Cryptocurrency and blockchain enthusiasts were excited about the announcement this week that President Donald Trump plans to name Office of Management and Budget Director Mick Mulvaney, a longtime supporter of cryptocurrencies and blockchain technology, as his interim White House chief of staff before the end of the year. As a congressman, Mulvaney was a co-founder of the Congressional Blockchain Caucus.
When it comes to actually embracing cryptocurrencies, the U.S. has been generally skeptical. As a recent opinion piece in the Harvard Business Review by law firm Jones Day blockchain initiative leaders Stephen J. Obie and Mark W. Rasmussen noted:
“Without clear regulations, cryptocurrency innovation in the United States is being stifled. Entrepreneurs sit on the sidelines for fear of innocently running afoul of the law. Investors, meanwhile, hang back because of uncertainty regarding valuations. And the commonweal suffers, as other countries lure innovators away from the United States by creating rules that make their jurisdictions more hospitable to this growing asset class.”
That was one of the arguments made by U.S. Securities and Exchange Commissioner Hester Pierce in her July dissent from an SEC decision refusing permission to create a Bitcoin-based exchange-traded product (ETP), a security that would track the value of the cryptocurrency. She wrote that the decision “preclud[es] approval of cryptocurrency-based ETPs for the foreseeable future,” and “demonstrates a skeptical view of innovation, which may have an adverse effect on investor protection, efficiency, competition, and capital formation well beyond this particular product.”
Which isn’t to say that the U.S. is alone in avoiding serious decisions on regulating cryptocurrencies. A June 2018 report for members of the U.S. Congress by the Library of Congress, “Regulation of Cryptocurrency Around the World,” noted that “over the past four years cryptocurrencies have become ubiquitous, prompting more national and regional authorities to grapple with their regulation,” but goes on to point out (and map in some detail) that the ways governments are addressing them varies wildly.
And indeed, the U.S. is grappling, with the Commodity Futures Trading Commission (CFTC) regulating cryptocurrencies as a commodity while the Securities and Exchange Commission (SEC) says that initial coin offerings are securities. Then there’s the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which consider them to similar to a currency, and the IRS, which considers cryptocurrencies to be property. Several states, such as New York (which regulates cryptocurrency exchanges) and Ohio (which just announced it would accept Bitcoin for taxes) have their own rules.
On the other hand, the U.S. has been fairly supportive of creative uses by industry of the distributed ledger technology (DLT) that underlies blockchain. Agencies including the General Services Administration and Department of Homeland Security have announced blockchain technology programs, according to the Washington Business Journal. While noting that many states have focused on investor warnings and financial regulation of cryptocurrencies, an April 2018 report by the Brookings Institute noted that several, including Delaware, Illinois, and Colorado, have been working to bring blockchain technology into the delivery of government services. And West Virginia even experimented with using blockchain in the 2018 elections.
In the private sector, American companies like IBM and JPMorgan Chase are creating blockchain tools that allow firms like Walmart to track food through the supply chain and insurers like Aetna and UnitedHealthcare to potentially maintain secure but sharable healthcare information, among other uses.
Europe pushes ahead
Among the governments taking a more coordinated approach is Switzerland, which this month directed government agencies to update its legal system to embrace cryptocurrencies. On Dec. 7 the Swiss Federal Council, a seven-member body which is the country’s highest executive authority, approved a report that “shows that Switzerland’s legal framework is well suited to dealing with new technologies, including blockchain,” according to a press release. “The Federal Council… wants to create the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies.”
While noting concerns about anti-money laundering and terrorism financing using cryptocurrencies like Bitcoin, the Federal Council instructed the Federal Department of Finance and the Federal Department of Justice and Police to draw up by the first quarter of 2019 a draft proposal for necessary legal adjustments in several areas, including civil and insolvency law, financial market and banking law, and anti-money laundering law.
Malta, the EU’s smallest member state, has been Europe’s most aggressive supporter of cryptocurrencies, having already put a regulatory framework in place. In March it passed a trio of laws regulating distributed ledger technology and cryptocurrencies, including the Virtual Financial Currencies Act, which came into force on Nov. 1. The goal of the act, according to the Malta Financial Services Authority, is to “achieve investor protection, market integrity and financial stability through regulation that is proportionate and which supports innovation and new technologies,” as well as “ensuring that money laundering and financing of terrorism risks in this field are addressed.”
