Inventory | Keywords and trends of global cryptocurrency regulation in 2020

Analyst: Carol Editor: Tong Source: PANews

The development of blockchain cannot be separated from the interaction with the global regulatory system.

The regulatory policies of different countries vary according to the different identification of the basic components of blockchain. It is generally believed that blockchain can be divided into two units: the underlying blockchain and the digital currency based on it. The Chinese government believes that the chain and the currency can be separated. Therefore, "coin-chain separation" is a consistent regulatory principle in my country from top to bottom, that is, on the one hand, strictly supervise the development of digital currency in accordance with the law and continue to tighten the supervision of digital currency, and on the other hand, actively encourage the development of blockchain technology.

Most overseas countries believe that chains and coins are two inseparable parts of blockchain, so their policies are mainly based on clear regulation of coins, or define them as securities and include them in the existing regulatory system, or specifically formulate laws to regulate the issuance and trading of digital currencies, and then allow blockchain to develop freely in the market. In general, this year, overseas countries have paid general attention to the taxation, anti-money laundering and stablecoin risks of cryptocurrencies.

In this article, PAData will review the regulatory attitudes and trends of major countries and regions towards the blockchain industry this year based on PA Weekly’s weekly review of important global regulatory policies.

China: Piloting central bank digital currency and supporting currency-free blockchain applications

From the perspective of discourse analysis, the high-frequency words that appear in the policy include "blockchain", "finance", "technology", "digital (currency)", "application", "technology", "industry", and "innovation". It is not difficult to see that the policy direction of our country is mainly to support the rapid development of the blockchain industry, especially focusing on the application of blockchain technology in the financial field, and taking blockchain technology as an important breakthrough for scientific and technological innovation.

This year, in addition to 21 provinces mentioning blockchain in their 2020 government work reports, central ministries and commissions such as the National Development and Reform Commission, the Ministry of Industry and Information Technology, the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission have also issued relevant documents to support and regulate the development of the blockchain industry. From the main content of supervision, it mainly focuses on supporting the development of blockchain technology and industry, and also includes the central bank's digital currency pilot, blockchain standard formulation, "regulatory sandbox" pilot and digital currency risk warning.

Different regulatory agencies have introduced regulatory policies on blockchain technology based on their responsibilities. The following trends are worth noting:

▣ People's Bank of China: Central Bank Digital Currency Pilot, Financial Risk Management

The People's Bank of China has focused on promoting the research and development and pilot work of the central bank's digital currency this year. State-owned banks such as the Agricultural Bank of China, Industrial and Commercial Bank of China, and China Construction Bank have been testing digital currency wallets, and places such as Shenzhen and Suzhou have begun to experiment with digital currency application scenarios, such as digital RMB red envelopes.

The People's Bank of China and its co-hosted Internet Finance Group, and its Internet Finance Association have repeatedly warned of the risks of virtual currency speculation this year. The Internet Finance Association issued a document entitled "Risk Warning on Participating in Speculation and Speculation on Overseas Virtual Currency Trading Platforms", solemnly reminding that any institution and individual should strictly abide by national laws and regulatory regulations and not participate in virtual currency trading activities and related speculative behaviors. The Internet Finance Regulation Leading Group and the Online Lending Regulation Leading Group jointly held a video and telephone conference on the special rectification of Internet finance and online lending risks, emphasizing the monitoring of new risks in other areas such as virtual currency speculation and illegal foreign exchange transactions, always maintaining a high-pressure situation, and fully implementing the overall requirement that "financial business must be licensed". The General Office of the People's Bank of China issued the "Notice on Carrying out a Special Survey of Financial Technology Application Risks", requiring the survey of financial application risks involving new technologies such as blockchain.

