Regulations: The East vs the West

It’s been a hot topic for quite a while now: cryptocurrency regulations. How to deal with ICO’s, security tokens/breaches, market manipulation and of course… outright scams?

Many countries continue to change their stance. It seems like pretty much none of them were ready for the late 2017 boom and they still have trouble figuring all of this out. A huge part of the space looks at the SEC for guidance, and with their recent statement on Bitcoin and Ethereum not being a security, we may finally get closer to some clearance after all.

So… where are we now? How do all these crypto-countries deal with the current state of regulations at this point in time? Let’s dive into each country (separately) and see if we can spot a pattern/trend.

The East (Asia)

China

Their ban on cryptocurrency trading and ICO’s had a huge impact on the market. It was the main topic in this space for quite some time and this year, China even went a step further. The Chinese government enlisted its firewall to block Bitcoin websites, they closed (the) accounts of crypto-exchanges on WeChat and shut down OKEX on social media.

The PBoC (People’s Bank of China) has also ordered financial institutions to stop providing banking or funding to any activity related to cryptocurrencies. They are now studying the feasibility of developing its own digital currency themselves, which was not a surprising move looking at China’s history.

However, the ban hasn’t stopped the Chinese investors; most traders use VPN or have moved to the underground market (or overseas to Japan), and former Chinese exchanges Huobi and OKEX have thrived ever since their relocation to Hong Kong.

On a higher level, interesting things have been happening as well. President Xi Jinping recently named blockchain as part of the ‘new industrial revolution’, the Ministry of Industry and Information Technology just came up with a new public cryptocurrency rating system, and state-owned CCTV called the monetary value of blockchain 10 times more than that of the internet. Aside from that, a Chinese court has ruled that blockchain-authenticated evidence can now be presented in legal disputes.

So, China’s position is gradually shifting, but in general, they are pretty harsh. You could say that they are trying to take decentralization out of this decentralized system. Nonetheless, the developments in China are raising expectations that the country may decide to ease its ban on cryptocurrency.

South Korea

In July last year, the government recognized Bitcoin as a legal payment method. They started introducing regulatory frameworks and the Korean exchanges were being tied to the Financial Services Commission (FSC). Around that time, South Korea was the third largest Bitcoin exchange market — behind the US and Japan.

Not too long after that, the FSC struck with a ban on ICO’s, as a means of protecting investors against fraud and scams. Along with other ‘FUD’ (all over the world, but especially in/from China), this steered the market in a downward spiral.

At the end of 2017, the government banned anonymous trading on local exchanges. They also excluded foreigners, and later on government officials. The market went in full panic-mode when an official spread rumors about a potential ban on all domestic crypto exchanges.

The rumored ban was never employed and South Korea reportedly plans to soften its crypto regulations in line with the policies set by the G20 nations. They are also close to reversing the ICO ban, allowing Initial Coin Offerings under certain circumstances. Furthermore, the South Korean central bank recently said that crypto investment poses insignificant risks, suggesting that measures won’t be too extreme.

The facts at this point in time: AML measures are ramping up, a taxation framework is coming in the near future and there are investigations happening around the recently hacked exchanges — right now.

But (still), we see a ‘pro-blockchain’ government — working on a new blockchain industry classificatory scheme — , banks exploring using blockchain, businesses implementing the technology and (the) citizens (of this nation) being responsible for 30% of the world’s cryptocurrency trading volume. It’s safe to say South Korea is on its way to become a strong leader in this space.

Update: Early September ’18, an official from South Korea’s Financial Supervisory Service (FSS) has proposed greater international cooperation between regulators for crypto and ICO regulations. The South Korean official stressed that country’s main aim is to improve transparency in transactions to prevent illegal activities.

Japan

This second-largest cryptocurrency market in the world — primarily focused on Bitcoin — has over 3.5 million citizens trading cryptocurrencies. For a very long time, Japan has been pretty soft in terms of regulations. With restrictive policies in neighboring countries, Japan was seen as Asia’s frontrunner in this industry (especially taking in regard the Mt. Gox debacle).

At the beginning of 2016, Japan announced Bitcoin as a legal form of payment, and since April 2017, cryptocurrency exchange businesses operating in Japan have been regulated by the Payment Services Act; they must be registered, keep records, take security measures, and take measures to protect customers, amongst other things. Currently, they are considering to regulate exchanges by the FIEA (Financial Instruments and Exchange Act), which should enhance customer protection.

It comes as no surprise that things are changing in Japan. The turning point? The Coincheck heist. After that happened, the FSA (Financial Service Agency) increased their focus on investigating exchanges to prevent another hack. Last September, the FSA approved 11 cryptocurrency exchanges; now 6 of them have received AML business improvement orders by the same FSA.