Along with Malta, small nations like Lichtenstein, as well as the British territories of Bermuda and Gibraltar, have put out the welcome mat for cryptocurrency startups, offering legislation to support startups and initial coin offerings, according to the New York Times. Another EU state, Estonia, has been aggressively licensing cryptocurrency exchanges and wallet providers, Bitcoin.com reported in November.
And while she focused her remarks on security and fraud issues, International Monetary Fund CEO Christine Lagarde in February told CNNMoney that regulation of cryptocurrencies is “inevitable” and is “clearly a domain where we need international regulation and proper supervision.”
The EU is more decisive on the blockchain front. On Dec. 13, the European Parliament issued a resolution calling on the European Commission to produce a strategy on adopting blockchain technologies in the areas of trade, supply chain management, and intellectual property, as well as developing “a set of guiding principles for blockchain application to international trade, in order to provide industry and customs and regulatory authorities with a sufficient level of legal certainty that encourages the use of blockchain and innovation in this area.”
It also calls for the UE and its member states “to play a leading role in the process of standardization and security of blockchain, and to work with international partners and all relevant stakeholders and industries to develop blockchain standards.” The goal, it adds, is for the EU “to become a leading actor in the field of blockchain and international trade.”
As Modern Consensus reported earlier this month, Malta has been positioning itself as Europe’s “Blockchain Island” and spearheaded an announcement by seven southern European states—France, Italy, Spain, Greece, Portugal and Cyprus were also participants—of a “vision to make Southern Europe a leader on emerging technologies, such as Distributed Ledger Technologies… that can help our countries transform their economies and society into truly digital ones and become a leading region in this sector.”
Asia skeptical of cryptocurrencies but bullish on blockchain
The picture is a bit muddier in Asia, which has been the main hub of cryptocurrency mining and exchanges. China cracked down especially hard in late 2017, banning cryptocurrency exchanges and initial coin offerings, but remains enamored with blockchain technology. President Xi Jinping wants blockchain technology used in the creation of a smart city for the Xiongan New Area economic zone, and a half dozen major cities including Shanghai and Guangzhou have official policies encouraging blockchain development, according to a report by China’s Abacus News in November. Shenzen has gone so far as to create a 500 million Yuan ($72 million) blockchain investment fund. And tech giants like Alibaba and Tencent are investing in DLT technology for uses like healthcare and logistics tracking, it found.
While cryptocurrencies are hugely popular in South Korea, the government takes a different view, banning initial coin offerings. In July, the Financial Services Commission set up a temporary Financial Innovation Bureau to “help nurture Korea’s fintech industry, mostly covering the nation’s cryptocurrencies and blockchain technology,” the Korea Times reported. Since then, the government has come under increasing pressure to come up with regulations governing initial coin offerings and cryptocurrency exchanges from the legal community as well as industry, crypto news site CoinDesk reported in November.
South Korea takes a much more aggressively positive stance on non-cryptocurrency uses of blockchain and distributed ledger technology, with several government agencies actively pushing the technology’s use in a variety of logistics-related endeavors. In June, news site Business Korea reported that the Ministry of Science and ICT launched a blockchain initiative consisting of “six pilot projects includ[ing] livestock history management, personal customs clearance, simple real estate transactions, online voting, international electronic document distribution, and maritime logistics.”
Japan, which has seen several huge hacking thefts from cryptocurrency exchanges—just two, of Mt. Gox in 2014 and Coincheck Inc. in 2018, accounted for about $1 billion lost—regulated cryptocurrency exchanges in 2017. The country’s Financial Services Agency went one step farther in October, approving the creation of a self-regulating cryptocurrency body, the Japan Virtual Currency Exchange Association, according to Reuters. It has been given the power “to set rules to safeguard customer assets, prevent money laundering, and give operational guidelines,” the news agency said. “The association will also have to police compliance.”
In terms of adopting blockchain, Japan is a leader. “Japan is trying to become the world’s Blockchain hub,” research firm ResearchandMarkets.com noted in a report this summer, “Japan Blockchain Technology Market (2018-2023)” [purchase required]. “By industries, the Japan Blockchain market is divided into banking and financial services, insurance, supply chain management, and healthcare. Banking and financial services holds the largest market share.”
