Regulation

Liechtenstein wants to create a legal framework that will offer certainty for tech companies with its new Blockchain Act, which aims to promote the development of a token economy as the race to bank crypto wealth gains speed. 

According to prime minister Adrian Hasler, it is important for the state to provide companies clarity about "what is possible and where the concrete boundaries lie".

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This is what Liechtenstein aims to achieve with its new Blockchain Act. As Hasler explains, this is not simply about the financial sector: while blockchain can be used to digitally represent securities, it can also be used for rights of use to vehicles or licensing rights to intellectual property. 

"These application fields, which in principle encompass the entire economy, are usually summarized under the term ‘token economy'," Hasler wrote  in an article in the daily newspaper Neue Zürcher Zeitung.  Liechtenstein now wants to promote the token economy with its new law.

By introducing the token as a new legal entity, Liechtenstein is creating an instrument with which any right from the analogue world can be represented digitally. In Hasler's opinion, this is one of the most important innovations of the planned Blockchain Act.

Liechtenstein has set out to become Europe's blockchain hub. Crown Prince Alois has announced his plans to transform the country into the place-to-be for blockchain businesses.

However, neighboring Switzerland has its own ambitions to become Europe's Crypto Nation.

The canton of Zug is home to Switzerland's "Crypto Valley" where blockchain powerhouses such as Ethereum, ShapeShift, Xapo, Tezos, Melonport, and Monetas have established a presence.#In December 2018, the French Government has issued a  decree outlining asset tokenization and the use of blockchain in securities management.

Specifically, the "use of a shared electronic recording device for the representation and transmission of financial securities and for the issue and sale of minibonds."The decree follows up on a previous statement posted by the Minister of the Economy and Finance in May of 2018.

This statement had the purpose to "make the registration of an issue or transfer of financial securities in a blockchain the same as the book-entry of financial securities.

"Malta has also devised a blockchain legal framework even as most regulators in Europe have not put much effort into creating blockchain industry regulations over the past years.

A mission from the International Monetary Fund (IMF) has judged that the growth of blockchain in Malta has created significant risks of money laundering and terrorism financing in the island’s economy. The news was reported in local English-language daily the Times of Malta on Jan. 24.

According to the article, the IMF announced its findings following a visit to the island, and isolated blockchain — alongside financial and remote gaming sectors and the government’s citizenship-by-investment scheme — as being high in their list of concerns regarding possible anti-money-laundering (AML) compliance violations.

As reported, the Maltese parliament has passed three blockchain- and crypto-related bills in a bid to spearhead innovation and establish a robust and transparent crypto regulatory climate.

The country’s prime minister, Joseph Muscat, has positively endorsed cryptocurrencies as being the inevitable future of money, making a strong case for the transformative impact of blockchain technologies across a gamut of political, civic and corporate applications.

The IMF cautioned Malta — whose efforts have earned it the moniker of “blockchain island” — to ensure its local authorities bring crypto service providers into line with AML requirements.

While conceding that Malta’s Financial Intelligence Analysis Unit has implemented a series of sound measures, the mission nonetheless advocated for intensified and immediate action to close loopholes in supervisory and enforcement systems.

Among its recommendations, the IMF said the authorities would need to apply more sanctions and sharpen their understanding of possible risks and regulatory breaches. The mission reportedly voiced concerns over capacity restraints, warning that:

“The increasing number of financial entities under supervision, the rapid development of new products, the evolving regulatory environment and the tightening of the labour market have put the Malta Financial Services Authority under considerable strain.”

Aside from its blockchain and crypto-focused remarks, the mission is reported to have identified a series of issues with the island’s real estate market, labor shortages and strained infrastructure. It nonetheless deemed that Malta’s growth prospects remain broadly favorable.

Cryptocurrencies continue to occupy a prominent place in Malta’s political life, having recently even provided fuel for a Maltese opposition leader to critique the government for its alleged silence vis-a-vis the fall 2018 crypto market slump.

The IMF has previously advised the Marshall Islands not to issue its own national cryptocurrency due to money laundering concerns. In November, however, IMF Deputy General Counsel revealedthe organization has been positively devoting a lot of attention to fintech, and in particular to blockchain.

IMF managing director Christine Lagarde has also recently said there may be a role for central bank issued digital currencies in the future global economy.

A new report published January 9 by the European Banking Authority (EBA) has recommended further research into cryptocurrency and is calling for a number of actions to be carried out in the cryptocurrency sector throughout 2019.

The report delves into the standardization of regulations pertaining to cryptocurrency businesses operating within the European Union, and the EBA believes this is a much-needed move to eliminate unfair regulatory arbitrage and protect investors.

