On Jan. 23, the United Kingdom’s Financial Conduct Authority’s (FCA), the domestic financial regulator, released a 50-page-long consultation paper dubbed “Guidance on Cryptoassets.”
As the U.K. seems to be moving closer toward rolling out a definitive regulatory framework, it is time to reassess how other crypto markets, specifically the major ones, are dealing with cryptocurrencies on the juridical level.
“Guidance on Cryptoassets,” reviewed: How the U.K. is going to deal with virtual currencies
Given the tone of the new FCA paper, the U.K. government seems to be leaning toward a rather neutral approach for cryptocurrencies.
The primary goal of the document is to provide more regulatory clarity for crypto market participants. Specifically, the FCA aims to help them understand whether their digital assets of choice are within the regulatory perimeter, what regulations apply to their business and whether they need to be authorized with the agency.
In the paper, the regulator outlines various possible definitions of crypto assets and currently applicable U.K. laws. Specifically, the agency notes that crypto assets could be considered “Specified Investments” under the state’s Regulated Activities Order (RAO) or “Financial Instruments” regulated by the Markets in Financial Instruments Directive II. The regulatory body also mentions that such assets could be subject to E-Money Regulations or Payment Services Regulations.
The FCA’s consultation paper then breaks down cryptocurrencies into three potential categories: exchange tokens, security tokens and utility tokens.
Thus, as per the agency, exchange tokens are those “not issued or backed by any central authority and are intended and designed to be used as a means of exchange.” The FCA cited the example of Bitcoin (BTC) and Litecoin (LTC) in the context of that particular type of digital asset, adding that exchange tokens are usually decentralized. Consequently, the regulator adds, such tokens can be used for the buying and selling of goods and services without the need for conventional intermediaries, such as banks.
Security tokens, in turn, are assets that “are the same as or akin to traditional instruments like shares, debentures or units in a collective investment scheme.” The FCA adds that such tokens likely fall under RAO and are hence “within the perimeter” of the watchdog’s purview. The FCA avoided mentioning specific examples of such security tokens, but nonetheless outlined a more abstract example:
“Firm CD, incorporated in the UK, has created a social trading platform, called the CD Platform, for users to easily exchange fiat currencies for exchange tokens. The firm issues ‘CD Tokens’ which are exchanged for fiat funds and these tokens are used to purchase other exchange tokens.”
In this scenario, the FCA writes, CD Tokens might be categorized as security tokens, as they “confer on the holder a right of ownership of the CD Platform.”
Finally, coins referred to as utility tokens are those that give users access to a product, but do not grant the same rights as security tokens — and hence are not covered by the regulatory regime, unless they can be classified as e-money by definition.
The FCA cites data previously obtained by the U.K. Cryptoassets Taskforce, noting that the country accommodates less than 15 crypto spot exchanges. Combined, they appear to have a daily trading volume of about $200 million — accounting for approximately 1 percent of the daily global trade in cryptocurrencies. Moreover, there are 56 projects in the U.K. that have held initial coin offerings (ICOs), which is less than 5 percent of projects globally. That implies that the domestic crypto market is still relatively small.
However, despite the modest size of the U.K.’s crypto industry, the local regulators have been intensifying their scrutiny: In December last year, the FCA revealed that it is investigating 18 companies over cryptocurrency use, while the U.K. tax collection service issued its first detailed tax legislation for private cryptocurrency holders. As for the FCA consultation paper, the agency is asking the public to weight in on the document and submit comments before April 5. The finalized version of the document will reportedly be presented by summer 2019.
Therefore, the U.K. might soon join the list of countries that employ a definite regulatory approach toward cryptocurrencies. Some of those players, along with the ways in which they define digital assets, will be discussed below.
Status of cryptocurrencies: legally-accepted means of payment
Japan is one of the world’s largest markets for cryptocurrencies. According to the data collected by the Financial Services Agency (FSA), the chief domestic financial regulator, the country has about 3.5 million crypto traders who conduct annual transactions to the amount of more than $97 billion. The majority of them are reportedly businessmen around the age of 30. Moreover, domestic reports show that around 14 percent оf country’s young male workforce has invested in cryptocurrencies.
Given the significant size of the Japanese crypto market, the FSA has been notably active there. As a result of its politics, the domestic market has gained the reputation of being one of the most compliant and regulation-oriented.
