Overview of the latest regulatory policies and trends in the global cryptocurrency market

Original title: "Understand the specific policies and evolution trends of global crypto market supervision in one article | Chain Catcher"
Written by Richard Lee and Bran

USA

As the country with the most developed financial market in the world, the United States has very detailed regulatory rules for the crypto market. Multiple administrative agencies have formulated specific regulatory rules based on the nature of cryptocurrencies. For example, the U.S. Securities and Exchange Commission (SEC) considers some tokens to be "securities", the Commodities and Futures Trading Commission calls them "commodities", and the IRS considers them to be "property".

ICOs are generally susceptible to regulation by the U.S. Securities and Exchange Commission. Under the federal securities laws, if a crypto asset is determined to be a security, the issuer must register the security with the SEC or offer the security under an exemption from the registration requirements. The SEC has always left room for whether a token is considered a security, saying it "depends on the characteristics and use of the particular asset." But overall, the SEC is more inclined to consider cryptocurrencies as securities, while applying securities laws across the board to digital wallets, affecting both exchanges and investors.

In December 2017, the then-SEC Chairman issued a statement on cryptocurrencies and ICOs, saying that potential buyers are sold on the potential for token appreciation, can lock in these appreciations by reselling tokens on the secondary market, or profit from tokens based on the efforts of others, which are key signs of securities and securities issuance. Therefore, the chairman said that, in general, the initial token issuance structure he saw involved the issuance and sale of securities, and the SEC would take enforcement actions for ICOs that violated the Federal Securities Act.

Cryptocurrency exchanges are mainly regulated by the U.S. Financial Crimes Enforcement Network (FinCEN), with a focus on money transfer and anti-money laundering (AML). According to the Bank Secrecy Act, FinCEN regulates money service businesses (MSBs). In March 2013, FinCEN issued guidelines to identify cryptocurrency trading service providers as MSBs. Under this framework, cryptocurrency trading platforms must obtain FinCEN licenses and implement comprehensive anti-money laundering risk assessment and reporting mechanisms.

Last December, FinCEN proposed to add new data collection requirements such as KYC for cryptocurrency trading providers. According to the proposed rule, banks and money service businesses will be required to submit reports, keep records and verify customer identities, including private digital wallets hosted by non-financial institutions. This proposal has caused great controversy, and FinCEN announced in January this year that it would extend the time for soliciting comments, and there is no latest development.

In terms of crypto derivatives, the U.S. Commodity and Futures Trading Commission (CFTC) considers cryptocurrencies as commodities. According to the Commodity Exchange Act, cryptocurrency futures, options and other derivative contracts must be publicly traded on exchanges supervised by the CTFC. Currently, the Chicago Board Options Exchange and the Chicago Mercantile Exchange offer futures trading linked to the price of Bitcoin.

In terms of crypto investment taxation, the IRS treats cryptocurrencies as property and imposes taxes on them. For individual citizens, if they hold cryptocurrencies as capital assets for more than one year and have realized gains, they must pay capital gains tax; if they hold cryptocurrencies for less than one year and have realized gains, they must pay ordinary income tax.

In addition to the decentralized regulation at the U.S. federal level mentioned above, state governments can formulate specific rules and regulations within their jurisdictions.

In August 2015, New York State took the lead in proposing the BitLicense, a comprehensive regulatory framework for the crypto market, which is also the most influential license in the crypto industry. The BitLicense includes key consumer protection, anti-money laundering compliance, and cybersecurity guidelines. The regulations stipulate any company or individual living in New York that uses cryptocurrency, requiring companies involved in virtual currency business to apply for a license. Currently, more than 20 companies including Circle and Ripple have obtained BitLicense licenses.

In addition, New York State has also launched a trust charter for cryptocurrency custody companies. Currently, nearly 10 companies including Paxos, Gemini, NYDIG, Coinbase, Bakkt, and Fidelity Digital Asset have obtained the charter.

Wyoming is a relatively cryptocurrency-friendly state in the United States, having enacted more than a dozen related bills. The most influential of these is HB70, the "Open Blockchain Token Exemption" bill passed in March 2018, which proposes an asset class similar to "utility tokens." According to the bill, if the issued tokens are not used as investments and are only used for consumer purposes, such as exchange, for receiving goods and services, etc., they can be exempted from the Federal Securities Act.