▣ Local government: blockchain industry support policies

Since the central government set the tone for the development of blockchain technology and industry on October 24, 2019, local governments at all levels in my country have introduced corresponding support policies. In the two sessions of various places that ended in late January this year alone, the heads of 21 provinces, cities and autonomous regions, including Beijing, Shanghai, Guangdong, Fujian, Guizhou, Gansu, etc., mentioned blockchain in their government work reports. In addition, many places have also introduced strong financial subsidy policies, for example, Shenzhen Futian supports blockchain companies to settle down and rewards up to 3 million yuan, Tianjin will provide up to 5 million yuan in support for blockchain-related projects, Wuhan will reward 2 million yuan for companies that are shortlisted in the top 100 blockchain companies in the country, Suzhou Xiangcheng has established a 1 billion yuan blockchain guidance fund, and Hangzhou Xiacheng District has established a 1 billion yuan blockchain industry venture capital fund, etc.

▣ Judicial system: determining the attributes of Bitcoin and punishing related illegal and criminal acts

In July, the Supreme People's Court and the National Development and Reform Commission jointly issued the "Opinions on Providing Judicial Services and Guarantees for Accelerating the Improvement of the Socialist Market Economic System in the New Era", requiring the strengthening of the protection of new rights and interests such as digital currency, online virtual property, and data. In the "2019 Shanghai Financial Procuratorial White Paper" released by the Shanghai People's Procuratorate, it is clear that "virtual currency" is a special virtual commodity with property attributes, but does not have the legal status of currency. On the other hand, Liao Jinrong, Director of the International Cooperation Bureau of the Ministry of Public Security, said at the 9th China Payment and Clearing Forum that more than one trillion yuan of gambling funds flow out of the country every year, and some gambling gangs use virtual currency to collect and transfer gambling funds, and may work with financial departments to regulate virtual currency transfers.

Local public security has repeatedly filed cases involving virtual currency crimes. For example, the Ministry of Public Security cracked the PlusToken case, a transnational online pyramid scheme involving more than 40 billion yuan; Huizhou police cracked the country's first case of using USDT to operate a scoring platform; the collapsed exchange FCoin was filed a criminal case by the Hunan police, etc. In general, my country's judicial supervision of virtual currencies is mainly to determine that Bitcoin is not a legal currency but a virtual commodity, and the country prohibits token financing trading platforms from engaging in activities such as the exchange of legal currency and tokens, and virtual currency.

▣ Other ministries: Supervision of sub-sectors

Among the regulatory policies of other ministries and commissions, the most noteworthy is that the Cyberspace Administration of China continues to promote the blockchain registration system; the Ministry of Industry and Information Technology takes the lead in formulating a variety of blockchain standards, such as security standards, financial application standards, technical standards, etc.; the National Development and Reform Commission clearly states that blockchain belongs to the category of new infrastructure.

The United States: The attitude towards central bank digital currency is wavering, and ICO-related activities are strictly regulated

This year, the high-frequency words that appeared in important US policies mainly include "(crypto)currency", "bill", "regulation", "bank", "stablecoin", "asset", "transaction", "rule", "law", etc. In general, the US regulatory policy regards cryptocurrency as an asset, and regulates the issuance and trading of cryptocurrency and its derivatives within the existing legal regulatory system, among which ICO and stablecoin bank custody are particularly focused. In addition, the United States is also actively discussing the possibility of taxation on cryptocurrencies. However, the US government's attitude towards central bank digital currency/digital dollar is still wavering.

This year, many important departments including the Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the New York State Department of Financial Services have released regulatory information in related fields. These areas mainly involve ICO and securities, anti-money laundering, licenses, taxation, stablecoins, derivatives trading, privacy protection, etc.

Compared with other countries and regions, the regulation of the blockchain industry in the United States has two obvious characteristics. First, from the perspective of regulatory subjects, there are many departments and institutions involved in regulation. Second, from the perspective of regulatory tools, the current tendency is to incorporate cryptocurrencies into the existing legal framework rather than rebuild a new regulatory system. In terms of specific regulatory content, the trends worth noting are:

▣ Ministry of Finance: taxation, anti-money laundering, stablecoin custody

The Financial Crimes Enforcement Network (FinCEN), the Internal Revenue and Tax Administration (TIGTA), and the Office of the Comptroller of the Currency (OCC) are the three main enforcement agencies of the Treasury Department that regulate digital currencies.