Also, Japan is one of the first countries to legally recognize Bitcoin. Thus, since May 2016, the cryptocurrency, along with other altcoins, can be used as a legally accepted means of payment in the country. However, cryptocurrencies are still not defined as legal tender in Japan. In April 2017, the local Payment Services Act came into force: The document confirmed cryptocurrencies’ role as a form of payment and outlined further regulatory measures of local crypto exchanges and ICOs.
In December 2018, the FSA decided to place Bitcoin and other cryptocurrencies under a single category dubbed “crypto-assets,” according to reports from local media. The government was allegedly worried that, because cryptocurrencies were called “virtual currencies,” traders were mislead into thinking that they were purchasing legal tender recognized by the government.
Status of cryptocurrencies: not recognized, banned for trading
China used to be an extremely significant player in the crypto market, hosting a substantial share of Bitcoin miners (in 2017, it was estimated that 50 to 70 percent of Bitcoin mining took place in the country) and Bitcoin trading volume. However, since the government's major crackdown on local exchanges and ICOs in September 2017, both figures have been significantly downplayed. Nevertheless, China has not abandoned crypto altogether and moved on to become a strictly blockchain power.
Thus, since the wave of regulatory repression took place, people in China can hold cryptocurrencies, but cannot legally exchange them for fiat money. According to the local government, domestic regulators do not recognize cryptocurrencies as legal tender or as a tool for retail payments, and the Chinese banking system is not accepting any cryptocurrencies.
Status of cryptocurrencies: varied, depends on the agency
In the U.S. Congress holds supreme power over federal regulatory agencies, such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), discharging them to comply with the laws it issues.
However, Congress has remained silent on the matter of regulating and defining cryptocurrencies. Meanwhile, different regulatory agencies have taken the matter into their hands, with each regulatory body defining cryptocurrencies in its own way.
The SEC, the body that oversees securities transactions, mostly considers crypto as securities. According to the 70-year-old Howey Test, which the SEC applies to determine the purview of its jurisdiction, a security involves the investment of money in a common enterprise, in which the investor expects profits primarily from others' efforts. Nonetheless, the SEC has ruled that Ethereum (ETH) and Bitcoin are not securities, meaning that the assets’ ICOs won’t be reassessed by the regulator, which has been shutting down “unregistered securities” during its sweeping probe.
The CFTC, the agency that controls commodity derivatives transactions, claims that tokens are commodities. Basically, in their view, Bitcoin is closer to gold than to conventional currencies or securities, as it is not backed by the government and does not have a liability attached to it.
The Financial Crimes Enforcement Network (FinCen), the bureau that has full authority for Know Your Customer (KYC) and Anti-Money Laundering (AML) matters, considers tokens to be money. In their view, ICO sales are subject to the money transmitter rules under the Bank Secrecy Act, and are therefore required to register with the government, collect information about their customers, and report any suspicious financial activities.
The Internal Revenue Service (IRS), in turn, believes that cryptocurrencies are not currencies, but properties, meaning that when cryptocurrencies are sold for a profit, a capital gains tax will be levied.
However, the complex supervisory situation in the U.S. might change in the future. In late December 2018, two congressmen introduced a bipartisan bill titled “Token Taxonomy Act,” aiming to prevent over-regulation in the domestic cryptocurrency space. Specifically, the paper offers more clarity in regard to ICO registration and taxation policy.
Status of cryptocurrencies: private money
Cryptocurrencies are not legal tender in Germany, but they have been recognized as “private money” by the German Finance Ministry since 2013. Consequently, any profit made through trading, mining or exchanging Bitcoin or altcoins is subject to a capital gains tax. However, according the German Income Tax Act, if the assets (cryptos) are held for more than one year, they become tax exempt.
Crypto seems to be relatively popular among young people in Germany. According to a November poll conducted by the German Consumer Centers of Hesse and Saxony, more than a quarter of Germans aged 18 to 29 are interested in buying digital assets.
Meanwhile, the German Federal Financial Supervisory Authority (BaFin) has been maintaining a rather aggressive stance toward ICOs, reporting on unauthorized offerings and warning private investors to “keep away from such things.” The agency has also called for international regulations in the sector.
Status of cryptocurrencies: properties
Home to the famous Crypto Valley located in Zug, Switzerland is renowned for its friendly approach toward crypto-related technologies. Just recently, major global Bitcoin wallet Xapo announced it will relocate key business operations from Hong Kong to Switzerland, citing “opaque jurisdiction.”
In Switzerland, cryptocurrencies constitute properties. According to a 2014 report issued by Federal Council, the Swiss government classifies cryptocurrency as “virtual currencies,” or, more specifically, as "digital representation of a value which can be traded on the Internet but not accepted as legal tender anywhere.”