“Applicability and Suitability of European Union Law to Crypto-Assets”

In the newly-released document, Europe’s banking watchdog (EBA) admits that cryptocurrency and crypto-related businesses do not fall under the European Union law.As stated in the document’s summary:

Typically, crypto-asset activities do not constitute regulated services within the scope of EU banking, payments, and electronic money law, and risks exist for consumers that are not addressed at the EU level.

Now that the EBA has addressed that the crypto sector requires a new standardization of regulation to comply with European law, they have recommended that the European Commission carry out further analysis in order to take action.

The EBA is beginning to tackle the issue of cryptocurrency regulations because different cryptocurrency laws among member states would create undesirable regulatory arbitrage, unfair competition, and a congregation of crypto businesses in countries with less stringent rules.

Overall, the report is focused on the research and analysis of issues relating to crypto-assets and businesses. The EBA is simply calling for a nuanced approach to developing a regulatory framework with rules and standards for the emerging asset class.The EBA report noted:

Given the pace and complexity of change, it would be desirable for a technologically neutral and future-proof approach to be adopted in developing any proposals should it be concluded that EU-level action is needed.

Other Crypto and Blockchain Initiatives in Europe

While the EBA is just now taking initiative to develop a standardized regulatory environment for the cryptocurrency sector, other countries in the EU have already been addressing cryptocurrencies and blockchain technology.

For instance, 7 European Union countries have formed what they are calling the “Mediterranean Seven,” which aims to improve blockchain education, increase awareness, and spur the usage of blockchain technology across an array of industries.

This “Mediterranean Seven” initiative was largely started because of the EU’s struggles in gaining a strong foothold in blockchain and cryptocurrency.Another example of EU members taking blockchain and crypto into their own hands is the Italian government which recently established a 30-member blockchain advisory board.

All in all, regulatory clarity is needed in the blockchain and crypto industry so that businesses can flourish and investors can be protected. The EBA has addressed this need and we can expect to see some regulatory improvements as we head into 2019.

Do you think the EBA will actually establish any kind of cryptocurrency regulatory framework this year? If so, will it foster or hinder blockchain and crypto innovation? Let us know what you think in the comment section below. 

Regulatory uncertainty in Britain’s blockchain sector has emerged as one of the biggest concerns for distributed ledger technology firms in the country.

According to research conducted by digital innovation agency Digital Catapult, 74% of blockchain firms in the United Kingdom cited regulatory issues as being one of their key concerns, surpassing other issues such as access to technical, business or legal expertise.

These regulatory challenges include the European Union’s General Data Protection Regulation (GDPR). As the GDPR unifies Europe’s regulatory landscape regarding the use and storage of personal data, the legislation has become a sticking point for firms which use permissionless blockchains since the storage of data is not limited to any one particular geographical location.

“This legislation raised concerns for companies using permissionless, public blockchains, which are open to anyone regardless of location, and where full copies of the database are replicated across all of the nodes participating in the network, making it impossible to selectively limit where the data goes,” Digital Catapult wrote in the report titled ‘Blockchain in Action: State of the UK Market’.

Right to Erasure

Additionally, the GDPR empowers citizens to delete their personal data at any point and this is in conflict with the nature of permissionless public blockchains where data becomes immutable once recorded.

The regulatory uncertainty surrounding the raising of funds via Initial Coin Offerings was also another cause of concern.

The report noted that the UK Financial Conduct Authorityhad indicated in April this year that it would regulate ICOs but has yet to issue formal guidance as at the publication date of the survey.

Per the firms that were surveyed, the delay in issuing guidance has further heightened the uncertainty and consequently hampering the ICO plans some projects may have had:

“This uncertainty was raised many times by the companies consulted, as they were unsure whether they should conduct an ICO in the UK or allow UK citizens to participate given the current regulatory landscape.

”The regulatory uncertainty has also affected relationships between blockchain firms and traditional financial institutions. In the survey which polled 264 DLT firms, 54% of the blockchain companies indicated that they faced difficulties opening a bank account with the firms which were particularly hard hit being those dealing with cryptocurrencies.

Still Growing

Additionally, the survey found that firms which had raised funds in crypto-assets found it particularly hard to obtain a traditional bank account despite the necessary Anti-Money Laundering and Know Your Customer checks being undertaken on investors.

Despite the regulatory challenges, the report noted that the DLT sector in the UK is on a growth path with investments in the sector continuing to balloon:“…investments rose from just over US$50m in Q3 of 2016, to US$150m by Q2 of 2018 (with ICO-related investments topping US$100m in Q4 of 2017 and fiat investments climbing to over US$100m in Q2 of 2018).