Since then, well-known crypto companies such as Ripple and Cardano development company IOHK have moved to Wyoming. Since September 2020, three companies including Kraken and Avanti have also obtained approval from Wyoming regulators to establish crypto banks under the authorization of the SPDI Act to provide commercial banking and custody services for tokenized assets and digital currencies.

In May this year, the US SEC said it had urged Congress to legislate to give the SEC more regulatory power over digital assets. At the same time, the SEC is also committed to taking the lead in establishing a broad regulatory framework for crypto assets, allowing multiple US regulatory agencies to clearly divide the scope of market supervision and perform their respective duties, and even bring all digital assets under supervision.

Recently, the U.S. SEC has begun to shift its regulatory focus toward DeFi. The SEC chairman also stated that any DeFi project that provides security token services is under SEC supervision, and any stock tokens or crypto tokens that provide exposure to underlying securities are subject to securities laws, which has caused considerable controversy in the crypto market.

Japan

Perhaps influenced by the bankruptcy of Mt.Gox exchange, Japan is currently the country with the most advanced regulatory system for cryptocurrency exchanges in the world.

In May 2016, the Japanese parliament passed a bill to amend the Funds Settlement Act, which officially came into effect in April 2017. The law added a chapter on "virtual currency", which clearly defined virtual currency as a means of settlement and payment, and had property value. At the same time, the bill also clearly introduced a regulatory mechanism for crypto asset exchanges, and only companies registered with the Financial Services Agency/Financial Bureau of Japan can provide cryptocurrency exchange services in the country.

It is understood that the registration requirements generally include: minimum capital of more than 10 million yen; providing customers with trading asset information, contract details, etc.; separate management of user property and operator property; KYC confirmation, etc.

In 2017, the Financial Services Agency of Japan issued licenses to 16 cryptocurrency exchanges. However, due to the theft of Coincheck in early 2018 and the loss of nearly US$500 million, the Financial Services Agency of Japan suspended the issuance of licenses that year. At the same time, it entered major registered exchanges in Japan and conducted inspections lasting 2-6 weeks, ranging from financial statements, anti-money laundering systems, employee background checks, to each computer's system version, passwords and employee attendance records. Since then, many unqualified exchanges have been warned of rectification, fined or even closed down.

Since then, the Japanese Financial Services Agency has reopened the issuance of licenses. As of June 2021, 31 crypto companies have been registered, including BitFlyer, Coincheck, and Coinbase, which was recently approved in June this year. The official website of the Japanese Financial Services Agency will also publish a list of companies engaged in crypto asset trading in the country without registration from time to time. Among them, Binance and Bybit have recently been warned.

In terms of crypto asset trading and management, margin trading and STO, the amendments to the Funds Clearing Act and the Financial Instruments Trading Act that came into effect in May 2020 and recent decrees have put forward more specific regulations:

In terms of crypto asset trading and management, in order to deal with the risk of crypto asset leakage, for user assets managed by hot wallets, companies are forced to retain the same amount and type of crypto assets as repayment resources; in terms of transaction risk investigation, exchanges are required to create and save transaction records and report suspicious transactions to the authorities; in terms of user rights protection, regulations require that when an exchange goes bankrupt, the managed crypto assets should be returned to users in priority; in terms of crypto asset custody, relevant service providers also need to obtain cryptocurrency trading licenses from regulatory authorities.

In terms of cryptocurrency derivatives trading, relevant operators need to register as both cryptocurrency exchanges and primary financial instrument operators. At the same time, Japan limits the leverage ratio to one time.

In terms of securitized tokens, Japan has also clarified the relevant regulatory mechanisms in the Financial Instruments and Exchange Act. In March this year, Japan's Sumitomo Mitsui Bank and the securitized token platform Securitize launched the first asset-backed security token, which is also the first security token that complies with the Financial Instruments and Exchange Act.

Japan also attaches great importance to the role of industry associations in the crypto market. The Financial Instruments and Exchange Act certifies the Japan Virtual Currency Exchange Business Association and the Japan STO Association as autonomous regulatory organizations in the field of cryptocurrency trading and ST, respectively, to carry out specific operations related to the law and formulate specific rules and guidelines for the industry.

