Saturday, 30 May 2020

Cryptocurrency Regulation Update (September 2018)

This piece is part of a monthly series covering regulatory updates related to cryptocurrencies (here are the updates from June, July, and August).

This piece provides important regulatory updates since the August piece, broken down by developments in the United States and the rest of the world.

I. United States

SEC Denies Nine More Bitcoin ETFs (August 23rd): The SEC denied nine separate proposals for a Bitcoin ETF from Direxion, GraniteShares, and ProShares. These filings were different from past filings in that they were based on the Bitcoin futures markets that trade on the CBOE and CME rather than the spot market on exchanges. The filers thought this approach might have merit given that the SEC has pointed to the unregulated nature of the underlying market as a concern. In explaining its decision to reject the application, the SEC stated that, “the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.” The SEC is concerned that the market for Bitcoin can be manipulated and has not developed sufficient confidence yet to proceed with a listed product. Given that individuals in the US are able to sign up for an account with a cryptocurrency exchange and buy Bitcoin directly, there is likely no rush to approve a listed product.

II. NASAA Updates Coordinated Crypto Crackdown (August 28th):

As explained in its recent update, “The North American Securities Administrators Association (NASAA) announced that more than 200 active investigations of initial coin offerings (ICOs) and cryptocurrency-related investment products are currently underway by state and provincial securities regulators in the US and Canada as part of NASAA’s ongoing initiative ‘Operation Cryptosweep.’ ” This effort was launched in May as part of a regulatory focus on initial coin offerings and cryptocurrency-related investment products. It is worth noting that the investigations do not solely focus on potential cases of fraud and may often be related to violations like failing to properly register an investment product before offering it to investors. As further detailed by the report, “If these products qualify as securities, they should be registered with the appropriate regulatory agencies or qualify for an exemption from registration. The registration process provides some protection for investors by subjecting the offering to regulatory review.” Additional enforcement for ICOs would likely be beneficial for the ecosystem.

III. Winklevoss Effort to Self-Regulate Cryptocurrency Gets Members (August 20th):

The Virtual Commodity Association, founded by Cameron and Tyler Winklevoss of Gemini, announced that Bittrix, BitFlyer USA, and Bitstamp joined its cryptocurrency self-regulatory group. The group has emerged in response to uncertainty surrounding the industry that has not been addressed by government regulators. The Virtual Commodity Association hopes to lead the charge in cleaning up the industry by allowing members to coordinate efforts to identify fraud and to share knowledge and best practices. Self-regulatory organizations are common in other industries — for example, the Financial Industry Regulatory Authority (FINRA) plays a significant role in the financial markets regulating brokerage firms and exchange markets. Because these institutions have deep domain expertise, self-regulation may prove important as governments continue to learn about the space before crafting regulation.

IV. Rest of the World

1. China to Block Access to More Than 120 Offshore Exchanges (August 23rd):

China is upping its effort to block access to cryptocurrencies by blocking more than 120 foreign cryptocurrency exchanges. In addition to blocking these foreign exchanges, the government will continue to “monitor and shut down domestic websites related to cryptocurrency trades and initial coin offerings (ICOs), and ban payment services from accepting cryptocurrencies, including bitcoin.” This is the most recent in a series of steps taken by the government to prevent citizens from gaining access to cryptocurrencies. The government itself, however, is interested in the underlying blockchain technology and continues to publish rankings of various cryptocurrencies via the Chinese Center for Information Industry Development (CCID), a research group under the Ministry of Industry and Information Technology. Additionally, large Chinese companies like Alibaba continue to file a significant number of blockchain technology related patents.

2. EU Taking Another Look at Regulating Crypto (August 29th):

European Union finance ministers are likely to further discuss digital assets during a September 7th meeting in Vienna, according to a draft note prepared for the meeting reviewed by Bloomberg News. The topics of interest include “a general lack of transparency and also crypto’s potential to be misused for money laundering, tax evasion and terrorist financing.” Current EU laws don’t offer protection to investors who may be at risk in digital asset markets given the significant price volatility and lack of oversight for offerings and exchanges. As reported in previous regulatory update editions, regulatory leaders in the EU have long acknowledged the presence of, and growing interest in, cryptocurrencies but have been waiting and watching before taking decisive action.

3, Bank of Spain Report Suggests Cryptocurrency May Have Role in Monetary Policy (August 9th):

A recent report from Banco de España (the Bank of Spain) suggested that cryptocurrency and blockchain technology could have a positive impact on monetary policy. The report specifies, however, that the digital currency should be controlled by the Central Bank. These comments are in line with comments from the IMF in the June regulation update (which can be found here) suggesting that central banks may one day need to compete with cryptocurrencies (“continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies”). In particular, the Direct General for the Economy at BDE, Galo Nuño, is excited about the potential to have better control of interest rates and the money supply by being able to more finely control currency in circulation.

4. African Regulators Taking ‘Wait-and-See’ Approach on Cryptocurrency (August 11):

A recent report from Ecobank, a pan-African banking conglomerate, that surveyed the regulatory response to cryptocurrencies in 39 sub-Saharan countries (graphic below) found that regulators are waiting to see the responses of other countries in the region before taking action themselves. Indeed, more than half of the countries examined in the report had yet to make a public statement on the topic at all. Namibia was the only country examined that had issued an outright ban on cryptocurrencies while many of the countries had largely declined to provide a regulatory framework for the time being.

By Phil Glazer
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