Bitcoin’s boom has spawned more than just a digital currency revolution. Companies across the globe have explored the potential of blockchain technology in a range of different spheres, including cars, phones, and a multitude of disruptive alternatives in banking, government and as well as shipping.
Also, it is not only the small startups that are trying to push blockchain innovation, but rather conglomerates as big as Amazon, Alibaba and Microsoft. However, these companies are still trying to negotiate an ever-expanding regulatory framework that is growing at different rates across different states.
Many different companies began springing up within the cryptocurrency ecosystem, usually attached to a capital raising ICO, which left many regulators wondering how to control this decentralized, crowd-funded form of capital raising.
From the SEC to the Chinese government's hard clampdown on ICOs to Malta and Switzerland competing to be the premier destination for fintech and blockchain, different nations have taken widely different views on how to regulate, quash or support blockchain startups.
Thus, because of the global nature of blockchain products, it is unnecessary to worry about a regional customer, but rather it is important for blockchain projects to examine the legislation, the atmosphere and approach from the community, fees, and a myriad of other factors in different countries to see which will aid them in realizing their outcomes.
The different approaches by governments and regulators have created what has sometimes been referred to as ‘cryptocurrency havens’, as nations look to try to attract fintech and blockchain projects to their shores in the hope of using a potential financial revolution to boost their own agendas.
On the flipside, there are countries that are trying to discourage and scare away of as many blockchain projects as they can, and it has been successful in many cases. One of the most notable examples is China, where the ban of ICOs and access to exchanges has forced these startups and digital currency exchanges to go elsewhere.
For example, one of the globe’s biggest exchanges, Huobi, which was forced to leave China in September last year because of legislative changes. Since then, the exchange has looked to open offices in a number of other different locations, such as Australia, the United States, Singapore, South Korea, the United Kingdom and others.
While not all of these countries are actively supportive of cryptocurrencies, they are at least tolerant and are looking to set their rules to make it easy for companies to follow the legislation.
Importance of a regulatory framework
While regulations are often frowned upon by those who have spent some time in the blockchain space, they are a necessary part of the evolution of the technology. Some companies have gone from having free rein — building their company up with no restrictions — only for the legislature to catch up.
However, some companies are appreciative of building their blockchain company in a space that is regulated and has easily defined boundaries to follow.
One of the first countries to begin building a regulatory framework for blockchain projects — and a crypto-friendly framework — was Switzerland.
Switzerland - Crypto Valley
The U.S. may have Silicon Valley, but Switzerland wants to have the 2.0 version — Crypto Valley — in the small town of Zug. However, even before Zug started turning its full attention to cryptocurrency, Switzerland was working toward becoming a fintech sandbox.
In July last year, Switzerland put in place options for companies that accumulated around $1 million in third-party funds to test out their innovative financial technology ideas without the usual regulation surrounding finance and digital currency.
They also said that banking licenses would be re-evaluated in order to allow these companies earning less than $1 million to obtain licenses for depositing and allowing crowdfunding donations to be withdrawn over a period of 60 days rather than the previous seven days.
In the year since Switzerland started making life easier for blockchain and fintech companies, there has been a big boom in these innovative projects.
Stephen Meyer, a legal professional and Ph.D. Candidate in Blockchain & Law living in Zurich Switzerland, has seen both the advantages and disadvantages of launching a blockchain project in the small European nation:
“Switzerland has a very clear regulatory situation based on the Swiss financial authority FINMA’s ICO Guidance of February 2018. Also, one of the major benefits is the possibility of receiving an individual pre-ruling by FINMA. Every crypto team can describe its project, send it to FINMA and will usually receive within 4-8 weeks a clear statement whether regulatory provisions are applicable.
“Instead of creating new blockchain-related legislation, which — as with every new legislation — leads to uncertainty regarding the specific application, Switzerland applies the existing regulatory framework, but with a flexible and principle-based approach.”
ICOs are also nothing new in Switzerland, as they have seen the Ethereum Token Generation Event back in 2014 and have been gaining experience ever since.
“FINMA and the tax authorities have longstanding experience with crypto projects since the launch of the Ethereum TGE in 2014. In the meanwhile, they have handled a substantial number of ICO as well as more and more other crypto projects as exchanges and funds. Therefore, as a crypto team, you do not have to explain blockchain technology to these authorities, and they usually are up-do-date,” said Meyer.
Valentin Botteron, Swiss attorney currently visiting scholar at Columbia Law School in New York, completing a Ph.D. in Antitrust as well as research in blockchain and smart contract-related legal matters. He had similarly positive things to say about Switzerland’s approach:
“Switzerland has a very tech-friendly approach on regulating the fintech companies, ICOs and cryptocurrencies. The Government has already stated several times that it aims to make Switzerland a regulatory-friendly place for blockchain companies. Switzerland hosts several blockchain companies and associations who advocates for a healthy regulation of the technology.