In addition, Japan has also established a taxation mechanism for cryptocurrency transactions. Individuals with annual salary income exceeding 20 million yen or non-salary income exceeding 200,000 yen are required to declare their cryptocurrency trading profits and income, with tax rates ranging from 15% to 55%.

Singapore

Singapore is one of the most crypto-friendly countries in the world and has introduced detailed regulatory policies, making it popular with many crypto companies. At the same time, the country's sovereign wealth fund GIC and state-owned investment company Temasek have invested hundreds of millions of dollars in the crypto field.

The Monetary Authority of Singapore (MAS) is the main agency responsible for regulating the crypto market in Singapore. Its officials said in 2018 that MAS will classify tokens into application tokens, payment tokens and security tokens. MAS does not intend to regulate application tokens, but the draft payment regulations applicable to payment tokens will be formulated by the end of the year, and security tokens are subject to the existing Singapore Securities and Futures Act.

According to the official website document, MAS defines digital payment tokens as digital representations of any value. They are not denominated in any currency or pegged to any currency. They can be transferred, stored or traded electronically. They are intended to be a medium of exchange accepted by the public or a part of the public as a means of payment for goods or services or settlement of debts, such as Bitcoin and Ethereum.

As early as 2017, MAS issued the "Guidelines on the Issuance of Digital Tokens" to guide and regulate the country's digital token issuance. It has been revised many times since then and the latest version was launched in 2019, which also proposed 11 specific cases.

According to the guidelines, when it comes to issuing tokens of securities nature, the issuer needs to obtain a capital market services license; when it comes to trading tokens of securities nature, the trading platform needs to obtain a certified capital market operator (RMO) license; when it comes to providing token-related financial advisory services, the company needs to obtain a financial advisory license. At the same time, all relevant business operators should comply with the provisions of laws related to anti-money laundering and anti-terrorist financing.

MAS introduced the Payment Services Act in 2019 and it came into effect the following year. The Act requires companies engaged in certain payment services to obtain a license to carry out their business activities, including digital payment token services, specifically "buying or selling digital payment tokens (DPT) (commonly known as cryptocurrencies, or providing a platform that allows people to exchange DPT." This is widely regarded as a license for cryptocurrency exchanges.

However, Singapore has not yet issued licenses to crypto companies, but some crypto companies have obtained license exemptions for crypto payment services for a specific period of time, including Paxos, Coinbase, Genesis, etc. At the same time, MAS requires crypto payment service providers to take strong control measures, such as fulfilling customer due diligence and transaction monitoring obligations, and submitting suspicious transaction reports to the Department of Commercial Affairs (CAD) to detect and prevent illegal funds from flowing through the Singapore financial system.

At the same time, MAS also launched a regulatory sandbox mechanism in 2019, enabling financial institutions and fintech players to experiment with innovative financial products or services in a real environment but within a clearly defined space and duration. At least two crypto companies, including bond exchange BondEvalue and securitization token platform ISTOX, were shortlisted.

In February 2020, MAS officially approved ISTOX to operate publicly, providing services such as issuance, settlement, custody and secondary trading of securitized tokens. In October 2020, MAS officially approved BondEvalue as a market operator (RMO) to provide blockchain-based bond trading services to institutional investors.

U.K.

The Financial Conduct Authority (FCA), the main institution in the UK responsible for regulating the crypto market, only regulates for anti-money laundering and counter-terrorist financing. In January 2020, the FCA was granted regulatory powers to oversee how crypto asset companies manage money laundering and counter-terrorist financing risks. Since then, UK crypto asset companies must comply with the Money Laundering Regulations (MLR) and register with the FCA.

Currently, the crypto companies that have completed registration include Ziglu, Gemini, Archax, Fibermode, and Digivault. In addition, there are more than 80 crypto companies on the temporary registration list that can temporarily operate before March 31, 2022, including Wintermute, Revolut, Galaxy Digital, Fidelity Digital, eToro, Huobi, etc.

If a crypto company is not on the temporary registration list, it will not be allowed to carry out any crypto business activities. The FCA has also published a list of hundreds of unregistered crypto companies on its official website, including Binance, which was recently warned.