”Featured image from Shutterstock.

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Cryptocurrency enthusiasts have been eagerly awaiting the approval of what would be the first-ever bitcoin exchange-traded fund, or ETF.

But the man largely behind greenlighting one — Securities and Exchange Commission Chairman Jay Clayton — has a few worries that need to be assuaged before he's "comfortable" approving the investment vehicle.The first is a lack of market surveillance.

Because most cryptocurrency exchanges don't use the same monitoring tools as stock exchanges, Clayton said investors may not get a fair assessment of bitcoin's price.

"What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation," Clayton said at the Consensus Invest Conference in Manhattan.

"It's an issue that needs to be addressed before I would be comfortable."The New York Stock Exchange and the Nasdaq have what's known as "surveillance," or systems that monitor, prevent and investigate abusive and manipulative activity on the exchanges.

"Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade," Clayton said.There are outliers though. In April, Nasdaq announced a collaboration with digital currency exchange Gemini, founded by early bitcoin investors Tyler Winklevoss and Cameron Winklevoss.

The deal gives Gemini access to Nasdaq's surveillance technology to help make sure the platform provides a fair and "rules-based marketplace" for their own participants, Gemini CEO Tyler Winklevoss said in a statement.

Exchange-traded funds track an index or group of assets but trade like stocks. Analysts say the approval of one could bring in a wave of institutional buyers and because bitcoin has a fixed supply theoretically push up prices.

The agency has rejected multiple applications for a cryptocurrency ETF. In its decision not to approve the Winklevoss brothers' ETF, the SEC pointed to the risks of fraud and market manipulation and the challenge of investor protection.

Custody needs to be 'improved'

How to safely store these assets is a major roadblock. While bitcoin'sprice itself is certainly volatile, investors could also be exposed to a risk of theft in the underlying asset.

"We've seen some thefts around digital assets that make you scratch your head," Clayton told Silver Lake Partners' Glenn Hutchins, who moderated the panel. "We care that the assets underlying that ETF have good custody, and that they're not going to disappear.

"There are dozens of cryptocurrency custody solutions that have either been announced or are already on the market. Fidelity said in October that it was launching a separate company to handle cryptocurrency custody and trade execution for institutional investors.

Crypto companies Coinbase, Gemini, BitGo, Ledger and ItBit are among those already working on similar solutions. Japanese bank Nomura also announced plans in May to offer crypto custody, and Goldman Sachs and Northern Trust are reportedly exploring custodial services.

But until Fidelity, there had been a noticeable lack of big U.S.-based incumbents officially entering the space. Despite the options, Clayton said custody offerings still "need to be improved and hardened."

'Assume' your ICO is a security

Clayton also had a message for those issuing initial coin offerings: Chances are, it's subject to SEC laws."You should start with the assumption that you're starting with a securities offering," Clayton said.In June, Clayton made it clear that the agency won't bend the rules for cryptocurrency when it comes to defining what is or what isn't a security.

He told CNBC at the time that the U.S. has built a $19 trillion securities market that's "the envy of the world" following the current rules.Whether an asset is a security right now follows the "Howey Test.

" The ruling comes from a 1946 U.S. Supreme Court case that classifies a security as an investment of money in a common enterprise, in which the investor expects profits primarily from others' efforts.

The SEC has said explicitly that bitcoin and ether are treated as commodities and therefore aren't subject to that test. But all other cryptocurrencies are still seen by the SEC as securities and need to register with the agency.

The SEC has penalized multiple cryptocurrency projects that failed to do so. Earlier in November, the agency announced its first civil penalties against founders who did not register new coin offerings, adding to its crackdown aimed at abuses and outright fraud in the growing digital industry.

Bitcoin, the world's largest cryptocurrency, was trading near $3,760 Tuesday, down more than 80 percent from its all-time high in December, according to data from CoinDesk.




Kate Rooney

Markets Reporter

Wolfie Zhao   

Technology giant IBM has launched a new research center through a partnership with Columbia University in a move aimed to boost blockchain application development and education initiatives.

Opening Tuesday, the center is located in the Manhattan campus of Columbia University in New York City and will, among other things, incubate blockchain applications through a combination of academic and technical expertise, the firm said.

Soon to be announced, a dedicated committee comprised of both Columbia faculty members and IBM research scientists will start reviewing proposals for blockchain "curriculum development, business initiatives and research programs" later this year.

In addition, the center will advise on regulatory issues for startups in the blockchain space and provide internship opportunities to improve technical skills for students and professionals with an interest in the tech.

