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International developments relating to cryptocurrencies - April 2018
While Chinese regulators have announced the successful removal of ICO platforms from the market, other regulators around the globe have continued efforts in bringing cryptocurrencies within the ambit of existing regulatory regimes. These have been discussed below.
- European Union: The European Parliament has announced closer regulation of virtual currencies with respect to AML/CTF concerns. The new measures require virtual currency exchange platforms and custodian wallet providers to be registered under the European Union’s (EU) Anti-money laundering Directive, and apply customer due diligence controls, including customer verification. The changes are due to enter force three days following publication in the Official Journal of the European Union. Member states have 18 months to bring the requisite changes into national law.
- Switzerland: In its annual report for 2017, the Swiss Financial Market Supervisory Authority (FINMA) drew attention to the high interest in fintech, particularly in relation to blockchain, cryptocurrencies and ICOs. With an almost 70% rise in the number of queries relating to fintech, FINMA noted that the asset management and funds sector especially required regulatory clarification and focus on cryptocurrency valuations, custody arrangements and how these duties are organised. ASIC currently has a fintech co-operation agreement in place with FINMA.
- Malta: The Malta Financial Services Authority (MFSA) has released a consultation paper proposing a ‘financial instrument test’ to determine whether the cryptocurrencies in question fall within national or the EU’s regulatory scope. The three-stage test would be implemented under the proposed Virtual Financial Asset Act (VFAA). The proposed stages are:
- Where a digital asset qualifies as a utility token, the VFAA does not apply;
- If paragraph 1 above does not apply and where a digital asset can be traded on a secondary market as a security, the asset comes within the regulatory scope of the EU Markets in Financial Instruments Directive; and
- If paragraphs 1 and 2 above do not apply, the digital asset is regulated by the proposed VFAA under Maltese law.
The consultation closes 5 May 2018.
- Hong Kong: The Securities and Futures Commission’s (SFC) Deputy Chief Executive Office and Executive Director of Intermediaries, Julia Leung recently spoke on fundraising efforts using blockchain technology, calling many ICOs “dubious, if not downright frauds.” Acknowledging the technology’s potential in improving efficiencies and financial inclusion, Leung reiterated the SFC’s position on ICOs, being that the SFC’s securities regime is technology-neutral. Last month, the SFC halted one ICO and Leung indicated that the SFC would “continue to police the market and enforce where necessary” in conjunction with implementing investor education programs regarding the risks of ICOs.
- Korea: The city of Seoul has begun developing its own cryptocurrency to be used for government administration, including a social benefits program. Named ‘S-Coin’, Seoul’s mayor indicated that careful consideration would need to be given to prepare institutional and legal support to implement proper usage of S-Coin. The announcement is particularly notable as South Korea remains one of a handful of jurisdictions to have implemented strict prohibitions on cryptocurrency-related activities such as ICOs.
- India: The Reserve Bank of India has announced a prohibition on regulated banks dealing in virtual currencies or providing services facilitating dealing with or settling virtual currencies (eg, maintaining or opening accounts for exchanges dealing with virtual currencies accounts, registering, trading, settling, and clearing). One Indian company, Kali Digital Ecosystems, has already filed a petition with the High Court of Delhi over the prohibition on the basis of the prohibition being “arbitrary and unconstitutional.” Regulated banks will be expected to cease any dealings in virtual currencies in the next three months.
- Canada: The Ontario Securities Commission (OSC) has released a draft of its Statement of Priorities for the 2018-19 financial year, with a core priority area being responsive regulation with respect to cryptocurrencies. Emphasising the significance of “minimal impacts on investors or disruptions to capital markets”, the OSC indicated, among other things, a desire to complete issue-oriented reviews in relation to cryptocurrencies, enhance guidance where offerings involve securities, and ongoing monitoring of cryptocurrency issuers, particularly those wishing to become reporting issuers. The draft Statement of Priorities is open for consultation until 28 May 2018.