“The parliament is well aware of the phenomenon and urges the government not to miss the opportunity to be amongst the first countries to attract blockchain-related actors. The political stability of Switzerland makes it an ideal place to develop business in general. Besides the economic actors, several scholars conduct research in economics and law about blockchain in Swiss universities.”
With a look at what Switzerland is doing, and then seeing how other nations are trying to replicate and advance it, there is this feeling of competition. As Botteron states, Switzerland’s parliament is pushing the government to be the leader in blockchain growth.
The biggest competition to Switzerland in terms of attracting blockchain companies is probably the small Mediterranean island of Malta.
A look at the cryptocurrency headlines surrounding Malta shows some impressive growth for blockchain and fintech on the island. The biggest vindicator was probably when Binance, the world’s biggest cryptocurrency exchange, decided to open an office in Malta due to building regulatory pressure in Japan.
However, since then, there has been an impressive level of growth for ICOs and blockchain projects.
The Maltese government put forward a legal framework for distributed ledger technology (DLT) as of March 12, which included three crypto-positive bills. These include: Malta Digital Innovation Authority (MDIA) Act, Innovative Technology Arrangements and Services (ITAS) Act, and the Virtual Currencies (VC) Act.
The result of these positive pieces of legislation has seen a flood of interest in Malta as a premier destination for blockchain and ICOs.
Other exchanges — including OKEx — have moved there, as well as Polish exchange BitBay. The positive regulations for virtual currencies are clearly being gratefully accepted, but even the smaller blockchain projects are cashing in too.
Jonathan Galea, a graduated lawyer in Malta, president of Bitmalta and managing director at Blockchain Advisory, spoke to Cointelegraph about what makes Malta different from other countries.
“What distinguishes Malta from the rest of other jurisdictions when it comes to blockchain and cryptocurrencies — put simply — is the fact that the government, the opposition and all regulatory authorities are pulling the same rope together, chasing one single vision: making Malta one of the leading countries in the space. That, coupled with the ease of accessibility to top officials in relevant positions that are there to promote and aid business activities rather than to hinder it, makes Malta an attractive destination for all blockchain-related matters.
“Of course, one cannot not mention the regulatory framework that has been devised in the span of less than two years, following various consultations with various important stakeholders in the crypto sphere — both locally and internationally. The creation of the first ad-hoc, comprehensive framework in the world, catering for the legal, technical and financial aspects of blockchain and crypto-related activities, grants absolute legal certainty and peace of mind to those wishing to operate within a completely regulated ecosphere — which, at the same time, promotes rather than restricts business growth.”
Cryptoindex is such a blockchain project that has benefited from the Maltese regulatory stance, as CEO VJ Angelo explains just why it is important to get the financial regulations right in this space.
“For a company like ours,” Angelo told Cointelegraph. “We chose Malta as its location for the business headquarters because it became an early incubator for the crypto industry and, as a result, has been looking at its long-term impacts long before most other regions.
“In passing the Virtual Financial Assets Act in June of this year and creating the Fittest for classification of the various cryptocurrencies and tokens, the Malta Financial Services Authority took the lead in Europe. A great deal of the Act has been mapped to MiFID II, meaning the Europe-wide regulations have been carefully considered in their new laws. While it does not entirely solve the concerns of a different approach by other regulators in Europe and beyond, the use of existing regulation does mitigate some of the risk.
“The Maltese approach has been very much one of fostering all the opportunities for growth and development in the crypto market, while putting protections in place to cover ICO participants and ensure a dramatic reduction in the stories of fraud and scams that have prevented many new adopters of crypto.”
While both Malta and Switzerland are striving to make the most open and inviting environment for blockchain projects, there are other nations that realize the potential of the technology, but have strict laws governing finance and money, as well as securities.
Freedom, liberty and securities in the U.S.
The U.S. is a major player in both the cryptocurrency and blockchain ecosystems, with the majority of ICO projects from the last 18 months originating in the U.S. — 16 percent of all global ICOs.
However, the U.S. has been fighting a big battle with ICOs thanks to its Securities Exchange Commission’s definition of what a newly founded virtual currency can be classified as.
The SEC, however, found that, in a major precedent-setting decision, that the decentralized autonomous organization (DAO) tokens that were issued in 2016 were securities. This essentially lumped the majority of ICO projects as securities and put them under the scrutiny of the regulator.
But that does not mean that the U.S. is closed off to ICOs and blockchain projects, rather there are some harder hoops to jump through — especially with the division of state and federal law.
Jack Keating, an attorney in New York and a former regulator at the Financial Industry Regulatory Authority (FINRA), spoke to Cointelegraph about the challenges that ICOs and blockchain projects face in the U.S., and particularly in New York State.
“The biggest problem with ICOs is that many of them are being done in clear violation of U.S. securities laws. Whether the issuers are unaware or agnostic to the potential consequences of issues unregistered securities, without a exemption from Section 5 registration. Many ICO issuers have ignored the requirements of the raising capital in the U.S.