On the official website, the FCA stated that it would seriously warn users about investing in crypto assets. If users purchase crypto assets and problems arise, they will be unlikely to receive access to the Financial Ombudsman Service or the Financial Services Compensation Scheme. “Crypto assets are considered to be very high-risk speculative purchases. If you buy crypto assets, you should be prepared to lose all your money.”

The FCA does not regulate specific crypto assets and related businesses, but it still regulates crypto asset derivatives (such as futures contracts, CFDs and options), as well as crypto assets that are considered securities (security tokens). Due to concerns about the volatility and valuation of crypto assets, the FCA has banned the sale of crypto asset derivatives to retail customers.

In the FCA’s view, security tokens are tokens that provide certain rights, including ownership status, repayment of a specific amount of money, the right to share future profits, etc. All rules related to traditional securities apply to security tokens.

Currently, the UK government is also consulting on stablecoins as a means of payment. If the government's proposal is adopted, the FCA will consult on the rules for applying these proposals. This means that stablecoins used for payments and services will be regulated in the future to provide consumer protection under the rules.

In addition, the FCA has issued electronic money institution (AEMI) licenses to a number of crypto companies, including Circle, Coinbase, Wirex, and CEX.io. This license allows these companies to issue and create electronic wallets on behalf of customers, conduct mobile payments, global remittances and other businesses, and open segregated accounts to store customer funds.

Hongkong

The Hong Kong Securities and Futures Commission is the main regulatory agency for crypto assets in Hong Kong. For many years, it has mainly focused on regulating security tokens, and has no clear regulatory policies for other types of crypto assets and trading platforms. It is currently the actual headquarters of well-known cryptocurrency exchanges such as FTX, BitMEX, and Bitfinex.

In 2017 and 2019, the Hong Kong Securities and Futures Commission issued statements on initial coin offerings (ICOs) and security tokens (STOs), respectively, clarifying that cryptocurrencies that can represent rights and interests such as shares, debentures and collective investment plans are considered "securities", and transactions, consulting, fund management, and distribution activities related to security tokens are subject to the supervision of the Hong Kong Securities and Futures Ordinance. Relevant institutions must be licensed by the Securities and Futures Commission or registered with the Securities and Futures Commission. For crypto assets that do not fall within the legal definition of "securities" or "futures contracts", their market is not regulated according to the regulatory framework statement issued by the Hong Kong Securities and Futures Commission in November 2018.

The March 2019 “Statement on the Issuance of Security Tokens” also clarified that security tokens are only available to professional investors (in Hong Kong, individual professional investors refer to investors with HK$8 million in circulating assets and a rich investment record in the past year).

In terms of trading platform supervision, Hong Kong has been exploring the regulatory framework since 2018, and has recently become more stringent. Hong Kong has not enacted or amended laws specifically for crypto assets and related businesses. Regulators can only introduce regulatory policies within the existing legal framework, and their regulatory powers and space are relatively limited.

In November 2019, the Hong Kong SFC issued the "Position Paper on the Supervision of Virtual Asset Trading Platforms", formulated a licensing system for trading platforms, and announced specific licensing terms and conditions. The system only targets "platforms that provide at least one securities-type virtual asset trading service."

The licensing conditions mainly include: the platform can only provide services to professional investors, formulate strict asset inclusion criteria and only provide services to customers who fully understand virtual assets, operate an external market monitoring system, and ensure that risk-related insurance for managed crypto assets is always in effect.

Under this mechanism, the Hong Kong Securities and Futures Commission issued a license to OSL, the first crypto asset trading platform, on December 15, 2020. OSL, a digital asset trading platform under the listed company BC Technology Group, obtained Type 1 and Type 7 licenses under the SFC regulatory framework, respectively authorizing securities trading (brokerage services) and providing automated trading services.

Therefore, under the current regulatory laws and regulations, non-securities crypto assets and their financial activities have been in an unregulated state. Until the end of 2020, the Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region Government issued a legislative consultation document, which proposed to implement a similar "mandatory licensing system" for all crypto asset trading platforms in the "Anti-Money Laundering and Terrorist Financing Ordinance".

