One cannot but describe the regulatory landscape of cryptocurrencies as diverse, maybe even fragmented.
The general attitude towards cryptocurrencies, led by national central banks, is to reject the possibility of cryptocurrencies qualifying as legal tender, thus leaving the floor to other authorities to express their views and interpretations.
That being said, the use of cryptocurrencies as a mean of payment to either purchase goods or commodities or acquire a service is growing rapidly, and in huge numbers.
The most common regulatory approach to cryptocurrencies by national authorities is debating on the applicability of VAT to transactions involving cryptocurrencies while warning the public of possible Anti-Money Laundering implications and associated risks, and occasionally applying AML duties on parties involved in cryptocurrencies related transactions.
Although the regulatory status of cryptocurrencies is being shaped as we go, it is important to point out that only a handful of countries have publicly banned the use of cryptocurrencies in their territories, namely Russia, China, Venezuela, and a handful of others.
Several countries have taken a bolder and innovative approach by trying to apply a regulatory framework to cryptocurrencies.
These countries are divided between those which have designed a specific regulatory regime for cryptocurrencies, while other have interpreted and applied exiting regulatory frameworks on cryptocurrency activities.
Amongst the countries which have developed specific regulatory schemes for cryptocurrencies are Japan and the US State of New York, which introduced the Bitlicense.
Amongst those countries are which have chosen to apply existing regulatory frameworks on cryptocurrency activities are Switzerland, Luxembourg and Germany.
While the US is yet to come up with a comprehensive regulatory framework at Federal level, despite the fact that The Financial Crimes Enforcement Network (FinCEN) has already delineated the main actors of this industry and some broad principles to regulate them, the floor was left open to State level interpretations and initiatives. Having said that, it is important to point out the recent decision by the US Federal Securities regulator, the SEC, to review its decision not to approve a bitcoin based Exchange Traded Fund (ETF) while simultaneously considering the application for admission to trading of an Ethereum based ETF.
At state level, the State of New York, the final rules applying on the Bitlicense were published in 2015. The rules address matters such as capital requirements, custody and protection of customer assets, reports and financial disclosures, anti-money laundering program, cyber security program, business continuity and disaster recovery, advertising and marketing and consumer protection.
While New York is leading the way, it is certainly not alone and many other US states, such as California, Arizona and Washington, are in the midst of enacting applicable regulatory frameworks to cryptocurrencies activities.
On May 25, 2016, Japan approved a law regulating virtual currency exchange operators (VCEOs). The law came into effect on April 1, 2017. The law states capital requirements for virtual currency exchanges as well as and sets cybersecurity and operational requirements, as well as duties to conduct employee training programs and submit annual audits.
In Luxembourg, exchanges may be licensed and regulated as either payment institutions or electronic money institution. One of the leading examples is Bitstamp, a bitcoin exchange which is widely acknowledged as being the first licensed bitcoin exchange in the EU. It is licensed as payment services provider allowing it to provide services under the Luxembourg Law on payment services. Another example is Snapswap, licensed as an e-money institution, it provides a solution for remote digital onboarding which includes a blockchain based solution.
German regulator BAFIN has expressed its view that cryptocurrencies activities may be licensed and regulated as either brokers, market makers or exchanges under the MIFID regulatory scheme. Existing licensed entities in Germany include Bitcoin Deutschland AG, which is described as the only bitcoin trading platform in Germany. Bitcoin Deutschland AG is acting as tied agent for FIDOR Bank AG. In other words, FIDOR bank holds the license to offer the bitcoin activities, while the platform acts as tied agent to that bank. Another example is Bitbond, a peer to peer bitcoin lending platform which is fully licensed and supervised by BAFIN.
Switzerland was one of the first countries to license cryptocurrencies activities, with Swiss financial regulator defining licensing requirements for bitcoin kiosk operators. Quite recently, Switzerland made another step forward by being the first country to have a bank allowing its clients to hold and exchange bitcoins, through a cooperation between Falcon Bank and Bitcoin Suisse AG.
Many countries have declared initiatives to propose and draft applicable regulatory rules to cryptocurrencies in their territories and the number of countries regulating cryptocurrencies activities is likely to grow fast.
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Porat Group is one of the first law firms to offer legal services that enables cryptocurrency business owners to regulate their businesses and activities. Our lawyers are well equipped to handle regulation processes for the industry, for various jurisdictions and make sure to be up to date with any news in the industry, such as new jurisdictions allowing regulation for cryptocurrencies.
If you are a business owner active in the cryptocurrencies field and would like to know more about how to regulate your product or business, as well as what your alternatives regarding regulation are, please contact us for a free, non-binding consultation on the matter.