Status of cryptocurrencies: not defined yet
South Korea has been spearheading the crypto industry since the 2017 investor boom. Specifically, in July 2017, the local exchange market was processing over 14 percent of global Bitcoin trades, being the third-largest market after the U.S. and Japan. Soon, the South Korean crypto industry was hit with a Chinese-like blanket ban on ICOs, performed by the local financial regulator, which was lifted later in May 2018. Meanwhile, the country has been advancing on the fintech field, steadily becoming an international blockchain hub.
While there’s been a lot regulatory uncertainty along the way, it might not be the case in the near future. In late December, as many as six bills to regulate the crypto industry were introduced by local lawmakers. Specifically, the proposed legislation aims to establish more protection for private investors and deal with the lack of “definition for virtual currencies and regulations for virtual currency transactions in the current law,” among other things.
Status of cryptocurrencies: digital medium of exchange, unit of account, store of value
Malta is famously called the blockchain island, where several foreign cryptocurrency exchanges, including OKex, Binance and BitBay have set up their operations due to the development of a crypto-friendly space.
In July 2018, the local parliament approved and enacted three bills on distributed ledger technology (DLT): the Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act and the Virtual Financial Asset Act.
Announcing the changes on Twitter, Silvio Schembri, the junior minister for financial services, digital economy and innovation within the Office of the Prime Minister of Malta, claimed that the country became “the first world jurisdiction to provide legal certainty to this space.”
As per the Virtual Financial Asset Act, cryptocurrencies are officially referred to as virtual financial assets (VFA), possibly to avoid the stigma that might be attached to the word “cryptocurrencies”: For instance, ICOs have been named initial VFA offerings, while crypto exchanges have become VFA exchanges.
More specifically, VFA stands for "any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value," which is, however, "not electronic money, a financial instrument, or a virtual token." The use of virtual tokens is allowed only on “the DLT platform on which it was issued,” while the redemption for funds is available only “on such platform directly by the issuer of such DLT asset.”
Status of cryptocurrencies: securities
Recently, Malaysia became one of the latest countries to roll out regulatory policy in regard to crypto. Starting from Jan. 15, cryptocurrencies are now classified as securities there, which means they are under the purview of the Malaysian Securities Commission. Crypto exchanges or ICOs that continue to operate without the watchdog’s approval could face a 10-year jail sentence and up to $2.4 million in fines.
Nevertheless, the changes came in with a silver lining: According to Finance Minister Lim Guan Eng, the Malaysian government sees the potential of cryptocurrencies and blockchain to boost the domestic economy:
“The Ministry of Finance views digital assets, as well as its underlying blockchain technologies, as having the potential to bring about innovation in both old and new industries. In particular, we believe digital assets have a role to play as an alternative fundraising avenue for entrepreneurs and new businesses, and an alternate asset class for investors.”
Status of cryptocurrencies: not legal tender, unregulated
Singapore is a booming market for crypto: Close to the end of 2018, both South Korea’s largest crypto exchange, Upbit, and major Chinese player Binance announced their expansion into the local market.
Meanwhile, in November, the Monetary Authority of Singapore (MAS) broadened the existing regulatory regime to bring certain cryptocurrencies under its jurisdiction. Thus, the central bank introduced a mandatory licensing regime for payment service providers, which are now required to apply for one of three licenses based on the nature and scale of their crypto activities.
Previously, however, the MAS stressed that cryptocurrencies are not legal tender in Singapore, and that the agency does not regulate them.
Status of cryptocurrencies: not yet regulated
On Jan. 23, an Italian Senate committee approved an amendment on the blockchain industry in what seems to be the first regulatory move of this kind for the country, putting Italy on the map of blockchain-oriented countries.
The amendment, dubbed “Decreto semplificazioni,” provides basic industry terms, such as distributed ledger technology (DLT)-based technologies and smart contract definitions, according to the document that has been published on the Senate’s website.
The document also states that a blockchain-powered digital data record will enable a legal validation of documents at the time of registration.
The decree now requires further approval from the Italian parliament — one from the Chamber of Deputies and another from the Senate of the Republic.
As for cryptocurrencies per se, there is no established regulation in Italy, yet. Nevertheless, the country’s Treasury Department of the Ministry of Economy and Finance had been working on a bill that aims to classify the use of crypto in Italy. Interestingly, the decree was specifically set to define how and when “service providers related to the use of digital currency” should report their activities to the government, which implies regulation on the tougher side.