On May 21, 2021, the Hong Kong Financial Services Bureau released a summary of the legislative consultation. The document shows that most respondents support the establishment of the licensing system. The above-mentioned amendments to the Anti-Money Laundering Ordinance are seen as plugging regulatory loopholes in non-security token transactions. The ordinance is currently in the revision stage, and the draft ordinance will be submitted to the Hong Kong Legislative Council for deliberation in the 2021-2022 legislative year.

South Korea

South Korea is one of the countries with a relatively active cryptocurrency trading market. Due to the high enthusiasm of cryptocurrency investors in the country, the Bitcoin price market in the country's exchanges is higher than other exchanges in the world, which is called the "Kimchi Premium". In recent years, South Korean regulatory authorities have gradually strengthened their supervision of the crypto market and have now become one of the countries with the clearest regulatory mechanisms for the crypto market.

In September 2017, the Financial Services Commission (FSC) of South Korea, which is responsible for the management and supervision of digital assets, announced that it would ban all forms of ICO activities, but did not formulate regulatory policies for cryptocurrency exchanges. Self-regulation was mainly promoted by the Korea Blockchain Association. Since then, Korean exchanges such as Bithumb and Upbit have developed rapidly.

In March 2020, the South Korean government approved the revised "Act on Reporting and Use of Specific Financial Transaction Information", which came into effect in March this year. According to this law, all virtual asset service providers (including custodians, exchanges and brokerage firms) must register with the Korea Financial Intelligence Center before September 25 and report transaction data regularly, otherwise they will be subject to severe penalties.

At the same time, virtual asset service providers are also required to obtain an Information Security Management System (ISMS) management certificate and open a real-name account under the guidance of a bank to prevent money laundering. Currently, only exchanges such as Korbit, Bithumb, Coinone and Upbit comply with real-name trading regulations.

Due to the aforementioned strict regulatory rules, several exchanges including OKEx Korea have decided to withdraw from the Korean market before the new rules come into effect. At the same time, more than 10 exchanges in operation have begun to remove a large number of high-risk currencies.

Currently, the South Korean government has not recognized cryptocurrencies as financial assets, but announced in December 2020 that it would impose taxes on investor earnings. If investors earn more than 2.5 million won (about US$2,200) per year using crypto assets such as Bitcoin, they must pay a 20% tax rate.

In June this year, the South Korean parliament began discussing legislation on crypto assets to promote the development of the crypto asset industry and protect investors.

Thailand

Thailand is also one of the countries in the world with the most complete regulatory system for crypto assets. Since 2018, it has introduced a number of clear licensing mechanisms to regulate the development of the domestic crypto industry.

In May 2018, the Thai SEC officially issued the Digital Assets Act to encourage technological innovation, provide capable enterprises with various fundraising tools, ensure that the purchase, sale or exchange of digital assets is fair, transparent and responsible, and establish a mechanism to maintain the stability of the national financial system and macroeconomics.

According to the law, digital assets are divided into cryptocurrencies and digital tokens. The first type of digital assets are used to exchange goods and services or as a medium of exchange like ordinary currency, while the second type of digital assets are used to invest in projects/businesses and exchange for goods/services/any other rights in accordance with the regulations of the Securities and Exchange Commission.

At the same time, the law divides Thailand's digital asset business operators into digital asset exchanges, digital asset brokers, and digital asset dealers. Operators of each type of business need to apply for the corresponding license to operate related businesses. In addition, the Thai SEC has also set up a licensing mechanism for ICO portals that publish ICO information.

As of now, the Thai SEC has issued digital asset exchange licenses to eight companies including Upbit, Huobi, and BITKUB, digital asset dealer licenses to six companies including Upbit, and ICO portal licenses to four companies including Longroot.

The Thai SEC has also developed a corresponding tax mechanism for digital asset transactions. Individual investors should pay 7% value-added tax and 15% capital gains tax on their digital asset transactions.

However, under these relatively complete crypto asset regulatory mechanisms, the Thai SEC still maintains a strict regulatory attitude towards the development of the domestic crypto industry. For example, in terms of DeFi, in May this year, Thailand's licensed exchange Bitkub issued tokens for its DeFi platform Tuktuk Finance, but the SEC soon warned it that DeFi-related activities may require permission from financial regulators in the future.

