Xiao Sa: Who is the legal chasm? Comparison of virtual currency regulatory measures in various countries

In China, whenever we talk about the regulation of virtual currencies such as Bitcoin, we almost always mention "Document 289" and "Document 9.4". The former refers to the 2013 "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China, and the latter refers to the "Notice on Preventing Risks of Token Issuance and Financing" issued by the People's Bank of China on September 4, 2017. These two departmental regulations are almost the only official documents that can reveal the attitude of Chinese regulatory authorities towards virtual currencies such as Bitcoin.

Legal research often emphasizes comparative research methods. China is like this when it comes to virtual currency regulation, but what about other countries? The following is a list of countries such as the United States, Singapore, Japan, Germany, Switzerland, and the United Kingdom that the SA team has selected to share with readers the regulatory situation.

1. United States

The regulation of digital currencies in the United States is relatively complicated, and there is no unified and clear understanding. Different regulatory departments may characterize different digital currencies differently in order to include them in their own regulatory scope, which seems to be a situation where "everyone wants to regulate them."

The U.S. Treasury Department considers virtual currency to be a type of currency, so all virtual currency exchanges must apply to the Financial Crimes Enforcement Network (FinCEN) for a registered MSB license (Money Service Business).

The U.S. Commodity Futures Trading Commission (CFTC) considers Bitcoin futures to be commodities. In December 2017, the Chicago Mercantile Exchange (CME) launched Bitcoin futures contract trading.

The U.S. Internal Revenue Service (IRS) recognizes virtual currencies such as Bitcoin as property rather than currency. It imposes value-added tax on transactions between virtual currencies such as Bitcoin and has set up a team to combat tax evasion in virtual currency transactions.

After seeing the popularity of the ICO market, the U.S. Securities and Exchange Commission (SEC) believes that some virtual currency ICOs that can pass the Howey test are securities issuances and need to be registered with the SEC and regulated by laws such as the Securities Act and the Securities Exchange Act.

The so-called Howey Test is a standard used by a U.S. court in a ruling as early as 1946 (SEC v. Howey) to determine whether a specific transaction constitutes a securities issuance. The specific standards include: (1) whether it is an investment of money; (2) whether the investment expects the generation of profits; (3) whether the investment is aimed at a specific business (common enterprise), that is, whether there is a project party; (4) whether the generation of profits is derived from the efforts of the issuer or a third party.

Among these four standards, the standard of "money" is constantly expanding. In 2013, a US court ruled that Bitcoin has the attributes of money (SEC v. Trendon T. Shavers & Bitcoin Sav. & Tr.). Therefore, even if an ICO only absorbs virtual currencies such as Bitcoin for financing, it is very likely that the SEC will regard it as a securities issuance and be subject to stricter supervision.

2. Singapore

In November 2017, the Monetary Authority of Singapore (MAS) issued the "A Guide to Digital Token Offerings", which pointed out that if digital tokens are identified as products that should be regulated by Singapore's securities laws (i.e. capital market products), the sale or issuance of digital tokens must comply with the existing Singapore Securities and Futures Act (SFA). Unlike the United States, which may have an "all-encompassing" definition of securities, Singapore's definition of "capital market products" is relatively narrow. According to Section 2 of Singapore's Securities and Futures Act, "capital market products" refer to securities, futures contracts, contracts and arrangements for foreign exchange transactions (including leveraged transactions), and financial products specially designated by MAS. In other words, most virtual currencies will be identified as non-capital market products. Furthermore, MAS has essentially given the green light to virtual currency issuance projects, which are most non-capital market products.

On September 19, 2018, at the CoinDesk Consensus Conference in Singapore, Damien Pang, Director of the Technology Infrastructure Office (TIO) of the MAS Fintech and Innovation Group, said: MAS currently divides tokens into three categories: application tokens, payment tokens, and security tokens. In terms of regulation, MAS does not intend to regulate application tokens, but for payment tokens, MAS expects to formulate a payment services bill to apply to tokens with storage and payment value. As for security tokens, the existing Securities and Futures Act (SFA) applies.

On January 14, 2019, the Payment Services Act was reviewed and passed by the Singapore Parliament, clarifying the supervision of payment token business. The Act stipulates that virtual currency exchanges, OTC platforms, wallets, etc. are payment token service providers and need to comply with relevant anti-money laundering regulations and apply for corresponding licenses.

3. Japan

On April 1, 2017, Japan's Payment Services Amendment Act officially came into effect. This is the world's first bill to formally include virtual currencies in the regulation at the legislative level. The legality of some virtual currencies as a means of payment is officially recognized, and virtual currency exchange businesses are regulated. In the bill, virtual currency is defined as "a property value calculated in legal currency and processed through an electronic system that can be used for transfer payments or debt repayment between different entities."

