Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

Looking at the regulation of virtual currencies in several countries listed in this paper, it is easy to find that all countries try to make some kind of clearer classification of virtual currencies, so that different types of virtual currencies are included in the existing regulatory system to meet different levels of regulatory requirements such as anti-money laundering and anti-financial fraud.

In China, whenever we talk about the regulation of virtual currencies such as Bitcoin, we almost always refer to “Circular 289” and “Circular 9-4”, with the former referring to the 2013 Yinfa Circular 289 of the People’s Bank of China and others “Notice on Preventing the Risk of Bitcoin” and the latter referring to the People’s Bank of China and others’ “Notice on Preventing the Risk of Token Issuance and Financing” issued on September 4, 2017. These two departmental regulations are almost the only official documents that provide a glimpse into the attitude of Chinese regulators towards virtual currencies such as Bitcoin.

When doing legal research, we often focus on comparative research methods. This is the case in China, but how about abroad? The following is a selection of the regulatory situation in the United States, Singapore, Japan, Germany, Switzerland, and the United Kingdom, to share with readers.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

I. United States

Different regulators may characterize different digital currencies differently in order to incorporate them into their own regulatory scope, and there is a tendency that “everyone wants to regulate”.

The U.S. Treasury Department considers virtual currencies to be a form of currency, so all virtual currency exchanges are required to apply to its Financial Crimes Enforcement Network (FinCEN) for an MSB license (Money Service Business).

The CFTC considers bitcoin futures to be a commodity, and in December 2017, the Chicago Mercantile Exchange (CME) launched trading in bitcoin futures contracts.

The Internal Revenue Service (IRS) identifies virtual currencies such as Bitcoin as property rather than currency, and it wants to impose a value-added tax on transactions between virtual currencies such as Bitcoin and has set up a team dedicated to combating tax evasion on virtual currency transactions.

After seeing the explosion of the ICO market, the U.S. Securities and Exchange Commission (SEC) considers certain virtual currency ICOs that can pass the Howey test to be securities offerings that need to be registered with the SEC and regulated by the Securities Act, the Securities Exchange Act, and other laws.

The so-called Howey test is a standard used by the U.S. courts in a 1946 decision (SEC v. Howey) to determine whether a particular transaction constitutes a securities offering, with specific criteria including: (1) whether it is an investment of money; (2) whether the investment is made in anticipation of benefits; (3) whether the investment is for a specific cause (common enterprise), i.e. (3) whether the investment is for a specific cause (common enterprise), i.e., whether there is a project party; and (4) whether the benefits arise from the efforts of the issuer or a third party.

Of these four criteria, the “money” standard is expanding, and in 2013 a U.S. court ruled that bitcoin has the property of money (SEC v. Trendon T. Shavers & Bitcoin Sav. & Tr.). Thus, even ICOs that only absorb virtual currencies such as Bitcoin for financing purposes are likely to be considered by the SEC as securities offerings and subject to more stringent regulation.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

II. Singapore

In November 2017, the Monetary Authority of Singapore (MAS) issued “A Guide to Digital Token Offerings” (A Guide to Digital Token Offerings), which states in the document that digital tokens that are identified as products that should be regulated under Singapore’s securities laws (i.e., capital market productscapital market The document states that if digital tokens are deemed to be products that should be regulated under Singapore’s securities laws (i.e., capital market products), then the offering or issuance of digital tokens will need to comply with the existing Singapore Securities and Futures Act (SFA, Security Future Act). Unlike the U.S. definition of securities, which may be “all-encompassing,” Singapore’s definition of “capital market products” is relatively narrow. Under Section 2 of the Singapore Securities and Futures Act, “capital market products” refers to securities, futures contracts, contracts and arrangements for foreign exchange transactions (including leveraged transactions), and financial products specifically designated by MAS. In other words, most virtual currencies would be deemed to be non-capital market products. Further, the MAS essentially gives the green light to virtual currency issuance programs that are the majority of non-capital market products.

On September 19, 2018, at the CoinDesk Consensus Conference Singapore, Damien Pang, Head of Technology Infrastructure Division (TIO), Fintech and Innovation Group, MAS, stated that MAS currently classifies tokens into three categories: application-based tokens, payment-based tokens, and security-based tokens. In terms of regulation, MAS does not intend to regulate application-based tokens, but for payment-based tokens, MAS expects to develop a payment services bill to apply to tokens with storage and payment value. As for security-based tokens, the existing Securities Futures Act (SFA, Security Future Act) will apply.

On January 14, 2019, the Payment Service Act (PSA) was considered and passed by the Singapore Parliament to clarify the regulation of payment-based token business, which stipulates that virtual currency exchanges, OTC platforms, wallets, etc. are payment-based token service providers and need to meet relevant anti-money laundering regulations and apply for corresponding licenses.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

III. Japan

On April 1, 2017, Japan’s Payment Services Amendment Act came into effect, the first bill in the world to formally include virtual currencies in its regulation at the legislative level. The legality of some virtual currencies as a means of payment was officially recognized and virtual currency exchange business was regulated. In the bill, virtual currency is defined as “a property value denominated in legal tender and processed through an electronic system that can be used to transfer payments or settle debts between different entities.”