FinCEN is primarily concerned with anti-money laundering, and the latest proposed rules require users who want to transfer cryptocurrencies from centralized exchanges to their own private wallets to provide personal information to the exchange. This is consistent with the overall regulatory trend of requiring virtual asset service providers (VASPs) to implement KYC rules.

TIGTA focuses mainly on tax issues, with taxpayers being asked to answer whether they received, sold, sent, exchanged or otherwise acquired any virtual currency in 2020. This year, the General Taxation Administration is evaluating different ways to tax cryptocurrencies and intends to increase scrutiny of crypto exchanges.

The main regulatory content of the OCC is to legally connect the use of cryptocurrencies with traditional banking. This year, a long-term plan of the OCC aims to provide national banking licenses to payment companies that do not provide deposit services. It has announced that it will allow US national banks and federal savings associations to custody cryptocurrencies, clarifying that such custody services are a modern form of traditional banking activities related to custody services, which provides legal space for the issuance of stablecoins. The OCC's regulatory rules will enable cryptocurrency companies to use banking services more.

▣ SEC: ICOs and Securities

The Securities and Exchange Commission (SEC) is the main agency in the United States that regulates digital currencies, and its enforcement is mainly based on the Securities Act. The SEC believes that ICO (including IEO) issuance may involve the issuance and sale of securities, and therefore must comply with the registration requirements applicable to issuance under the federal securities law. This year, the SEC has repeatedly regulated ICOs, such as suing technology company Kik for violating Section 5 of the Securities Act by offering and selling securities without submitting a registration statement or exemption from registration; suing John McAfee for promoting ICOs without disclosing compensation and suspected tax fraud; and accusing Ripple of conducting an unregistered sale of $1.3 billion in securities. In the future, the trend of strong regulation of ICOs may be strengthened.

▣ Commodity Futures Trading Commission: Derivatives Trading

The Commodity Futures Trading Commission (CFTC) has made comprehensive cryptocurrency regulation a priority. In recent guidelines, it has clearly limited the rules for "futures commission merchants" (FCMs) to deposit customer virtual currencies. In addition, the CFTC has also warned the public about the risks of cryptocurrency trading.

▣ Federal Reserve: Central Bank Digital Currency/Digital Dollar

The Federal Reserve has focused on central bank digital currencies this year, but its attitude towards it is rather wavering and not positive. Federal Reserve Chairman Powell admitted that central bank digital currencies (CBDCs) may improve the US payment system, and about 80% of central banks around the world are exploring the concept of CBDCs, but at the same time said that the Federal Reserve is not in a hurry to issue its own CBDC. Powell believes that there are many questions to be answered around digital currencies, including network issues, privacy issues, etc., and whether digital currencies can maintain the central position of currency credibility is still in doubt.

Japan, South Korea, Singapore, and Hong Kong, China: Positive attitude towards central bank digital currencies, issuing blockchain-related licenses

Japan, South Korea, Singapore, and Hong Kong, China are several major markets in Asia besides mainland China. In the regulatory policies of these countries and regions, "cryptocurrency", "blockchain", "CBDC", "asset", "technology", "payment", "transaction", "finance", "regulation", "bill" and other high-frequency words. In general, these countries and regions are very positive about issuing central bank digital currencies or participating in central bank digital currency research and cross-border cooperation. The supervision of digital currency issuance and trading in Japan, South Korea and Singapore has gradually become clear, either incorporating it into the regulatory scope of the original financial bills, or formulating special regulatory bills. In addition, the governments of South Korea and Singapore are very supportive of the application of blockchain technology.

From the perspective of regulatory agencies, this year departments such as the Ministry of Finance of South Korea, the Financial Services Commission of South Korea, the Financial Services Agency of Japan, the Monetary Authority of Singapore, the Hong Kong Monetary Authority, and the Securities and Futures Commission of Hong Kong have all issued relevant regulatory rules. The content of the supervision mainly includes anti-money laundering, licensing, taxation, stablecoins, derivatives trading, etc.

