Crypto Regulation: Regulating the Unknown
The rise of blockchain and cryptocurrency has taken the financial world by storm. In 2017, various companies and financial firms raised capital through initial coin offerings(“ICO”). As cryptocurrency becomes more politically popular, world economic powers are faced with an important question: how do we regulate cryptocurrency? Currently, regulatory approaches vary from country to country. Outside of the core desire to remove anonymity and push adherence to tax laws, government actions have been anything but consistent. (see Element Group report). While the current cryptocurrency regulatory landscape is in flux, this article addresses recent trends and responses to the crypto explosion around the globe.
In the past month, Austria and South Korea have both been in the news regarding their approaches to cryptocurrency regulation. Austria’s Financial Market Authority proposed a “threshold dependent” prosecutorial requirement that would treat cryptocurrency like securities. (Markus Kasanmascheff, Cointelegraph). Similarly, South Korea revealed a regulation scheme that is rigid but more welcoming to cryptocurrency business in the country. (Jay Rosen, Crypto Disrupt). Specifically, South Korea imposed stricter due diligence requirements for cryptocurrency exchanges, and it placed an emphasis on spotting suspicious fund movements in and out of cryptocurrency exchanges and bank accounts. These two recent regulatory moves demonstrate the fluidity of cryptocurrency regulation around the world. Although regulatory approaches remain in flux, the methods world economic powers are deploying now will shape cryptocurrency regulation for years to come.
The eyes of world economies have been on financial regulators in the United States in anticipation of their approach to cryptocurrency regulation. (Element Group). Various approaches from the SEC, CFTC, and IRS have created an inconsistent federal message. In an attempt to crack down on fraudulent ICOs, the SEC recently subpoenaed firms it suspects are violating securities law. (Bloomberg). Driving the SEC’s crackdown are fears that many ICOs are raising money for businesses that don’t exist.
Another challenge for the United States is the conflicting reactions among the states. Some states[1]require businesses to register for licenses to transfer or transmit cryptocurrency, while others[2]have no such requirement. (Rob Daly, Markets Media). Additionally, a small number of states passed legislation legalizing cryptocurrency for taxation purposes. (Matthew North, CryptoSlate). Looking ahead, it’s hard to predict what the regulatory framework will look like in the United States, but there is no doubt financial regulators and Congress are starting to take a serious look at this new financial frontier. This year, Congress included cryptocurrency in its Annual Economic Report for the first time. (see 2018 House Joint Economic Report).
There is also little consistency in cryptocurrency regulation amongst other world economic powers. (see Element Group). China sent shockwaves through the cryptocurrency community when it implemented a blanket ban on all cryptocurrency trading and domestic exchanges in September 2017. (Lucinda Shen, Fortune). While industry leaders in cryptocurrency feared the Chinese blanket ban would devastate the industry, the market stabilized and many leaders are confident cryptocurrency will reenter the Chinese market by the end of 2018. Conversely, Japan recently announced plans to legalize ICOs, despite numerous cryptocurrency exchange scams in the past. (see Element Group). Russian President Vladimir Putin planned to implement cryptocurrency regulations in July 2018. (William Suberg, Cointelegraph). To date, Russia has been a haven for the cryptocurrency community. One of the proposed regulations would require coin issuers to provide proof that they possess at least 100 million rubles of authorized capital within a legally recognized national bank account. Another would require ICO initiators to possess valid accreditations for a minimum period of five years. These recent Russian ICO regulations are making Russian based ICO organizers watchful of Kremlin cryptocurrency action. (Shiraz Jagati, CryptoSlate). In the UK, the announcement of a UK Cryptocurrency taskforce demonstrated the Bank of England’s concern about digital assets. (JP Buntinx, NewsBTC). Although the Minister of Finance desires to reduce possibilities of illegalities and maintain transparency, the use of blockchain throughout the UK’s financial system remains strong. (see Element Group).
Predicting how certain nations will regulate cryptocurrency in the future is extremely difficult. But two common goals continue to be present for nearly all actors in the cryptocurrency space: (1) develop a better understanding of cryptocurrency, and (2) establish penalties for bad actors. (see Element Group). If cryptocurrency is going to be further legitimized in world economies, leaders and law makers need to understand how the technology operates and how they can prevent fraud from harming their constituencies. In the coming year, the rush to capture the value and potential of blockchain technology will be met with further attempts to rules and procedures. For now, regulation of cryptocurrency around the world remains inconsistent and unknown.
________________________________________________________
[1]New York, Connecticut, New Mexico, and Washington.
[2]Kansas, New Hampshire, and Texas.