In March 2019, Japan amended the Payment Services Act and the Financial Instruments and Exchange Act, changing the original term "virtual currency" to "crypto assets". Cryptocurrency exchange institutions must be joint stock companies registered with the Financial Services Agency, and after registration, they must fulfill obligations such as information security management, information disclosure, asset separation management (separation management of self-owned assets and user assets), and regular submission of business reports.

Regarding ICO activities, if the tokens issued are considered to have the nature of securities, that is, the so-called investment ICO, they will be subject to strong supervision of the Financial Instruments and Exchange Act, and various registrations need to be obtained in accordance with relevant regulations. The issuer should also make necessary information disclosures and regulate advertising and sales behaviors. In September 2019, the Digital Currency Exchange Industry Association under the Financial Services Agency of Japan promulgated the "Rules on the Issuance of New Currencies" and the "Guidelines on the Rules on the Issuance of New Currencies", which put forward higher regulatory requirements for digital currency exchanges. In general, Japan has high compliance requirements for the digital currency industry, and it is difficult to raise funds and trade projects. As a result, although Japan did not deny the legality of ICO after the amendment, in fact, few projects have been successfully issued for a long time.

4. Germany

Germany is the first country in the world to recognize the legality of Bitcoin. However, Germany has not issued special laws for virtual currencies. Instead, it classifies digital currencies into different types according to their business scenarios and application characteristics for differentiated supervision, that is, virtual currencies are included in the existing legal system for classified supervision.

In August 2013, in response to an inquiry from FDP property expert Frank Schaeffler, the German Ministry of Finance stated that it had officially recognized Bitcoin as a "currency unit" and "private asset."

In September 2018, the German Federal Financial Supervisory Authority released the Regulatory Report on Blockchain Technology, which divides digital currencies into three categories:

First, payment tokens, similar to Bitcoin, refer to a means of payment or value transfer used to purchase goods or services. They do not have value in themselves, but are only used as a means of payment to undertake the function of clearing or settlement. If payment tokens are used for payment in commodity transactions, or if a token trading platform is built, an application must be submitted to the German Financial Authority in accordance with the German Banking Act. At the same time, as a provider of financial instruments, it is also subject to the German Anti-Money Laundering Act and needs to comply with the following four provisions: First, due diligence on customers; second, implementation of customer identity information and transaction preservation system; third, establishment and improvement of internal anti-money laundering control system; fourth, establishment and execution of large-value transaction and suspicious transaction reporting system.

The second is security tokens, including equity tokens and other capital tokens, whose holders have ownership of specific assets, equity and debt instruments, and will promise investors future company earnings or profits, so their functions are similar to securities, bonds or other financial derivatives. According to Article 2, paragraph 1 of the German Securities Trading Act, a type of virtual currency must meet the following four conditions to be recognized as a security: first, the transferability of the token; second, the liquidity of the token in the financial market or capital market (the token trading platform can be regarded as the financial or capital market in this definition); third, the embodiment of rights in the token, that is, the token holder has the right to claim similar rights such as shareholder rights or debt rights; fourth, it meets the standards as a payment tool. As for whether the token meets the above four standards, the German Financial Authority adopts a case-by-case review approach, and there is no unified answer.

The third is the utility token. The German Financial Supervisory Authority believes that this type of currency is only used in the issuer's own network system and is relatively closed. It grants its users the right to use its products or services through blockchain technology. For a single utility token, it does not have financial attributes in essence and is not subject to the supervision of relevant German financial laws. However, utility tokens may be given the functions of payment tokens and security tokens, and will be supervised in accordance with relevant regulatory requirements.

5. Switzerland

In April 2018, the Swiss Financial Market Authority (FINMA) issued a guideline that divided tokens into three categories based on their basic purpose and whether they can be traded: payment tokens, i.e. digital cryptocurrencies; utility tokens; and asset tokens. FINMA believes that payment tokens do not constitute a financing method; asset tokens constitute securities and need to be subject to securities regulatory rules. FINMA has not yet clarified what regulatory rules apply to the issuance of utility tokens, but has clearly pointed out that utility tokens are not securities and are not subject to securities regulatory rules.

6. United Kingdom

In January 2019, the UK Financial Conduct Authority (FCA) released the "Guide to Cryptocurrency Assets", in which it also divided cryptocurrencies into three types. Among them, trading tokens such as Bitcoin and Litecoin can be used to buy and sell goods and services without going through banks; security tokens should be regulated; utility tokens other than electronic currencies are not regulated.

Final Thoughts

Looking at the regulation of virtual currencies in the countries listed in this article, it is not difficult to find that all countries have tried to make a more clear classification of virtual currencies, so as to incorporate different types of virtual currencies into the existing regulatory system to meet the regulatory requirements at different levels such as anti-money laundering and anti-financial fraud. Some countries have also maintained a certain consistency in the classification of virtual currencies, namely, payment tokens, security tokens and utility tokens.