It makes sense that Japan has become more cautious after not even one, but two breaches on huge, domestic exchanges. Instead of taking a lead role, it’s possible that we will see Japan watch from the sidelines and wait for others to take initiative.

Update: Around the end of August ’18, Japan’s financial regulator stated he wants the crypto industry to grow under appropriate regulation, finding a “balance” between consumer protection and technological innovation. “We have no intention to curb excessively.”

Thailand

‘The land of the smiles’ is dealing with all of this in a different, but very pragmatic way. They wrote an entirely new law on cryptocurrencies and digital tokens, which includes fees, licensing requirements, and other rules.

Starting July 18, Thailand will be one of the first jurisdictions in the world to permit ICO’s to function in a fully-regulated environment. Back in March this year, fourteen banks — in collaboration with three state enterprises and four large business corporations — launched the ‘Thailand Blockchain Community Initiative’, aiming to upgrade businesses efficiency and competitiveness by adopting blockchain technology.

Thailand is realizing that policies with strict, overpowering principles are chasing investors (and their taxes) away. Now it’s one of the few countries showing leadership, innovation and clearly defined rules. Clarity is definitely something others are still lacking, so let’s hope they follow Thailand’s example.

Update: August 16, the Thai SEC cleared seven cryptocurrency operators to serve clients, and is currently reviewing the data of two other digital asset operators that have filed an application under the Transitional Provisions.

The West (USA x Europe)

Europe

If there’s one thing Europe agrees on regarding cryptocurrencies, it’s the fact that closer regulation is needed to prevent money laundering and terrorist financing. This idea is widespread over all the members of the European Union and it’s something the parliament has voted for.

Under the agreement, cryptocurrency exchanges and custodian wallet providers will have to apply customer due diligence controls, including customer verification requirements — just like their banking counterparts.

Most members cared less for what was happening in the early years, showing very little resistance. But when ‘the craze’ started, they were forced to take a second look on what was happening. Often pointing out the risks of investing in a speculative market and favoring closer regulation of cryptocurrencies,
they are also well aware of the underlying technology’s potential.

Not only European banks, but the European Central Bank also started experimenting with blockchain technology, and the European Commission’s VP went as far as urging European countries to be supportive of developing blockchain tech, proposing a 23-step ‘action plan’.

In general, Europe can be seen as fairly progressive. Countries ahead of the curve are Switzerland and Malta, but other than those; Estonia has already spearheaded the implementation of blockchain technology, Denmark has a 0% crypto tax, Germany was the first country that accepted Bitcoin as a currency, and the Netherlands holds the most Bitcoin ATMs in the entire world.

To summarize, the biggest problem Europe has with this space is anonymity and it would make sense that the regulatory measures that will be taken are related to this. Besides this, the general consensus is ‘bullish’.

USA

Anyone familiar with ICO’s is aware of that one provision excluding American citizens (except for accredited investors) from participating. The nation is, amongst other things, notorious for strict investment regulations (and not strictly cryptocurrency related). Also notorious is their SEC (Securities and Exchange Commission), and how they deal with security laws.

The SEC has not been perceived as ‘crypto-friendly’. For a long time, they have viewed cryptocurrencies as securities, which means the same laws should be applied in this field.

The recent change: An official stated that Bitcoin and Ethereum are not securities. Being closely followed by the rest of the world, there is a fair chance that other countries will follow soon.

So, they are still extremely strict when it comes to ICO’s, and ordered/issued subpoenas to ponzi-schemes and other forms of scams. But aside from that, things start looking brighter in the United States of America when it comes to cryptocurrency regulations.

Conclusion

In terms of ‘patterns’, Europe (as a whole) has been — and still is — very progressive. Despite the recent vote on closer cryptocurrency regulations, they are definitely supportive when it comes to blockchain technology. The only real exception in the whole continent is Bulgaria. The U.S. is known for their strict investment regulations, and they’ve sent out many subpoenas already, but with the SEC’s statement that Bitcoin and Ethereum are not securities, they don’t seem to be against the industry itself.

Looking at Asia as a continent and their stance on regulations as a whole, it’s more difficult to grasp their overall position. From China being China, to the ever-shifting stance of South Korea becoming the frontrunner over Japan, to Thailand’s clear regulatory laws, the words that come to mind are ambiguous and divided.

From a general point of view, the direction is heading the right away and there are many reasons to be optimistic about the market in Asia. We’re receiving more clarity over time and it’s something the industry needs and is bravely waiting for.

The main trend we see is that most regulatory decisions are made to ‘prevent illicit activities’, such as money laundering, tax evasion and avoidance, drug trading and terrorist financing. Furthermore, regulators mainly focus on the obvious scams and pyramid schemes. It’s expected that the regulations in the future will also be centered around these things.