The trends that deserve more attention include:

▣ Actively explore central bank digital currency

The attitude of Asia towards central bank digital currencies is generally positive. This year, the Central Bank of Singapore and the Chief Financial Technology Officer of the Monetary Authority of Singapore said that Singapore is ready to launch its own central bank digital currency (non-retail). The Bank of Korea said that it had completed the design or demand definition based on CBDC in July, and implemented a technical review, and on this basis, carried out the second phase of the project "CBDC work process analysis and external consultation", and planned to establish and test the CBDC pilot system next year. The Bank of Japan is preparing to issue CBDC and has established a CBDC working group in July to promote the digitization of the entire settlement system and research on CBDC.

▣ License and Anti-Money Laundering

South Korea, Singapore and Hong Kong have actively explored and implemented regulatory licenses this year. The Hong Kong Securities and Futures Commission plans to issue licenses to compliant exchanges, and virtual asset trading platform OSL Digital Securities Limited (OSL) recently obtained its first license; South Korea's "Law on the Reporting and Utilization of Specific Financial Transaction Information (Special Financial Law)" includes a crypto exchange license system; the Monetary Authority of Singapore provides a compulsory licensing system for payment service providers in accordance with the Payment Services Act, and service providers need to apply for one of the "Money Changer" license, "Standard Payment Institution" license, and "Major Payment Institution" license.

In addition, South Korea and Hong Kong, China also place special emphasis on anti-money laundering. The Financial Services Commission of South Korea is seeking legal amendments to compel virtual asset service providers (VASPs) to report the names of their customers; the Financial Services and Treasury Bureau of the Hong Kong Special Administrative Region Government has issued a consultation document to amend Chapter 615 of the Hong Kong Laws, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, requiring licensees to comply with the anti-money laundering and counter-terrorist financing provisions set out in Schedule 2 of the Anti-Money Laundering Ordinance and other regulatory requirements aimed at protecting investors.

▣ Clarify the regulatory framework

The governments of Japan and Singapore have clarified the legal framework for regulating digital currency transactions and services. Japan's revised Funds Settlement Act, which includes provisions related to virtual currencies, came into effect in May this year. Crypto custodian service providers and crypto derivatives businesses are now regulated by the Payment Services Act, the Financial Instruments and Exchange Act, and the Funds Settlement Act, respectively. Singapore's Payment Services Act came into effect in February this year. The new Payment Services Act is the first comprehensive regulatory provision for companies engaged in activities such as token trading.

▣ Encourage the application of blockchain technology

The governments of South Korea and Singapore place special emphasis on the application of blockchain technology. The South Korean government called on private enterprises to take advantage of the potential of blockchain and introduced a "digital new policy" to invest 20 billion won in cultivating AI and blockchain talents; the Singapore government-led blockchain program "Ubin Island Project" completed testing this year. In addition, enterprises, the Information and Communications Media Development Authority and the National Research Foundation launched a S$12 million (approximately US$8.9 million) project to further strengthen Singapore's blockchain ecosystem.

Europe: Legislation to give digital currencies legal status, emphasizing the regulation of stablecoins

This year, many European countries, including France, Spain, Germany, Switzerland, Italy, Sweden, Russia and Portugal, have introduced relevant regulatory policies. In these policies, words such as "(crypto)currency", "central bank", "asset", "regulation", "stable currency", "CBDC", "bank", "bill", "finance" and "framework" appear frequently.

From the perspective of regulatory agencies, central banks, congresses/parliaments/cabinets, and traditional financial regulatory agencies are deeply involved in the regulation of blockchain. These regulatory policies are mainly aimed at anti-money laundering, stablecoins, and central bank digital currencies. Overall, European countries have a positive attitude towards central bank digital currencies, and the supervision of anti-money laundering and stablecoins is increasing.

