Cryptocurrency regulation can have global, industry-wide implications. Developments in regulatory approaches to the emerging industry can impact asset values and the direction projects’ development takes. This week’s Regulatory Trends focus on emerging developments within the United Kingdom, the USA and China.
The UK’s Cryptoasset Taskforce published a report on the country’s approach to cryptoassets on 29th October. Working alongside the UK’s Financial Conduct Authority (FCA), the report considered the policy and regulatory implications of Distributed Ledger Technology (DLT) and cryptoassets, as well as the opportunities and risks both present. Underlying the report, the FCA made clear that in its view cryptoassets have no intrinsic value and therefore investors should be prepared to lose all value they put in. The key risks identified by the Taskforce included harm to consumers and market integrity, the use of cryptoassets for illicit activities and the potential future threats to financial stability. The Taskforce has also committed to a number of actions to mitigate these risks, including consultation on perimeter guidance on which cryptoassets fall within the UK’s regulatory framework and the implementation of a comprehensive response to the use of cryptoassets for illicit activities, going further than the fifth EU Anti-Money Laundering (AML) Directive. It seems that the UK is beginning to develop an institutional perspective on cryptoassets and it will be useful to see whether the country’s regulatory attitudes will grow to accommodate and incentivise the emergence of cryptoassets and DLT.
China’s central bank published its 2018 China Financial Stability Report on 2nd November. The Report delves into ICOs wherein the central bank shared that it will be cracking down on “disguised” ICOs trying to bypass current regulations. Having outright banned ICOs in September 2018, these disguised ICOs mostly consist of airdrop campaigns giving away parts of their token supply and then using speculative trading on secondary markets to drive up the price before selling for a profit on such markets. Additionally, the Report highlighted that since the relocation of many of the country’s ICOs to outside its borders, Chinese investors are using agents to invest for them, and that the central authority remains vigilant of such endeavours.
Hong Kong presents a healthy regional comparative to mainland China’s policy towards cryptoassets. Most recently, Ashley Alder, the Chief Executive of Hong Kong’s Securities and Futures Commission (SFC), proposed a “sandbox” for cryptocurrency exchanges in the country. Such a “sandbox” would acts as a way for developing regulation to keep up with market innovation whilst providing participating exchanges with a golden opportunity to perfect their regulatory compliance. The SFC is considering regulating exchanges in a similar fashion to automated trading services. Under the proposed “sandbox” model, only professional investors would be able to invest in cryptoassets and fund managers investing more than ten percent of their portfolio in cryptoassets would need a license before doing so. Cryptocurrency exchanges joining the “sandbox” cannot trade futures or derivatives, nor can they offer any financial incentives, and must comply with relevant rules on the fair treatment of clients and those on the prevention of market manipulation.
During the DC Fintech Week conference, William Hinman, the Director of Corporate Finance at the Securities and Exchange Commission (SEC), shared that the regulatory body plans on publishing clearer guidance on ICOs. The guidance would allow ICOs to determine with certainty whether their token would be classified as a security or not. Furthermore, Mr Hinman shared that should projects be unsure of the status of their cryptoassets, they have the ability to correspond with the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) to receive prompt advice on securities regulation. Interestingly, he also shared that Ether isn’t a security because it is sufficiently decentralised and that where an expectation of return exists, it is likely that the asset will be classed as a security. It will be interesting to see what the SEC’s long-awaited guidance details and how newer cryptoasset projects will adapt to the changing regulatory environment.
Regulatory trends across the globe continue to develop in divergent ways. The UK and the USA mimic China and Hong Kong; while both the UK and China maintain a conservative approach to regulation and advice, the USA and Hong Kong remain more liberal and welcoming of blockchain technology. It is likely that countries with more adaptive regulatory policies will attract greater fintech start-ups involved with DLT and this rings true for the four above.
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