Along with the appearance of Bitcoin, blockchain technology has become a more popular topic with a rapid development of crypto assets market. Cryptocurrency, Initial coin offerings (ICO), cryptocurrency exchanges also become keywords in regulatory documents. In order to deal with the risks accumulated in crypto assets, how to regulate this new market properly becomes more and more important. Therefore, the Sunshine Research Center recently did a research on cryptocurrency regulations worldwide through analysing and summarizing the supervisions on cryptocurrency in 19 countries and regions, following with several suggestions towards the cryptocurrency regulation in China. The original report was published on January 30th 2019.
Key findings are:
l Crypto assets as virtual assets are based on cryptographic principles.
l To date, regulatory actions have been mainly focusing on issuance and transaction.
l Regulation on issuance can be categorized as full ban, fit into current regulation and in-research.
l Issuance regulation requires issuers to register with authority and provide prospectuses.
l Regulations towards the transaction include full ban, license required, registration required (in plan) and self-regulation.
l Transaction regulation requires exchanges to register with authority and comply with KYC requirements.
1. Definition of crypto assets
Although coins such as Bitcoin and Ether have been existing since 2009, the definition of crypto assets has been in debate. The European Central Bank, Bank for International Settlements and International Monetary Fund have all provided different definitions of crypto assets. The Author of this paper reviewed all definitions and then concluded that ‘Crypto-asset as a digital representation of values built on the cryptographic principle, includes bitcoins that are generated by decentralized mechanisms and other cryptocurrency "tokens" that are based on various applications or physical assets’. Digital assets denominated in fiat money are knowns as "electronic currency", while other types of digital assets could be regarded as virtual assets. Therefore, crypto assets go under the virtual assets. (See F1)
F1 The classification of digital assets
Bitcoin had experienced a significant fluctuation in the whole year of 2018. The market value of bitcoin peaked up at 823.8billion USD in January, but followed with a sharp drop to 442.8 billion USD in February. At the end of 2018, the market value was 110 billion USD, only one-eighth of the value at the beginning of the year (see F2).
F2 Market Value of Bitcoin in 2008
As the accumulative risks in the crypto assets market had gradually exposed, regulators started to take actions, especially on issuance and transaction.
2. Regulation on the issuance of crypto assets
Nowadays, the Initial Coin Offering (ICO) has been a primary regulatory focus for almost every country. ICO might lead risks including cross border financing, information incomplete, fraud, uncertainty, price volatility and the lack of protection.
Major countries have regarded ICO as a public financing activity, particularly the issuance of securities. However, different countries had different standards. Some countries had banned the ICO transaction, some put ICO transaction under existing supervision and regulated according to the securities law, and some are still researching on ICO to see how to fit into the regulatory policy.
Table 1 Regulations on ICO issuance in major countries
Countries that put ICOs under supervision had similar progress.
Ø Firstly, identified the nature of crypto assets and to ensure that the asset is the main regulatory body or not.
Ø Secondly, regulated the assets based on the existing regulations and laws. Until now, there is not any now born laws from any country for crypto assets issuance.
In terms of the regulatory approach, ICO issuers should follow the law of securities including registering with the securities regulatory authority, and submitting prospectuses with information such as company information, business description, business plan, management structure, ownership structure, financial sheets and strategic initiatives, etc.
3. Regulation on transactions of crypto assets
Transactions of cryptocurrency consisted of direct personal transaction and the third-party trading platform. These transactions could be exchanges between cryptocurrencies or trading between the cryptocurrency and a legal tender. Meanwhile, due to the highly convenience and lack of transparency, in cryptocurrency trading, some risks in perspectives of pricing and security come into being.
Ø Pricing risk consisted of price volatility risk and the risk of price manipulation. The previous might result in losses caused by volatility when bitcoin is used as a way of payment for the transaction. The latter might intervene in the market to influence the price of cryptocurrency due to the centralized exchanges.
Ø Security risk consisted of delivery recovery risk and safety issues of transaction accounts. Due to the crypto of crypto assets, once a transaction accomplishes, the fund would be hard to recover and some even cross-border trade recovery would be limited by the jurisdiction.
Therefore, cryptocurrency trading platforms are banned to operate in some countries. Some countries required the operators to get a license as well as comply with the KYC, AML and anti-terrorism finance requirements. Switzerland did not have any clear regulations but all transactions have to meet the requirements from the AML law.
Table 2 Regulations in major countries towards the transaction
There are three ways to regulate the crypto assets transaction:
Ø Establish the barriers for cryptocurrency exchanges to enter the market.
Japan was the first to provide the legal framework for cryptocurrency exchanges to operate in the market. Exchanges need to implement fund depository, disclose relevant risks and products information, and guarantee information security.
Ø Introduce the KYC regulatory framework.
In order to meet the requirements on AML/CFT, regulatory authorities introduced the current KYC framework into the regulation of crypto assets to prevent criminals from anonymous transactions for criminal activities. KYC mainly focused on identifying both parties during the transactions.
Ø Establish security requirements for transaction account as well as hosting services
4. Enlightens from global crypto assets regulation
The Paper also shed some lights on the regulation and development in China with suggestions as following:
Ø Effectively crack down token-related criminal activities
Ø Continue to research on international regulatory policies and development
Ø Conduct in-depth research on blockchain technology, thus laying a good foundation for central bank digital currency.