▣ Clarify regulatory bills and regulatory innovation

Many European countries have made their digital currency regulations more clear this year. For example, the German Financial Supervisory Authority has made it mandatory to obtain the agency's permission when installing digital currency ATM machines, and the relevant provisions are set under the German Banking Act; the Ukrainian Ministry of Digital Transformation issued a new draft virtual asset in May, aiming to determine the legal status of encrypted assets and the circulation and issuance rules; the Russian Digital Currency and Blockchain Association plans to consider drafting a new digital currency law. In addition, this year Russian President Putin signed a bill that clearly allows cryptocurrency transactions but prohibits them from being used as a means of payment; Portugal issued a regulatory sandbox framework in April to test emerging technologies including blockchain.

▣ Positive attitude towards central bank digital currency

European countries are generally positive about central bank digital currencies, among which Sweden and Lithuania are leading in the practice of central bank digital currencies. In July this year, Lithuania issued 24,000 digital currencies LBCoin issued by its central bank. Although this is only a commemorative coin, its issuance is part of the national central bank digital currency pilot. It is also the first digital currency issued by a central bank in the euro area. This year, the Swedish central bank conducted an in-depth study on the feasibility of four models of the electronic version of the Swedish krona in the domestic market and outlined how different models meet its policy goals.

In addition, France, Germany and Italy are actively connecting with the "digital euro". The Italian Banking Association (ABI) has set up a working group to study digital assets, hoping to help accelerate the implementation of the European Central Bank's digital currency by participating in related projects and experiments; the French central bank has selected eight partners including HSBC, Accenture and Swiss crypto bank SEBA to test CBDC; the German central bank has also expressed support for international cooperation between central banks, believing that it is necessary to analyze and evaluate CBDC, especially in fulfilling its mandate.

▣ Pay attention to stablecoin risks

The most significant change in the European regulatory trend this year is that European countries have emphasized the risks of legal currency stablecoins. The Russian Central Bank has stated that it prohibits private enterprises from providing stablecoins backed by Russian legal currency, and only the digital ruble of the Bank of Russia can be used; the French central bank believes that although stablecoins provide opportunities to improve the payment system, they may also bring considerable risks.

▣ Anti-Money Laundering

France, Spain, and Ireland have emphasized anti-money laundering regulations this year. The French Ministry of Finance announced comprehensive KYC requirements for all cryptocurrency companies operating in and providing services to the country; the Irish Cabinet introduced the Money Laundering and Terrorist Financing Amendment Bill 2020 to make market participants "obligated entities", thereby subjecting these participants to anti-money laundering and anti-terrorist financing requirements; the Spanish Ministry of Economic Affairs and Digital Transformation has prepared a draft bill to regulate trading platforms, which will force crypto exchanges, wallet providers, and crypto custody service providers operating in Spain to comply with new anti-money laundering and anti-terrorist financing protocols.

West Asia and the Middle East: Actively develop mining and explore cryptocurrency-related taxation

In the blockchain-related policies issued by countries in West Asia and the Middle East, words such as "cryptocurrency", "bill", "mining", "central bank", "financial assets", "bank", "mine", and "miner" appear frequently. It is not difficult to see that West Asia and the Middle East countries have a positive attitude towards the mining industry. In addition, the central banks of these countries are also very positive about central bank digital currencies. In general, countries in the region hope to promote the development of blockchain-related industries through a friendly policy environment to benefit their own economies.

Central banks and economic development departments in West Asia and the Middle East are actively involved in the regulation of the blockchain industry, with the main areas of regulation including mining, taxation and central bank digital currencies.

▣ Allow and actively develop mining and collect mining-based taxes

The development of blockchain industry in West Asia and the Middle East is mainly focused on mining, which is related to the abundant energy in the region. Iran, Kazakhstan and Uzbekistan have successively issued documents to allow cryptocurrency mining. The Iranian government has issued operating licenses to 14 crypto mining farms, peak electricity charges can be reduced by 47%, and power plants are allowed to mine cryptocurrencies; Kazakhstan's bill defines mining as a technical process and mining services as a corporate activity, and plans to double its digital currency mining investment by the end of this year; Uzbekistan is more active, and the National Project Management Bureau plans to establish a national mining pool and cooperate with compliant cryptocurrency exchanges so that mining companies can circulate cryptocurrencies to the market.

