depending on how the cryptocurrency functions in the market. For example, if it operates as a fiat currency then it may fall under the regulations of the Bank Secrecy Act and FinCEN is the enforcing agency. If a particular cryptocurrency operates as a security it would fall under the ambit of the Securities Exchange Commission and FINRA. The primary securities legislation is the Securities Act of 1933.
Since 2015, the CFTC ("Commodity Futures Trading Commission") has been regulating bitcoins as a commodity. As such, bitcoins fall under the ambit of the Commodity Exchange Act. On October 17, 2017, the CFTC issued a Primer on Virtual Currencies which states that there is no inconsistency between the SEC's position that some virtual currencies can be securities and the CFTC's position that virtual tokens may be commodities or derivatives contracts depending on the facts and circumstances. They add: "The CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations."
Mirroring the American CFTC regulations, the E.U. has issued an Advice for its Member States through its financial regulatory agency, ESMA (European Securities & Market Authority). On January 9, 2019, the European Securities and Markets Authority (ESMA) published its Advice to the European Institutions regarding, inter alia, crypto-assets. There is an ongoing global conversation on the nature of virtual currencies and whether or not they qualify as securities. ESMA's Advice is essentially opening up a dialogue between the EU Member States to adopt regulations for crypto-assets. Some crypto-assets, e.g. those with profit rights attached, may qualify as transferable securities or other types of MiFID financial instruments. However, Member States have defined the term "financial instrument" differently, hence creating challenges to both the regulation and the supervision of crypto-assets.
In October 2018, the Financial Action Task Force (FATF) adopted changes to its Recommendations and Glossary, on items such as "virtual assets" and "virtual asset service providers", to explicitly clarify that the Recommendations apply in the case of financial activities involving virtual assets. The FATF Recommendations also set out comprehensive requirements for combating money laundering and terrorist financing, including those that make use of virtual assets.
Although guidelines are provided on a macro level in the E.U. (through regulatory bodies such as ESMA), in the E.U., virtual currency trading regulations are left to the individual Member States to devise. In Cyprus, for example, cryptocurrency trading is presently unregulated. Other EU Member States, such as Malta, have issued regulations to regulate cryptocurrency trading. There is also the establishment of Electronic Money Institutions ("EMI licenses"), which allows for cryptocurrency trading. Member States such as Estonia have been issuing such licenses and are allowing for cryptocurrency trading. Given the terminology of "money" versus "currency" (which is very different) and allowing for cryptocurrency trading under such licenses, it is evident that we are beginning to see an analytical trend much like in the U.S. - in which the manner of operation of the cryptocurrency itself is being taken into consideration to determine which regulations, if any, apply. If cryptocurrencies are considered "money" or even operate as fiat currency then we may very well see such trading come within the ambit of banking regulations with the E.U.
Since Asia is a vast continent within which to examine the virtual currency legislation of each nation, we will consider only Japan and Singapore for the purposes of this article. Interestingly, Japan was the first country to adopt a national system to regulate cryptocurrency trading. It is therefore no wonder why Japan is the biggest market for bitcoin, which is one of over a thousand types of virtual currencies. In Japan, exchanges are legal if they are registered with the Japanese Financial Services Agency ("FSA"). Moreover, Japan has implemented amendments to the Payment Services Act to now require cryptocurrency exchanges to be registered with the FSA in order to operate. Given the popularity of cryptocurrency exchanges, the Japanese Virtual Currency Exchange Association ("JVCEA") was established to provide advice to unlicensed exchanges and promote regulatory compliance. The aim of these implementations is to promote a safer environment with which to trade cryptocurrencies and help curb financial crimes.
Singapore takes a "soft approach" to cryptocurrency trading. Although cryptocurrencies are not considered legal tender in Singapore, they may be legally and freely traded on exchanges without the need for registration of these exchanges. In January 2018, the Monetary Authority of Singapore ("MAS") issued a press release warning the public of the risks of crypto speculation. The MAS FinTech chief, Sopnendu Mohanty, expressed that there is a need for further regulation to help ensure that cryptocurrencies are not used for financial crimes. To this effect Deputy Prime Minister Tharman Shanmugaratnam stated that cryptocurrencies are subject to the same AML and CFT measures as fiat currencies. This is also in line with the U.S. and E.U. regulations.
The common thread amongst all nations leaning towards regulation of virtual currencies is the anonymous and decentralized nature of virtual currencies and the need to regulate its exchange in order to protect the public from money laundering and other financial crimes. If one were to project where the regulations are headed in the future, one could see that more and more countries will be implementing virtual currency regulations and also regulations to tax the income derived from such trades. Already, in the more progressively regulated countries (such as the U.S. and Japan), tax regulations have been implemented with regards to profits gained from cryptocurrency trading. This is in part to due the fact that cryptocurrencies are, under certain circumstances, seen as securities. As cryptocurrency trading becomes more prevalent and more regulated globally, this may open the door to more Initial Coin Offerings. Although such regulations may still be deemed just the beginning, it is easy to see how more countries will follow suit in passing very similar legislation to accommodate this ever-growing field.
*As published in the New York State Bar Association Journal.
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