John H. Coatsworth, Columbia University provost, commented in the announcement that he expects the partnership will "significantly advance scholarship and applications," especially for blockchain's use case in data sharing.Coatsworth added:

"Our students and faculty, working together with IBM, will play an important role in the vibrant exchange of ideas and research surrounding this transformative technology."

The announcement marks the latest effort by the blockchain industry to invest in a top-tier university in the U.S. to accelerate blockchain understanding and adoption.

As reported by CoinDesk in June, San Fransisco-based distributed ledger startup Ripple said it will invest $2 million in blockchain research initiatives in the University of Texas at Austin in the next five years, as part of its pledge to invest $50 million in worldwide institutions.

Columbia University image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Coinbase shared big news Monday that federal regulators are allowing the popular cryptocurrency exchange to proceed with plans to sell cryptocurrency tokens that are deemed securities.

Last month, Coinbase acquired Keystone Capital, a California-based FINRA-registered broker-dealer that operates as an alternative trading system.

With the announcement, the SF-based cryptocurrency exchange disclosed that it would still need to get regulatory approval to operate under the Keystone licenses.

Today, the Securities and Exchange Commission and Financial Industry Regulatory Authority gave Coinbase just that, Bloomberg reported, approving that deal alongside the acquisitions of Venovate Marketplace and Digital Wealth.

Coinbase confirmed these details to TechCrunch as well.Today’s news opens up the scope of Coinbase’s ambitions to the billions of dollars that have been raised in initial coin offerings over the past several months.

With permission to trade tokenized securities, Coinbase users could soon have the ability to move beyond the limited cryptocurrency options currently available to be traded on the site’s central exchange which currently just lists Bitcoin, Bitcoin Cash, Ethereum and Litecoin.

The company announced last week that it was exploring adding five new tokens to its exchange, including Cardano, Basic Attention Token, Stellar Lumens, Zcash and 0x.

In a blog post, the company specified that the announcement did not necessarily deem that these tokens were not securities and that classification might vary by jurisdiction.

France’s “Monsieur Bitcoin” Jean-Pierre Landau released an initial report into cryptocurrency July 5, claiming it was “neither desirable nor necessary” to regulate the technology.

Government official and academic Landau consciously compares “technological” and “financial” innovation in the report, which runs to over one hundred pages. Some of the conclusions may come as a surprise to industry commentators, Landau arguing that over-regulation of cryptocurrency would constitute a “three-pronged danger.”

“Direct regulation is not desirable as it would oblige us to define, classify and therefore constrict objects which are essentially fluid and still unidentified,” he wrote in a summary section on cryptocurrency. The report continues:

“The danger is three-pronged: that of freezing the rapid evolution of technology in legislation, that of failing to grasp the real nature of the object we intend to regulate and that of pushing innovation towards regulatory avoidance. On the contrary, regulation should be technologically neutral, and in order to become so, address the actors and not the products themselves.”

Elsewhere, Landau advocates “minimal principles of transparency, integrity and robustness” for cryptocurrency exchanges, something which European lawmakers are reportedly considering as part of what is known as a ‘Euro-Bitlicense.

The report further contains several instances where financial and technological innovation are differentiated, Landau adopting a cautious tone.“We must dissociate technological innovation –– which we should encourage and stimulate –– from monetary and financial innovation, which should be considered with care,” he wrote, continuing:

“In the current phase, the correct approach would be to let cryptocurrencies - and the innovations they bring - develop in the virtual realm that they occupy, but in parallel we need to avoid and confine any contagion.”

Landau received a cold reception when he became head of a governmental cryptocurrency working group in January due to previously likening Bitcoin (BTC) to the 17th c. Tulip Mania

This increase in regulatory efforts, however, means ventures and investors must proceed more cautiously on what kinds of crypto activities they perform or participate in. On one hand, this protects citizens and consumers from exploitation inspiring a more trustworthy ecosystem. On the other hand, this can also restrain innovation.

John McAfee, founder of cyber security provider McAfee who is a widely known Bitcoin backer and believer, said in a recent interview:

    Our income taxes are the greatest source of revenue, but if everybody’s using Bitcoin, the government doesn’t know what your income is. They can’t tax it, and if you choose to say I didn’t have anything, they cannot prove otherwise,” McAfee said. “It will eventually frighten every nation state, but it doesn’t matter what they do, there’s no way you can create a law or to legislate something that will stop Bitcoin or any cryptocurrency because technically, you cannot.

Acceptance and use still limited

Blockchain and crypto activities have flown under the radar until recently. As bitcoin surged in pricing and reached all-time highs this year, many have now gotten wise about cryptocurrencies. Companies also are aggressively getting into blockchain because of its game-changing applications across a variety of industries.