The positive attitude towards mining is mainly for tax purposes. Iran, Kazakhstan and Kyrgyzstan have all expressed their intention to (propose) taxation of mining income this year. Iran requires mining entities outside of bonded areas to comply with tariff regulations for crypto mining; Kazakhstan plans to impose a 15% tax on Bitcoin mining; the Kyrgyz Republic Tax Code has supplemented Chapter 61, which stipulates a tax system for cryptocurrency mining. However, Uzbekistan is an exception in the region, which exempted taxation on income from cryptocurrency operations this year, clarifying that the business of legal persons and individuals related to the circulation of crypto assets (including business conducted by non-residents) is not subject to taxation.

▣ Positive attitude towards central bank digital currency

The United Arab Emirates, Saudi Arabia, Kazakhstan and Lebanon announced progress in central bank digital currencies this year. The Central Bank of Lebanon plans to launch a digital currency in 2021 to restore people's confidence in the banking industry; Kazakhstan plans to introduce a central bank digital currency and is analyzing various technical infrastructures and regulatory approaches to develop a scenario report on the introduction of digital currency in Kazakhstan; Saudi Arabia and the United Arab Emirates jointly announced the success of the trial run of the central bank digital currency, a project aimed at settling cross-border transactions between commercial banks in the two jurisdictions through a cross-border joint CBDC.

International organizations: Consider stablecoin risks and coordinate global regulatory frameworks

In addition to various countries and regions, this year, international organizations such as the OECD, G7, G20, EU, FATF, IMF, OMFIF and CMTA are also actively exploring and coordinating blockchain regulatory policies.

Judging from the high-frequency words in relevant policies, words such as "digital currency", "regulation", "stablecoin", "asset", "framework", "finance", "euro", "standard", "law", "central bank", and "payment" are more common.

The European Union is the organization that has disclosed the most regulatory policies or regulatory intentions. Its subordinate institutions such as the European Commission, the European Central Bank, the Research Service Center, and the Securities and Markets Authority have actively participated in international blockchain supervision this year. From the perspective of the content that international organizations are concerned about, stablecoins, anti-money laundering and regulatory frameworks are the three main contents.

Of particular note is the regulatory attitude of international organizations towards stablecoins. The G7 opposes stablecoins such as Libra, emphasizing that such payment services must be properly regulated so as not to undermine financial stability, consumer protection, privacy, taxation or cybersecurity; the G20 Financial Stability Board also emphasized the proposal to regulate the "Global Stablecoin" (GSC), hoping to implement international regulatory standards in national jurisdictions, including effective cooperation, coordination and information sharing arrangements; the finance ministers of the five EU countries (Germany, France, Italy, Spain and the Netherlands) called on the European Commission to regulate stablecoins to protect consumers and maintain monetary sovereignty.

In addition, international organizations have also made efforts in anti-money laundering and coordinating regulatory frameworks. The G20 will begin to explore regulatory measures such as preventing money laundering; the Financial Action Task Force plans to strengthen the global regulatory framework for crypto exchanges to coordinate and share information on virtual asset service providers (VASPs); the three-year strategic guidelines announced by EU regulators clearly state that a legal framework will be introduced for digital currencies.

Looking at the supervision of the blockchain industry in major countries and regions around the world, from the perspective of regulatory bodies, more and more diverse institutions are beginning to participate in supervision, not only within the country, but also internationally; from the perspective of regulatory tools, more and more countries have clarified the legal status of cryptocurrency/virtual currency/digital currency, or incorporated it into the existing legal framework for supervision, or formulated new special laws for supervision; from the perspective of the objects of supervision, it has covered a wide range of market participants, including enterprises and individuals. Increasingly clear regulatory rules can regulate the industry to continue to develop in a legal and compliant direction.