In 2017, bitcoins increasing popularity motivated regulators to take a closer look. The first few months in 2018 appear to accelerated their interest. Listed below are some general observations about regulatory trends within several different countries.
Crypto Regulation In The U.S.
Within the United States, the SEC continues to focus on ICOs (Initial Coin Offerings) and how they raise funds. In particular, they have begun subpoenaing these ICOs and demanding information on how their token sales are structured. They’re also freezing assets when necessary (in January, the SEC froze assets of AriseCoin after its ICO appeared fraudulent). In a similar manner, the CFTC began subpoenaing exchanges. In December, the CFTC recently subpoenaed Bitfinex and Tether. Nonetheless, a somewhat more lax attitude appears to be taking hold at the CFTC. Even CFTC employees may invest in cryptocurrencies.
The US government also appears conflicted on how to classify cryptocurrencies. While SEC is keen to classify cryptocurrencies as a currency, the CFTC is also keen to classify them as a commodity. However, the IRS has decided to classify cryptocurrencies as property. While these alphabet agencies sort this rulemaking out, non-compliance among crypto investors remains high.
If crypto goes mainstream, to what extent will crypto-fans become a political force to reckon with? Unlike many other countries, Americans tend to have a cultural bias against government regulation. This appears to be particularly true among cryptocurrency fans.
Crypto Regulation In China
Since banning cryptocurrency exchanges last September, cryptocurrency analysts have sought to determine if further regulation would follow. After providing mixed signals for several months, the Chinese government now appears ready to block access to overseas exchanges as well. Account owners who fail to comply risk having their accounts frozen. Thus a complete lockout from the The cryptocurrency industry appears to be in the works.
Is it simply a matter of capital control? While the desire for capital control remains a significant factor, regulators also believe that Chinese markets are particularly prone to bubbles. Apparently, an “auntie army” of middle-income older women were beginning to heavily invest their savings in crypto. Moreover, as Lawfare explains,
Retail investors have been blamed for a variety of bubbles that, like whack-a-mole, have drawn attention and reaction from the Chinese government. A boom in bitcoins last year—peaking with some 90% of global bitcoin transactions reportedly taking place in China—was moderated only when regulators put a four-month investigative freeze on bitcoin exchanges.
So it appears that the Chinese government’s propensity to ban crypto is a proactive effort to protect itself from any future backlash. As such, they may well view their actions from a consumer-protection angle – rather than from an autocratic need to exert control.
Crypto Regulation In Japan
Japan was the first major economy to recognize Bitcoin as legal tender. However, the recent CoinCheck hack has given regulators pause. Rather than regulation, a new entity named the Japan Blockchain Association (JBA) has been propelled into the spotlight. As a merger of two industry groups, the JBA will be promoting voluntary regulations for industry players. Aside from securing greater legitimacy, such moves are also sought to prevent insider trading and money laundering. Why the light touch? As an article in Medium explains,
Japan and its authorities are notoriously conservative when it comes to financial innovation. The government’s forward-looking attitude to virtual currencies may in fact be a reaction to that. The use of blockchain has given Japan an opportunity to shake things up a little and push local banks into more aggressive development. At the same time, the state’s proactive approach to regulation is also a way to keep crypto trading under centralized control.
Japan’s aging citizenry is well-known for its high-savings rate. Given that the country’s low-growth economy remains highly intractable, any attempt to constrain its burgeoning cryptocurrency investment might be considered counterproductive.
Crypto Regulation In South Korea
In South Korea, the government remains at odds as to whether cryptocurrencies should be regulated (complete with conflicting signals from competing bureaucracies, not altogether different from that seen within the United States). Although a relatively small market, South Koreans have enthusiastically embraced cryptocurrency. In terms of market influence, the country clearly punches above its weight. Why the national interest? An article by Element Group suggests that “The national ban on gambling may also partly explain the grip of cryptocurrency trading fever”.
Taking a cue from Japan, the government’s urge to regulate may be somewhat ameliorated with the self-regulatory moves pursued by the Korean Blockchain Association. Likewise, the focus will be on pursuing transparency rather than market supervision. Moreover, banning ICOs remains problematic. Implementing such a ban,
“would be a major concern for blockchain innovation, which the South Korean government is trying to promote as a next-generation economic pillar. Companies may use blockchain tokens — such as a cryptocurrency — to raise funds for their projects, or to hold data or value that traditional rules may struggle to define.”(Forbes).
Crypto Regulation In The EU
Initially, the European Union had appeared more than willing to regulate the cryptocurrencies if necessary. However, a March G20 summit hosted for bankers & finance ministers suggested that such regulation was not currently warranted. Regulators apparently feel that the industry is far too nascent to be concerned about.
Nonetheless, the EU is well-known for its bias toward regulation. For instance, the EU’s wide-ranging General Data Protection Regulation will come into effect in May, Although designed to provide EU citizens with greater control over their personal data, the rule is fundamentally at odds with the blockchain’s immutable nature. Future regulatory actions – particularly toward ICOs and Exchanges – appear to be imminent.
Crypto Regulation In The Near Future
While monitoring ICO’s remain a priority for regulators worldwide, centralized exchanges also remain under scrutiny. At present, “centralized exchanges act as a bank, broker and clearing house because they hold all your money and charge fees” (Bitcoin Magazine). However, this focus may be short-lived once decentralized exchanges become popular. Decentralized exchanges (DEX) conduct trades between users in a peer-to-peer manner. Moreover, a DEX does not hold funds. And as such, there “there are no AML/KYL (Anti-Money Laundering/Know-Your-Customer) requirements for users to set up accounts” (Bitcoin Magazine). If the technology proves feasible, expect regulators to be… extremely concerned.
XTRABYTES is currently working on producing its own DEX named X-CHANGE. As a platform module, X-CHANGE will include many of the platform’s superior capabilities. Expect his module to be forthcoming shortly.