Over the last decade, the landscape of cryptocurrency has evolved dramatically.
Historically, mainstream recognition of an emerging technology is a precursor to protective legislation. We’ve seen governments worldwide scramble to provide investors with regulatory oversight.
Here, we’ll take a deep dive into a number of legislative trends in cryptocurrency markets around the world.
According to Japan’s Financial Services Authority (FSA), there are more than 3.5 million active traders in Japan. Coinbase reportedly signed up 50,000 new global users a day in 2017. Furthermore, funding through initial coin offerings (ICOs) hit a staggering USD6.3 billion in the first quarter of 2018.
With statistics like these, it’s clear that individuals all around the world are excited about the potential of this new asset class as an investment vehicle. However, in response to rising levels of mainstream interest, governments have implemented regulatory measures to protect investors.
Following the Tokyo-based Mt. Gox hack in 2014, the FSA swiftly assembled a study group to develop a regulatory framework. This resulted in the formation of a mandatory operating license that focuses on customer identification and anti-money laundering, asset security, personnel management, and more.
The FSA has consistently worked with exchanges to iteratively improve license requirements, granting operating licenses to a number of domestic exchanges including Quoine, SBI VC and bitFlyer.
The Korean government has adopted a similar model of preventive regulation. It has banned anonymous trading accounts, requiring exchanges to register with the Financial Supervisory Service (FSS) and regulating exchanges similar to commercial banks. The strict regulatory environment has resulted in the formation of just a few domestic exchanges with Bithumb, UpBit and Coinone being the most popular.
On the opposite side of the spectrum, authorities in leading financial hubs such as Singapore, Hong Kong and Switzerland have adopted a relatively hands-off and reactive approach. They cite the need to find a balance between protecting investors and creating a suitable environment for innovation.
In Singapore and Hong Kong, exchanges have to comply with established standards for customer identification and combating the financing of terrorism, but do not require special operating licenses to function. With ICOs, Switzerland and Singapore have developed relatively lenient guidelines.
Singapore is home to top-tier projects like TenX, QTUM and Wanchain. On the exchange front, Quoine and Huobi have international offices in Singapore. BitMEX, the world’s leading Bitcoin exchange by volume, has an office in Hong Kong, and has expressed a commitment to work with regulatory authorities.
In smaller and developing countries, we can observe a clear effort to implement proactive regulatory approaches. A notable example is Malta, the “blockchain island”. In July 2018, the Maltese parliament passed three bills detailing regulatory frameworks for exchanges, ICOs and certification of distributed ledger technologies (DLTs). In this respect, Malta has become the first country in the world to create an official regulatory framework around this emerging technology, attracting major companies to set up shop.
The Maltese government’s willingness to develop a transparent regulatory environment suggests the country is banking on blockchain becoming the next economic goldmine. This kind of fast-track regulatory approach is more feasible for smaller countries.
In South-east Asia, Thailand has taken a progressive approach to regulation. In March 2018, the Thai government drafted a royal decree detailing a proposed regulatory framework for cryptocurrency exchanges and ICOs. Just three months later, the decree received final approval and was put into law. The framework gives regulatory oversight to Thailand’s Securities & Exchange Commission, and provides detailed guidelines for exchange licenses and accepted cryptocurrencies for ICO contributions.
The United States is home to many technology giants, but there’s a lack of legislative clarity on cryptocurrency. The cautious regulatory approach may be a by-product of the Securities & Exchange Commission’s (SEC) loose oversight during the dotcom bubble in the 1990s or it could also be a matter of figuring out which government institution has jurisdictional oversight.
For example, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) regulates cryptocurrency exchanges. It requires them to register as a money services business (MSB), implement proper anti-money laundering systems and report suspicious transactions. At the same time, the SEC is looking to regulate exchanges that offer tokenized securities, even though there are no formal guidelines detailing what constitutes a securities offering relating to cryptocurrencies. The Commodity Futures Trading Commission (CFTC) views cryptocurrencies as a commodity and is adopting a more hands-off approach to exchange regulation.
There have been a few significant regulatory developments in the US, like the BitLicense and the SEC’s ruling against Bitcoin and Ethereum being a security. However, their approach to regulation thus far has mostly consisted of applying existing laws that are not tailored to cryptocurrency and blockchain. As a result, only the most compliant companies are able to operate in the country. Coinbase, Ripple and Gemini are examples of US-headquartered blockchain companies that have experienced tremendous success.
We can see a clear trend that suggests many cryptocurrency exchanges and ICOs are actively seeking regulatory clarity and government support in places like Singapore, Hong Kong, Malta and Thailand. On the other hand, institutions that value globally recognized compliance and legitimacy are actively seeking expansion into the US, Korea and Japan.