In March 2019, Japan amended the Payment Services Act and the Financial Instruments and Exchange Act to change the term “virtual currency” to “cryptographic asset.” Cryptocurrency exchange institutions are required to be registered as joint stock companies with the Financial Services Agency, and after registration, they are required to fulfill obligations such as information security management, information disclosure, asset separation management (separate management of own assets and user assets), and regular submission of business reports.

For ICO acts, if the issued tokens are considered to have the nature of marketable securities, which is also known as investment ICO, they will be included in the strong regulation of the Financial Instruments and Exchange Act and need to obtain various registrations in accordance with the relevant regulations. The issuing entity should also make necessary disclosures and regulate advertising and sales practices.In September 2019, the Digital Currency Exchange Industry Association under the Japan Financial Services Agency issued the Rules Relating to New Coin Offerings and the Guidelines on Rules Relating to New Coin Offerings, which impose higher regulatory requirements on digital currency exchanges. Overall, Japan’s high compliance requirements for the digital currency industry and the difficulty of project fundraising and trading have led to the fact that although Japan did not deny the legality of ICOs after the law was amended, few projects have in fact been issued successfully for a long time.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

IV. Germany

Germany is the first country in the world to recognize Bitcoin as legal. However, Germany does not have a specific law for virtual currencies, but rather differentiated regulation according to the business scenarios and application characteristics of digital currencies into different types, i.e., virtual currencies are included in the existing legal system for classification and regulation.

In August 2013, the German Ministry of Finance, in response to an inquiry from Frank Schaeffler, a property expert for the Liberal Democratic Party, stated that it had officially recognized Bitcoin as a “Currency Unit” and a “Private Money Private Money”.

In September 2018, Germany’s Federal Financial Supervisory Authority published its “Report on the Regulation of Blockchain Technology”, which classifies digital currencies into three categories.

One is Payment Tokens (Payment Tokens), similar to Bitcoin, which is a means of payment, or a means of value transfer, being used to purchase goods or services, which does not have value in itself, but only serves as a means of payment and assumes the function of clearing or settlement. If a payment token is used for payment in a commodity transaction or to build a token trading platform, an application must be submitted to the German Financial Authority in accordance with the German Banking Act. At the same time, as a provider of financial instruments, it is also subject to the German Anti-Money Laundering Act and needs to comply with the following four requirements: first, to conduct due diligence on customers; second, to fulfill the system and method of keeping customer identification data and transactions; third, to establish a sound internal anti-money laundering control system; and fourth, to establish and implement a large-value transaction and suspicious transaction reporting system.

Secondly Security Tokens, including equity tokens and other capital tokens, whose holders have ownership of specific assets, equity and debt instruments that will promise future corporate earnings or profits to investors, and therefore function similarly to securities, bonds or other financial derivatives. According to Section 2(1) of the German Securities Trading Act, four conditions need to be met for a class of virtual currency to be considered a security: first, the transferability of the token; second, the negotiability of the token in the financial or capital markets (a token trading platform can be considered a financial or capital market for the purposes of this definition); third, the embodiment of rights in the token, i.e., the holder of the token has a similar right to shareholder rights or claims, etc. claims; and fourth, it meets the criteria of being a payment instrument. There is no single answer as to whether a token meets the above four criteria, and the German FSA adopts a case-by-case approach.

Third, Utility Token, which is considered by the German Monetary Authority to be applied only to the issuer’s own network system, has a relatively closed nature, and is granted to its users the right to use its products or services through blockchain technology. For a single functional token, it does not have financial attributes by nature and is not included in the regulation of relevant German financial laws. However, functional tokens may be given the functions of payment-based tokens and securities-based tokens, which will then be regulated in accordance with the relevant regulatory requirements.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

V. Switzerland

In April 2018, the Swiss Financial Markets Authority (FINMA) issued guidance that it classifies tokens into three categories based on their basic use and whether they can be traded: first, payment-based tokens, i.e., digital cryptocurrencies; second, functional tokens; and third, asset-based tokens.FINMA believes that payment-based tokens do not constitute a form of financing; asset-based tokens, on the other hand, constitute securities and require the adoption of securities FINMA has not yet clarified what regulatory rules apply to the offering of functional tokens, but has made it clear that functional tokens are not securities and are not subject to the regulatory rules for securities.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

VI. United Kingdom

In January 2019, the UK’s Financial Conduct Authority (FCA) released its “Guidance on Cryptocurrency Assets”, in which it also divided cryptocurrencies into three types. Among them, transaction-based tokens such as Bitcoin and Litecoin can be used for the purchase and sale of goods and services and do not need to go through banks; securities-based tokens should be included in the regulation; and utility pass-throughs other than electronic currencies are not regulated.

Who is the legal alcove? Comparing the Regulatory Responses of Virtual Currencies in Different Countries

In the end

Looking at the regulation of virtual currencies in the countries listed in this article, it is easy to see that countries are trying to make some kind of clearer classification of virtual currencies, so that different types of virtual currencies are included in the existing regulatory system to meet different levels of regulatory requirements such as anti-money laundering and anti-financial fraud. Some countries have also maintained some consistency in the classification of virtual currencies into payment-based tokens, securities-based tokens and functional tokens.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/who-is-the-legal-alcove-comparing-the-regulatory-responses-of-virtual-currencies-in-different-countries/
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