“[For] ICOs that do comply with the SEC Rules and U.S. securities laws, investment is often limited to accredited investors. This goes against one of the core tenets of many Bitcoin and blockchain evangelists, that being that this technology can democratize wealth. Unfortunately, when investment is limited to accredited investors, the rich get richer and the non-millionaires are left on the sideline.”
There is a path for ICOs to function in a popular ICO country, but the regulatory hoops go against the core values that the crypto community holds dear.
“Another challenge is banking solutions for crypto companies. Similar to how marijuana companies are blackballed by most financial institutions, many U.S. banks have a policy to not open accounts for crypto businesses. Because a bank account offers so many fundamental services to running a company, simply opening a checking account can be extremely difficult. Of late, Metropolitan Commercial Bank has professed its leadership in the space. However, they face heavy scrutiny from U.S. regulators, which challenges their sustainability.”
Keating concluded that it may not be the most welcoming place for blockchain, but the U.S. seems willing to foster the technology, and because of the hunger, it is worth it.
“In my opinion there is a lot of support for crypto and ICOs coming from the government. Whether they see value in it or are willing to foster the technology is hard to say. The lack of an outright ban is encouraging. It’s worth the pressure. The U.S. has the best investor base and the best courts in the world.”
The United Kingdom’s definition of an ICO token
With the likes of Switzerland and Malta setting firm and understandable definitions for crypto, ICOs and blockchain, the U.S. — as well as the United Kingdom — have far more ambiguous regulations about different aspects of the ecosystem, as they continue to decide how much, or little, they need to step in.
Romal Almazo, the cryptocurrency lead and principal consultant at CAPCO — a global business and technology consultancy in the U.K. — explained to Cointelegraph how the law is working around cryptocurrencies and ICOs in Great Britain.
“In the U.K., the FCA [Financial Conduct Authority] still does not regard cryptocurrencies to be a currency or a commodity under MiFID II. They do, however, admit that some firms will be regulated where they offer products or service which are caught under existing financial regulations — e.g., Bitcoin futures. Where firms offer ICO tokens, they also concede that some firms might be issuing a regulated security. For a token to be regulated as a security under the U.S. Securities Act of 1933, a firm should look to the ‘Howey test’ and the ‘U.S. Person’ test.
“Looking forward, there are still huge problems on agreeing what crypto assets are and how they behave. Is it an equity, commodity, currency, utility asset or some kind of hybrid? Until this taxonomy becomes clearer and universally agreed upon — which is unlikely in the near-term — competitive advantages between states and jurisdictions will emerge. For example, we are already seeing Malta <...> leading the pack by offering guidance and regulation. They want to create a blockchain island of innovation. The U.K. is still looking promising, but we are still seeing the majority of ICOs in the U.K. set-up through Malta, Gibraltar, Liechtenstein or Switzerland.”
Budding smaller nations
Others — such as Bermuda, Estonia and Liechtenstein — are also doing their best to wrest some crypto authority with their own friendly regulations.
Bermuda has recently — on July 2 — put forward plans to make amendments to the Banking Act in order to establish a new class of banks that offers services to local fintech and blockchain organizations.
Estonia is one of the countries that has actually been trying to make blockchain feel welcome for some time now. The government even went as far as to digitize its services by using blockchain technology. This appreciation of the potential of blockchain has made it easier for startups to build their own innovative projects.
John Smirnov, CEO of Block-chain.com, explained how Estonia’s reputation of a digitalized and forward-thinking country made it easy for them to register in Tallinn, the country’s capital.
“Timing was also crucial for us when we made a decision [of] which the country to start our company in. Estonian law is very user-friendly for blockchain projects that are holding all activities in cryptocurrency. That is why we are registered in Tallinn. It took us about a week to complete the process of company registration.
“With most regulators making some form of comment or direction for the present looking to the future of crypto, there are few actually enacting any laws. The crypto market is in the midst of an important transition. The likes of the SEC have made sweeping statements — catching the whole market in a difficult position, as far as the U.S. is concerned. Others merely state they don’t currently regulate crypto but will be announcing something soon, like the U.K.’s FCA.”
Still space to pick and choose
It is clear that there is certainly no global standard, which allows companies to pick and choose the places that are most suited for them.
The G20 might be looking to gathering data about cryptocurrencies in order to potentially put forward a united force for regulations, but it sounds like it still has a long way to go — and is not even guaranteed that everyone will agree.
However, what is clear, is that there are countries that are striving to let Blockchain flourish. A few islands, like Malta and Bermuda are changing their legislation to make their country more attractive to fintech companies, and other European Nations, like Switzerland and Estonia believe that they have the right laws to protect against the negatives of crypto while still encouraging its growth.
The UK and the USA have adapted their rules to encompass cryptocurrency into standing legislation, and while it seems quite stringent at the moment, it is a working system. In the end, there is no one place that is offering total freedom for blockchain projects, but along the spectrum, there is a lot of options for innovation.