Regulations around the world have struggled to keep pace with the explosive growth of digital assets, from cryptocurrencies to initial coin offerings. Below is an overview of how the global landscape is changing in October. The rules will continue to evolve, as regional and national lawmakers craft new policies and courts set precedents that indicate what businesses can and cannot do.
What’s the big picture?
Global digital asset policy making is highly fragmented, in part because it has largely been a rush to keep pace with market changes and emerging threats. Another factor is the lack of authority to oversee a truly international effort. While banking regulators agree on global policies under the Basel Committee on Banking Supervision, digital assets do not have an equivalent coordinating body.
Some suggest that even the Financial Stability Board, which includes finance ministers from some of the world’s largest economies, is not a broad enough forum as issues regarding digital assets extend beyond finance into areas such as technology and in society at large.
In the United States, Gary Gensler, recently appointed chairman of the Securities and Exchange Commission (SEC) and former chairman of the Commodity Futures Trading Commission (CFTC), is seen by some as a galvanizing force for the necessary global coordination. He has pulled out all the stops, first encouraging crypto trading platforms to register with the SEC, then pushing Congress to give him the power to regulate what he calls the “wild west” of the markets.
Small countries – and some American states – have also been at the forefront. Some are trying to quickly develop digital asset regimes to win business, such as the U.S. state of Wyoming, which has passed more than 20 crypto-related laws, including a new banking charter tailored for crypto businesses. . But some countries are aggressively cracking down, like China, which in September declared all cryptocurrency-related activity “illegal.” Meanwhile, El Salvador has taken the unprecedented step of making the cryptocurrency’s bitcoin legal tender.
What’s going on in the United States?
The regulation of digital assets in the United States is almost as fragmented as it is in the rest of the world. Gensler argues that regulation should be their responsibility because cryptocurrencies are essentially securities. The Federal Reserve also has a role to play, including restricting the crypto and digital asset activities of the big banks it already regulates.
The CFTC has supremacy over futures and other derivatives based on digital assets. State regulators are largely responsible for licensing money transmission companies, a category that some cryptocurrency companies claim to belong to.
However, almost all regulatory regimes predate digital assets. “What everyone spends their time doing is trying to determine what type of product [the digital asset] is, so we can understand where it fits within the existing US regulatory framework, ”says Jai Massari, partner at Davis Polk Washington law firm.
If the SEC believes the digital asset is security, the SEC can demand that its exchange stop selling the digital asset, according to Grant Fondo, a lawyer at Goodwin. This is likely the case for some tokens issued as part of initial coin offerings, the symbolic equivalent of an initial public offering of shares.
The Financial Crimes Enforcement Network, or FinCEN, which monitors financial crime risk, and the Department of Justice may also be interested in many types of digital asset activity. Payment company money transfer licenses can be granted at the state or federal level.
Case law plays an important role in sketching out the ground rules. “We see a lot more on the enforcement front than on the regulatory front,” Massari says, stressing the importance of cases such as Ripple’s legal battle against the SEC’s designation of its payout token as a listed security. in stock exchange. “If the court says we agree with XRP [Ripple’s payment token] is not a security. . . it changes the landscape a lot for the SEC in terms of jurisdiction and what it can do. “
The greatest hope for a national alignment can be found around dollar stablecoins, a form of cryptocurrency whose value is tied to the greenback. The United States is so concerned about the implications of this situation for financial stability that the heads of all of its major regulators said this month that stablecoin regulations were “urgently needed” and that coin operators should be treated like banks.
What about other major markets?
The UK’s approach is similar to that of the US, in that existing laws are applied to products and situations for which they were never intended. The UK has the advantage of having fewer national financial regulators, but its regulatory heritage complicates some issues.
Ben Regnard-Weinrabe, a regulatory lawyer at Allen & Overy, cites as one of those complexities the fact that the UK has two regimes for “security tokens” compared to the single US definition. Depending on the characteristics of a cryptocurrency, it can be characterized as a capital or debt security, a collective investment scheme, or electronic money. Alternatively, it could be unregulated. His colleague Bob Penn says that while the old laws that underpin the regulation of digital assets are “clear enough”, “from a legal perspective, it is often difficult to reconcile [the old rules] with non-traditional products ”.
Singapore has long been at the forefront of innovation. This month its chief regulator Ravi Menon, who heads the Monetary Authority of Singapore (MAS), reaffirmed the city-state’s goal of being a major player in crypto. “We believe the best approach is not to crack down or ban these things,” he said.
Attorney Tju Liang Chua, of Drew & Napier, said the rulebook was “relatively clear when it comes to global jurisdictions.” Singapore’s Securities and Futures Act includes a comprehensive list of characteristics that define what a security looks like. Lawyers then compare the digital assets to these to determine if the asset is a security. Singapore’s recently introduced Payment Services Act explicitly defines certain regulated unsecure digital tokens, such as bitcoin, and defines regulated electronic money, or stablecoins, whose issuers require a special license.
Another new feature of the Singapore landscape is that “there is practically only one regulator that matters,” says Liang. The MAS has authority over payments regulation, financial conduct and prudential regulation, as well as the central bank, and also has a dual mandate to encourage financial sector development.