The pace of cryptocurrency regulation continues to heat up globally, but there's still little consensus on how to properly insure that investor protections make sense yet are effective, while at the same time allowing the asset class to thrive. Though the notion of government regulation or at the very least internal industry regulation may be gaining traction, nevertheless criminal activity including fraud, hacking and outright theft continue to make headlines.
The Japan Virtual Currency Exchange (JVCEA), a self-regulatory organization which combined two already existing cryptocurrency focused entities, just released its initial set of guidelines, which are voluntary. These include a ban on insider trading and a prohibition on the trade of anonymity-focused cryptocurrencies such as Monero and Zcash. It's not clear though how much leverage this self-regulating body may actually have.
Indeed, just days after the guidelines were released, two VPs of the organization, who were also the CEOs of the bitFlyer and Bitbank cryptocurrency exchanges respectively, resigned from the self-regulatory body when each received orders from Japan's Financial Services Agency (FSA) on June 22, that their businesses needed a variety of improvements including "an effective management system...as well as countermeasures against money laundering and terrorist financing."
Elsewhere in Asia, in the wake of two high-profile hacking incidents in which a pair of South Korean exchanges, Bithumb and Conrail, lost millions of dollars within two weeks, the Korean government has formally stepped in to investigate the cause of the security breaches. As well, the government's Korean Financial Intelligence Unit (KFU) which is tasked with developing policies for traditional financial institutions, has added cryptocurrencies to their purview, in order to "find new ways of regulating the nascent markets," reports Cryptoslate.
In fact, cryptocurrency exchanges in South Korea only need to obtain a $40 communication vendor license to legally run and operate.
In a leap forward for cryptocurrency legitimization, the KFIU recognized cryptocurrency exchanges as large-scale financial institutions – subject to the equivalent scrutiny as that of commercial banks and stock markets.
China and India have each taken alternate approaches. Months ago China banned both ICOs and cryptocurrency trading. India's central bank appears to have taken the lead on its country's internal regulation, by asking banks to sever ties with cryptocurrency businesses in the hope that this will stanch their ability to operate. Notwithstanding, both countries have been unable to curtail crypto scams.
In China, police recently arrested the perpetrator of a 100 million yuan (nearly $15 million) Bitcoin mining equipment scam. Indian authorities are holding six people, including a police officer, accused of conducting an ICO scam that defrauded individuals of more than 140 million rupees (approximately $2 million). These are just two incidents among many. India's Department of Economic Affairs secretary, part of the government's Ministry of Finance, announced this week that a draft is being put together with a regulatory framework specifically for digital currencies.
Other countries have a more relaxed stance. Ukraine’s State Service for Special Communication and Information Protection has said that it does not plan to develop specific regulations on cryptocurrency mining but its central bank indicated it was ready to collaborate with the Bitcoin foundation on a project dubbed Ukrainian Bitlicense.
Investors: Don't Rely On Government Regulation Alone
How do cryptocurrency players regard the current state of global regulation? None are against it, of course, but many stress that it shouldn't only be up to government agencies to police the state of the asset class. Individuals interested in crypto investing should be scrupulous about doing their own due diligence.
Peter Engleman, co-founder of Portion, an Ethereum based global auction house, says no matter which industry or asset one is interested in, there's always the possibility of coming up against bad actors running scams. It's critical that investors remain alert when choosing any potential investment, crypto or otherwise.
If investors aren't sure their investments are properly secured by blockchain, notes Zoe Adamovicz, CEO and co-founder of Neufund, a blockchain-based equity fundraising platform, they should make sure it's protected by law.
“Some countries, like Germany, are already offering the possibility to conduct security token offerings in a legal way without special laws regulating that market, but with clear interpretations of existing laws. It’s [an] issuers obligation is to ensure that investor’s capital is secured properly.”
With the rise in visibility of the digital currency asset class, few regard regulation as a barrier to adaption. Sasha Ivanov, CEO of Waves Platform believes investors should consider regulation an obstacle or a threat.
“What we are witnessing now is that extremely vivid and risky at the beginning, the crypto market is becoming mature, being shaped by both regulation and the more and more defined presence of large-scale institutional investors. This evolution is necessary for the industry to gain full force. So I think that the same golden rules for investors on traditional markets can be applied for investing in digital assets: Set your goals, estimate the returns and the risks, and be very sensitive to what is happening at the market.”
Biggest Regulatory Risk: Tokens as Securities
Vadim Koleoshkin, Chief Business Development Office (CBDO) at Zerion says in his view, the biggest risk for crypto investors is the potential treatment of tokens as securities:
Most of the exchanges do not have licenses for security trading, and can’t list such tokens. If [the] SEC or other regulators officially start considering some token as a security, then it should be delisted. After such an event, the token loses liquidity and therefore its value. The only way for such crypto assets to be traded is through decentralized exchanges. Although they can't provide enough liquidity and scalability for market makers.”
Growth Ahead of Regulation
In many emerging markets, where cryptocurrencies are just beginning to gain traction, local governments aren't necessarily interested in regulation, betting it might suffocate the burgeoning asset class and its business potential for the region. Parts of South America don't even have a basic regulatory structure. Sebastian Serrano, CEO of Ripio Credit Network points out that in Argentina, one of the most promising tech hubs in Latin America, regulators are betting on the potential of fintech startups, and have decided to let blockchain-based companies grow before applying regulations. On the other hand, he says:
“Regulators in Bolivia and Ecuador are completely banning activities of startups related to cryptocurrencies. Here is a clear statement from the vice president of Argentina’s Central Bank: 'Blockchain technology has strengthened over the last few years, but regulations are not clear at the moment; they actually vary a lot from one country to another. In that line, it’s a great time to take a stand as a crypto investor.'”
Conversely, there's Switzerland, which has a strong and well delineated regulatory framework already in place. Andrea-Franco Stöhr, CEO of Crypto Finance Conference says investors should definitely consider the country in which any ICO (or for that matter exchange based sale) is taking place. For example, an ICO in Switzerland has to comply with Swiss legal and financial requirements before it can ever take place.
“The main focus in Switzerland lies on KYC [know your customer] and AML [anti money laundering] compliance, which not only helps the start-up in only accepting “clean” investments - it also reassures investors, who can be sure that the ICO is fully compliant. Clearly, no investors want to be associated with a money-laundering ICO.On the other hand, if you think about states where ICO regulation is either wholly absent, or very weak, companies will not only act without limitation - but will most likely turn out to be fraudulent. This is precisely because they do not have to comply with any regulations.”
In addition, she explains, compliant or regulated ICOs often use an “escrow agent” during the pre-ICO stage. The escrow agent acts then as an independent third party, safeguarding investors’ interests.