Digital assets live on borderless blockchains while regulatory agencies operate within a particular jurisdiction. This tension between local and global creates the need to strike a delicate balance between legislating for investor protection whilst fostering a culture that encourages innovation. Regulators that are tempted to place strict constraints on the digital asset market risk causing companies and investors to depart for friendlier jurisdictions.
As digital assets enter their second decade, the cloud of regulatory uncertainty is beginning to lift. We now see increased clarity in several jurisdictions, clearing the path for institutional investors seeking new sources of alpha. In this piece, we explore eight jurisdictions for issuing and dealing with digital assets: USA, UK, Hong Kong, Jersey, Switzerland, Abu Dhabi, Singapore and Australia. Plus one to watch — Labuan.
Each jurisdiction uses different terminology when referencing assets issued on distributed ledgers. For the sake of brevity, we used the term ‘digital asset’ to cover the gamut of blockchain-based assets. (Source: Global Crypto-Asset Regulatory Landscape Study, University of Cambridge)
In the United States, digital assets fall under the domain of the Securities and Exchange Commission and are subject to existing securities regulation. The exchanges on which they trade are considered money services businesses by the Financial Crimes Enforcement Network and therefore must comply with the Bank Secrecy Act. Leading the charge in the U.S. is the state of Wyoming, which recently enacted a series of 13 blockchain-enabling laws aimed at positioning the state as a first-mover in the digital asset economy. Wyoming is the first state to recognise direct property rights for individual owners of all forms of digital assets, reflecting the peer-to-peer nature of these assets.
In late 2018, the Securities and Futures Commission (SFC) took a proactive stance to digital asset regulation by issuing a set of standards for traditional asset managers who wish to invest more than 10% of their portfolio in digital assets. The terms and conditions set out in the latest SFC announcement include guidance on custody requirements, portfolio valuation and risk management. Unless an exemption is applied, security token offerings are subject to existing securities law.
Officials in the island of Jersey have been careful to balance the need for robust regulation with an innovation-friendly legal structure that does not stifle development. While virtual currency exchanges fall under the purview of Jersey law aimed at preventing and detecting money laundering and terrorist financing, exchanges with a turnover of £150,000 ($196,368) or less per calendar year are exempt from the cost of registration requirements. Alongside digital asset exchanges, the Jersey Financial Services Commission was an early mover in the regulatory space having approved the world’s first regulated Bitcoin fund back in 2014, legally recognising digital currencies, security offerings and asset managers.
Instead of applying broad strokes to digital asset regulation, the Monetary Authority of Singapore examines “the structure and characteristics of, including the rights attached to, a digital token in determining if the digital token is a type of capital markets products under the SFA [Securities & Futures Act].” Additionally, the Payment Services Bill (PSB), passed in January 2019, requires any entity ‘facilitating the exchange of digital payment tokens’ to obtain a license under the PSB.
According to the Financial Conduct Authority (FCA), digital assets fall in one of three categories: Exchange Tokens, Security Tokens, and Utility Tokens. While exchange and utility tokens fall outside the scope of the FCA, security token offerings are subject to existing securities regulation.
In October 2017, the Financial Services Regulatory Authority of the Abu Dhabi Global Market provided guidance on its approach to token offerings and digital assets. While digital currencies are treated as commodities by the law, security token offerings still await regulation that is expected to arrive in mid-2019. Meanwhile, Market intermediaries such as broker dealers, custodians, asset managers and digital asset exchanges dealing in these assets will need to be licensed by FSRA as OCAB (Operating a Crypto Asset Business) holders. Neighbouring Dubai has declared its intention to be the first city fully powered by blockchain technology by 2020, in a bid to enhance government efficiency, boost industry creation and position the Emirates as a leader in the nascent industry.
Digital asset markets enjoy a progressive regulatory regime in Switzerland. The Swiss Federal Tax Authority considers digital assets for taxation purposes, with holdings being subject to wealth tax and declared on annual tax returns. The Swiss Financial Market Supervisory Authority (FINMA) has taken a progressive stance towards the digital asset space, creating a registration process for exchanges and setting out principle-based guidelines for the issuance of digital securities. Token offerings must comply with existing provisions including
- Provisions on combating money laundering and terrorist financing
- Banking law provision
- Provisions on securities trading
- Provisions set out in collective investment schemes legislation
Residents of Zug, also known as “ Crypto Valley”, even have the option of paying their city fees with Bitcoin.
Digital asset regulation in Australia falls under the jurisdiction of aims to promote consumer trust and confidence, comply with existing laws such as the Corporations Act 2001, and spur the next wave of fintech innovation. Assets classified as managed investment schemes, shares, derivatives, or non-cash payment facilities are treated as financial products subject to the Corporations Act. Any platform that enables consumers to buy, issue, or sell these assets may involve the operation of a financial market and require a market license or exemption.
One to Watch — Labuan
Located near Brunei off the coast of Borneo, the island of Labuan is a free-trade zone and a federal territory of Malaysia. Digital asset exchanges are regulated by the Labuan Financial Services Authority under the Money Broker License, allowing them to provide both fiat and digital custody as well as fiat on ramps for digital asset investments. Not to be overlooked, Labuan provides a low tax environment, is business-friendly, and offers access to Asia’s largest banks, making it a compelling option for global businesses with a regional connections.
While it is encouraging to see regulators in various jurisdictions take the necessary steps to introduce clarity into the digital asset market, the constant state of flux these markets find themselves in means that the legislative frameworks governing them will too evolve over time.