For example, Japan’s Strategic Business Innovator Group (SBI) raised a $460 million AI & Blockchain Fund this summer, Forbes reported. In September, the Financial Times noted that three Japanese banks launched a blockchain-based domestic payments system, MoneyTap, created by a partnership between SBI and U.S.-based Ripple.
In November, the Monetary Authority of Singapore brought the Payment Services Bill before Parliament, seeking to create a framework for regulating and licensing of cryptocurrencies and electronic wallets, as well as safeguarding consumers, improving cybersecurity, and preventing the financing of terrorism, according to the Straits Times. The city-state’s government is an aggressive supporter of blockchain technology, and has substantial private investment in the technology, Earlier this month, the official Enterprise Singapore agency joined locally-based VC firm Trive Ventures, PricewaterhouseCoopers (PwC) Singapore’s Venture Hub, and South
Korea’s Icon Foundation in launching Tribe Ventures, a blockchain accelerator, according to the Straits Times.
In Vietnam, which the six-month-old U.S. Library of Congress report classifies as banning “any and all activities involving cryptocurrencies,” the prime minister reportedly “told the government agencies to prepare a draft for the country’s first legal digital currency framework,” according to a Dec. 18 story on the Malta AI & Blockchain Summit’s newswire.
In India, news site Quartz India reported that a Finance Ministry panel is planning to issue a draft report as well as a “draft bill on virtual currencies, use of distributed ledger technology in (the) financial system and framework for digital currency in India,” as soon as this month. That comes on the heels of a lawsuit filed by a number of cryptocurrency exchanges following an April order by the Reserve Bank of India giving banks three months to end business relationships with cryptocurrency exchanges.
The Persian Gulf
The Persian Gulf has been a longtime hotbed of blockchain activity, but cryptocurrency regulation is a recent and ongoing issue. Last year, the Financial Services Regulatory Authority of Abu Dhabi, one of the United Arab Emirates, released guidelines for regulating initial coin offerings and cryptocurrencies, CNBC reported. In October, the UAE’s Emirates Securities and Commodities Authority issued detailed rules for initial coin offerings that are expected to be enacted into law by mid-2019, according to Gulf News. Cryptocurrencies will be classified as securities, and the Authority is helping stock exchanges in Dubai and Abu Dhabi prepare for trading, it added.
The central bank of the Persian Gulf state of Bahrain is another proponent of proactive regulation, On Dec. 13, it issued draft rules for the licensing and and supervision of cryptocurrencies, according to the Bahrain News Agency. It cited Khalid Hamad, executive director of banking supervision, saying, “This regulatory framework will address the demand from the market for these services and the need to also recognise this innovation in financial services.”
Dubai has been working to not just adopt blockchain, but to weave the technology into the everyday running of the Emirate for several years. Working with the official Smart Dubai agency, IBM in October announced the launch of the Dubai Blockchain Platform. Among the first uses of the blockchain platform-as-a-service will be the Dubai Pay Blockchain Settlement and Reconciliation System which the government and financial industry launched in September.
Calling Dubai “a pioneer in blockchain technology since its inception,” Dr. Aisha Bint Butti Bin Bishr, director general of the Smart Dubai Office, said in the release, “[t]he Dubai Blockchain Strategy set a clear path for the emirate to have the world’s first fully digitized government by 2021.”
The strategy has helped Dubai launch blockchain applications in industries including roads and transport, energy, healthcare, and education, Arabian Business wrote at the time. The country is even experimenting with wrapping blockchain-based smart contracts into its legal system via the Dubai International Financial Centre Courts.
That legal certainty is an important step for blockchain, but one that’s fairly simple—after all, blockchain is just a smarter and more secure way of creating a contract. It’s been a longer road for cryptocurrencies, but the same thing is starting to happen, despite the plodding pace with which the U.S and other governments are getting around to figuring out whether they should be treated as a security or a commodity or a currency.
While she focused her remarks mainly on security and fraud issues, International Monetary Fund CEO Christine Lagarde in February told CNNMoney that regulation of cryptocurrencies is “inevitable” as it is “clearly a domain where we need international regulation and proper supervision.”