Crypto Currencies Under Pressure For Regulatory Oversight

• Another attempt at regulation in the US
• EP & ESMA walking in sync
• Asian-Pacific region among the front-runners

Since the birth of crypto currencies and their growing importance as an alternative to the fiat currencies issued by the National Banks, one outside drive is ever-present – the drive by regulatory bodies to gain the upper hand in terms of industry regulation and oversight.

USA

At the end of December 2019, following up to the earlier Bipartisan Legislation Bill by U.S. lawmaker Warren Davidson, a new draft bill was introduced, dubbed “Crypto-Currency Act of 2020”, where U.S. Congressman Paul Gosar seeks to bring regulation in the crypto industry.

Interestingly enough, Gosar introduces three different types of crypto products, allocating for each of these types a specific regulatory body as a “federal crypto regulator”.

Crypto commodities defined as “economic goods or services” by the bill introduced are expected to be under the regulation of The Commodities Futures Trading Commission /CFTC/, crypto securities – “all debt, equity, and derivative instruments that rest on a blockchain” – will go under The Securities and Exchange Commission /SEC/, while crypto currencies, which are defined as “synthetic derivatives resting on a blockchain” are proposed to be regulated by The Financial Crimes Enforcement Network /FinCEN/.

Most importantly, the proposed legislation requires for the tracing of each transaction and person engaging in deals with any of the three categories of crypto products, the same way financial institutions trace currency transactions.

EU

In the European Union, as per DIRECTIVE (EU) 2018/843 of the European Parliament and of the Council, dubbed the Fifth Anti-Money Laundering Directive, each fiat-to-crypto currency exchange and custodial wallet goes under a new regulatory framework, under which they are required to follow Know Your Customer /KYC/ rules for monitoring all transactions and file reports in cases of suspicious activities.

“…a sound legal framework for crypto-assets are increasingly becoming areas of focus for ESMA…”, The European Securities and Markets Authority /ESMA/ Strategic Orientation for 2020-2022.

The introduction of the KYC rule for crypto currency transactions participants means exchanges should identify each one of them as Know Your Customer implies submitting proof of identity and address before engaging in transactions.

UK

So far, the approach towards regulation of crypto currencies in the UK has been measured, with their financial regulatory body The FCA taking a stance that assets based of crypto currencies have no intrinsic value and therefore the trading venues and exchanges do not need to apply for authorization before conducting business.

As much as this approach facilitates the emergence of new exchanges and trading with crypto assets in general, as this industry remains outside of the regulatory scope, it also remains outside of The Financial Services Compensation Scheme /FSCS/, which practically leaves all the risk to the investors.

Asia

The trend towards regulation of crypto currency and crypto asset trading in Asia started much earlier, with the regulators of the Asia-Pacific Region /APAC/ such as The Securities & Exchange Commission /SFC/ in Hong Kong and The Monetary Authority of Singapore /MAS/ introducing new licensing laws with a prerequisite to obtain regulatory approval before trading is allowed.

Obviously, the regulatory decision in China to outlaw crypto trading resulted into other players in the region to introduce regulation, bring liquidity and eventually benefit from this relatively new market.