In June this year, the Thai SEC also announced that it would prohibit exchanges from providing trading services for the following types of crypto assets:

• Meme tokens: have no clear purpose or substance or basis, and their price follows social media trends;

• Fan Token: Tokenized by the popularity of the influencer;

• Non-fungible token (NFT): A digital creation that claims ownership or rights to an object or grants specific rights;

• A digital token issued by a digital asset exchange or related personnel for blockchain transactions.

Since then, the Thai SEC has successively asked Huobi Thailand to cease operations, filed a lawsuit against Binance, and issued an announcement urging listed companies to be particularly cautious when purchasing digital assets, and suggested that listed companies with relevant plans take the initiative to communicate with the SEC.

Other countries

In January 2020, Germany's government draft for the implementation of the EU's Fourth Money Laundering Directive Amendment officially came into effect. The law states that crypto assets do not have the legal status of currency or money, but can be accepted by natural or legal persons as a means of payment or for investment purposes, and are considered financial instruments by the German Banking Act. At the same time, all crypto custody companies that manage digital keys for investors must be regulated by the German Federal Financial Supervisory Authority, and Coinbase is the first company to obtain this license.

Starting from August 2 this year, Germany's newly implemented "Fund Positioning Act" will allow some institutional funds to invest in cryptocurrency assets on a large scale for the first time, with the maximum proportion of the portfolio not exceeding 20%.

In June 2020, amendments to Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act came into effect. One of the amendments confirmed the asset attributes of cryptocurrencies such as Bitcoin, and legally recognized cryptocurrency exchanges, payment processors and other cryptocurrency companies as money service businesses (MSBs) and thus brought them under regulation.

In January 2021, Russia's "Law on Digital Financial Assets" officially came into effect. This law requires Russian officials or individuals holding public office to disclose their digital assets, as well as the digital assets of their spouses and children. At the same time, the law prohibits certain Russian officials from holding any cryptocurrencies, such as the board of directors of the Central Bank of Russia, employees of listed companies owned by the Russian Federation, etc.

In June 2021, the Australian Securities and Investments Commission (ASIC) said it would seek market opinions on a series of crypto market regulatory proposals, planning to establish a code of conduct for the pricing, holding, risk management and information disclosure of these crypto assets to protect retail investors and maintain fair market behavior. Previously, Australia only required cryptocurrency exchanges to be regulated by the Australian Financial Intelligence Agency and fulfill anti-money laundering and counter-terrorism financing compliance and reporting obligations.

Summarize

According to data released by the Financial Action Task Force (FATF) in July this year, 58 out of 128 jurisdictions have stated that they have implemented the revised FATF standards, of which 52 jurisdictions regulate virtual asset service providers and 6 jurisdictions prohibit the operation of virtual asset service providers.

Recently, many governments have issued warnings to some cryptocurrency exchanges, mainly because they provided derivative transactions and were not registered in their own country. This also reflects that more and more countries are no longer keeping a laissez-faire attitude towards cryptocurrency transactions and are beginning to take the initiative.

At present, crypto assets are playing an increasingly important role in the global financial market, and therefore more and more countries are formulating corresponding regulatory mechanisms. However, most countries currently conduct corresponding supervision mainly for the defensive purpose of anti-money laundering and counter-terrorist financing risks, rather than for the main purpose of promoting industry progress.

In some countries with clear regulatory mechanisms, crypto assets are usually clearly divided into different types of tokens, such as utility tokens, payment tokens and security tokens, and security tokens are required to be managed in accordance with the relevant requirements of securities laws. Other types of tokens are less regulated.

In addition, Japan, Singapore, South Korea, the United Kingdom, Germany and New York State of the United States have introduced licensing systems for crypto companies. Among them, Asian regions such as Singapore, Hong Kong and Japan are the most friendly, attracting many crypto companies to establish businesses locally and even relocate their headquarters, making them the center of the current crypto market.

With the rapid development of new things such as DeFi and NFT, the crypto market regulatory issues faced by countries and regions around the world are becoming increasingly complex. How to deal with the balance between market innovation inclusiveness and financial stability risks will especially test the governance capabilities and strategic vision of governments.