However, despite all this buzz, blockchain and crypto activities have yet to fully break into the mainstream. The average consumer a yet to use blockchain technologies and transact using cryptocurrencies on a daily basis. Crypto activities still remain mainly the niche of tech-savvy users.

There are also some major disagreements between Bitcoin's code developers, investors and miners in the debate about how to scale Bitcoin's protocol in order to accommodate the growing demand, which will result in a hard fork and a new "Bitcoin Gold" cryptocurrency.

Roger Ver, chief executive officer of Bitcoin.com., speaks at the Shape the Future: Blockchain Global Summit in Hong Kong, China, on Wednesday, Sept. 20, 2017. Bitcoin will probably see another splintering off in November as miners and developers debate how best to scale the cryptocurrency’s rapidly growing marketplace, Ver said in a Bloomberg Television interview. Photographer: Anthony Kwan/Bloomberg

While blockchain is supposed to be disrupting the financial services industry, there is a gap between what blockchain and cryptocurrencies can do and how customers perform financial transactions. Blockchain must provide ways for consumers to transition from the status quo. For instance, it’s not as if one can easily walk up to a bank and exchange dollars for bitcoin and vice versa.

Regulations can be stifling

Yet, even if traditional institutions would want to support cryptocurrencies, it would be impossible without clear rules and regulations. Banking is a highly regulated activity and laws may even have to be amended or passed to accommodate the use cases of cryptocurrencies. Blockchain players also argue that limited adoption is not a matter of lack of innovation on their part but due to regulations that limit their ability to bring their services to particular markets.

Among the appeals of ICOs as means of funding is the relative speed and ease blockchain startups raise resources to develop and eventually try out their business ideas. However, the days of rapid fire ICOs may soon come to a close, at least for some markets. China made a drastic move by banning ICOs and the SEC is clamping down on such activities in the US.

Until recently, the SEC had modestly issued an investor alert, warning potential investors that participating in an ICO is a very risky practice. Now that the SEC has geared up, in efforts to separate 'cash-grabbing' ICOs from legitimate startups, One of the most common ways which are used today in order to allow token sales to be compliant with US securities laws and for investors to participate in upcoming token sales in the US is SAFT - “simple agreement for future tokens”.

    The SAFT agreement answers many questions about participating in the crypto capital markets in a safe and regulated manner.  Companies with blockchain technology use SAFTs to approach accredited investors about backing their venture in exchange for future tokens. Marketing a SAFT is complex, and issuers should choose a platform with a proven track record. says Suleyman Duyar of SaftLaunch a U.S.-based company providing SAFT services.

This 'harsh' approach by the regulators does have some positive implications such as forcing blockchain startups to solidify their concepts and prove market viability first before being able to get public money. On the downside, startups without a war chest or access to other sources of funding may never get their projects up and running at all.

Tougher ICO restrictions also give other countries the opportunity to become havens for crypto activities and ICOs. Singapore and Japan appear to be cultivating more positive environments to support blockchain ventures thanks to proactive legislation.

Safety and security

Japan’s move to acknowledge bitcoin as a legal payment method has been a huge win for the crypto community. It obliged businesses including brick and mortar establishments to support bitcoin. In addition, Japan has also added provisions to enhance investor protection in light of previous incidences such as the Mt. Gox collapse. Japanese exchange Coincheck is also launching an investment program (page in Japanese) for blockchain startups.

Startups and ventures could follow these regulations as acts of good faith that they truly are offering legitimate services instead of quick money grabs. To be fair, the government has the responsibility to protect its citizens from dubious business practices. There are cryptocurrencies and token sales that were revealed as scams.

China’s outright ban appears to be quite extreme as it hampers existing efforts by blockchain startups to move forward with their projects. China must then quickly follow up with new legislation that would curtail investor fraud and yet open up the possibility for legitimate enterprises to thrive.

Balance is key

What is critical then is for the crypto ecosystem to strive for balance. Governments must not be stubborn that just because crypto activities do not fall into the mold of traditional financial activities that these should be considered illegal.

Instead, governments should work on regulations that protect consumers from fraud and exploitation. In addition, they should help and ventures by laying out clear regulations that allow room for innovation and easy compliance.

Blockchain is a powerful and useful technology. It would be a shame for businesses and consumers to miss out on the positives when governments restrict and ban crypto activities. Likewise, it would also be a shame if governments fail to protect citizens by leaving the industry unchecked.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. I have no positions in any of the securities mentioned above.

Forbes covers several stories on the blockchain. Discover more and continue to page 2 of this article here: https://www.forbes.com/sites/nikolaikuznetsov/2017/10/10/regulations-to-make-or-break-cryptocurrenci...