Analysis of Various Regulatory Regimes in Relation to Cryptocurrencies

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Not only do token issuers as well as token holders need to abide by and educate themselves in laws that are directly related to digital currencies

There are substantial differences in legal approaches different countries have taken in regards to cryptocurrency legislation. On one end of the spectrum, there is China's ban on ICOs and cryptocurrency exchanges, and on the other, there are countries such as Gibraltar, which is rapidly building new regulatory frameworks to better incorporate crypto-businesses into their economies.

Most countries, however, fall somewhere between these two extremes as they are trying to craft regulations within their existing law structures, but the recurring theme is that existing regulations are often ill-equipped for the challenges blockchain technology is bringing to the forefront.

Not only do token issuers as well as token holders need to abide by and educate themselves in laws that are directly related to digital currencies, they also have to consider the many possible interactions with insolvency, gambling, money laundering, property laws, and other fields of law that are often overlooked, but can be applicable. Unlawful activities, performed intentionally or not, can lead to government interventions and in some instances even retrospective sanctions.

In the continuation of this article, we are going to take a look at regulatory environments in certain key jurisdictions around the world. The following list is a brief overview of the current situation and is by no means meant to be treated as legal advice.

European Union

EU bureaucrats have recognized that not all cryptocurrencies and accompanying activities exist within the scope of current regulations. 

In the "FinTech Action Plan", the European Commission has made it clear that the tokens that fall outside the jurisdiction of existing laws are, for the time being, actively monitored, and the EU Commission will eventually decide if regulatory action at the EU level is required. In the meantime, certain member states are writing special national legislations in order to fill the problematic legal void. 

The European Securities and Markets Authority (ESMA) has warned token issuers to carefully examine whether their products can be considered as securities before entering the market without the necessary approval. Any ICOs that are offering, broadly speaking, financial instruments (defined as a transferable security, a derivative or a unit in collective investment) are regulated with financial services legislation MiFID II/MiFIR. If the token in question meets the criteria of a financial instrument, there are numerous legal requirements that have to be fulfilled before the token sale can legally begin. 

Some of the relevant EU-wide directives that have to be followed are The Prospectus Directive (not applicable if less than €5 million have been raised over a period of 12 months), The Fourth Anti Money Laundering Directive (AMLD4); and other European legislation, such as The Benchmark Regulation, The Market Abuse Regulation and many others. There are considerable differences within EU as member states have varying degrees of implementation of aforementioned EU regulations.

United Kingdom

The current state of affairs on the island is very similar to the EU as most cryptocurrencies and associated activities are allowed in the UK, with the stipulation that companies comply with the existing regulatory framework. The Financial Conduct Authority (FCA) has recognized, similarly to their EU counterparts, that "many ICOs will fall outside the regulated space". Token issuers have to determine whether their services exist outside or within the legal boundaries of present regulations on a case-by-case basis.

The FCA has issued general guidelines for ICO participants in which they clearly outlined that any financial instruments that could be considered as "specified investment" (such as shares, bonds or debentures and derivative instruments) are regulated by the Regulated Activities Order (RAO). 

USA

As long as ICO organizers and their offered platforms are compliant with applicable legislations and specific legal recommendations, they are welcome to operate within the borders of the USA. 

After DAO's token offering debacle, the SEC provided legal commentary in which they reached the conclusion that cryptocurrencies must follow the US Supreme Court’s guidelines when determining (on case-by-case basis) whether a certain token can be considered a security or not. 

If the requirements laid out in the Howey Test, which determines which financial instruments are considered securities, are met, token issuers are subject to state as well as federal laws that regulate the trade and the creation of securities in the USA.

For now, no country-wide legislation has been put forward by the authorities, however, some individual states have taken upon themselves to regulate the industry in a responsible manner. For example, Wyoming's House of Representatives was first to officially recognize the obvious difference between security and utility tokens and decided to exempt the latter from state's money transmission and security laws, as long as utility tokens are not being marketed as an investment. Such progress is welcome especially because state laws are often the legal foundation that federal laws are built upon.

Switzerland

Switzerland is considered quite friendly to blockchain industry businesses on the global stage, which has attracted many token sale organizers to use a Swiss foundation to jump-start their campaigns. 

The Swiss Financial Market Supervisory (FINMA) is the first government regulator that is trying to tackle the difficult task of token classification by creating three distinct categories: payment, utility, and asset tokens. FINMA acknowledges the complexity of such an endeavor and recognizes that some tokens won’t fit in a certain category completely. 

Under FINMA's supervision, the existing laws that will be most rigorously followed in the future are money laundering and securities regulations since they both help protect market participants from all too common predatory behavior.

Gibraltar

Companies that are situated in Gibraltar and use digital currencies to store or transfer value are required by law that came in effect in February 2018 to apply for a government-issued license. Gibraltar has built the necessary regulatory framework to standardize the process of token distribution within its jurisdiction and thus became the first country to create a truly transparent application-based process for blockchain businesses.

To acquire the Gibraltar Financial Services Commission’s (GFSC) allotted license, applicants must adhere to a three-phase process, which can take up to three months to resolve. Interested parties must first file a pre-application in which they broadly describe their business model and type of activity they want to provide within Gibraltar or to customers outside its borders. After the first stage is complete, a £2,000 fee has to be paid to GFSC to examine the pre-application and offer its feedback. If the response is positive, the applicant is invited to present their business to a GFSC committee, which can then grant the license.

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