Section 2: UPDATE ON THE REGULATORY POLICIES
The following section discusses the major trends in the regulation of blockchain applications and cryptoassets globally. For more detailed updates by country, refer to ”Overview by Country” section, page 43.
CURRENT GENERAL APPROACHES BY GOVERNMENTS
Overall, governmental action in the field of DLTs and cryptocurrencies remains on track.
A wide variety of approaches are continuing, with some countries still banning cryptocurrencies and ICOs, while some smaller countries are keen to propose forward-looking frameworks to attract innovative fintech businesses, however, most countries are active in issuing guidelines or monitoring the compliance of crypto actors.
As emotions have calmed down, there is less urgency for officials to act and clamp down on crypto businesses, as they once claimed they would. Central banks, in particular, have almost unanimously concluded that cryptocurrencies are not a threat and not something they should be engaging with any urgency.
As an observation, civil law countries deploy regulations faster than common law countries—in which case, more framework is likely to be better than no framework, as finance people are among the most averse to uncertainty.
However, every country agrees that the profits made in trading cryptoassets should be subject to taxation. An increasing number of countries are taking actions to tax private cryptoasset traders. Examples highlighted in the press lately include Bulgaria, Denmark, and others. These moves include obtaining information from the exchanges (located in their territory— at least for the moment) of holdings and the activities of private traders.
The worldwide financial stability has confirmed the view that cryptocurrencies do not threaten the global economy. Arguably, the crypto sphere is too small, even more so now that the total market cap is back in the region of 100 billion dollars.
At the World Economic Forum gathering in Davos in 2018, the comments around crypto-assets and bitcoin were skeptical, but not completely closed to the emerging technology. This year, round tables and debates on blockchain were again held, and Davos participants have chosen sides. A lot of opposing views were expressed, and crypto-asset valuations were heavily criticized. The common ground found by panelists has been that the value of tokens will be derived from how useful the underlying protocol is. Hence wealthy, powerful people on the planet agree that what matters is the technology behind crypto, rather than the tokens themselves.
Responding to this consistent position of actors in the world economy, (bitcoin no, blockchain yes), Joseph Young came up with a nice saying: “That’s like saying: airplanes will go to zero while engines have potential!”
STATUS OF OFFICIAL INITIATIVES TO PASS FIAT ON DLT
Currently, it appears that officials have resolved this matter. Most countries have concluded that they will disregard possible sanctions at this time. The latest statement by the Bank of International Settlements says: “No central banks reported any significant or wider public use of cryptocurrencies for either domestic or cross-border payments in their jurisdictions. Usage of cryptocurrencies is assessed to be either minimal (‘trivial/no use’) or concentrated in niche groups.” BIS member central banks believe cryptocurrency use “will remain minor” due to “low retail acceptance, compliance issues, better understanding by the general public of the risks involved and, for some jurisdictions, outright bans.”
Only a few outliers are progressing in the area, of which Russia, China, and Japan are the most significant.
KYC, AML, AND CFT
The status is still very much the same as it has been in recent months, that is: very stringent, with systematic and effective implementation requirements imposed on businesses that want to register, irrespective of the jurisdiction. A business starting in cryptos today cannot debate this: KYC, AML and CFT checks of its customers are compulsory to be able to operate.
A question worth asking is if all exchanges and cryptocurrency price movements are the under scrutiny of regulators, why is fiat cash still allowed out there? Probably a wider reflection about what people should be allowed to do without KYC compliance should be conducted.
One observation one can make here relates to the questionable actions undertaken by the United States. When a US citizen wants to buy an asset issued abroad, with a non-USD currency, from a non-US counterpart, there is still concern about how US law may apply to the transaction. No other country in the world adopts this extraterritorial approach with its legislation, and there is no reciprocity when a non-US citizen does business with a US citizen. This situation impacts the KYC process. As a result, businesses prefer to discard US citizens from their pool of investors and clients. This asymmetry is, without question, a form of protectionism on the part of the US and is neither fair nor sustainable in the long run.
The problem is that KYC has some opponents, not the least being the exchange platform operators. Some claim that it is pointless implementing any KYC procedures, as everything is publicly available on the blockchain anyway. Others argue that the lengthy signup procedures and the tedious wait for KYC checks are an unacceptable violation of an individual’s privacy.
One example is Kraken, which complained about the cost of compliance, stating that the “cost of handling subpoenas (not to mention licenses) is quickly becoming a barrier to entry.” Rather than deterring criminals and increasing transparency, some argue that all KYC/AML does is financially exclude those who lack the documentation to prove their identity—a particular problem for the world’s 1.7 billion unbanked, whose hope it was that DLT could help them to integrate.
The fight is just beginning, and of course, governments and states have a significant head start in this field. However, fears of hacks of KYC data from banks or exchanges are starting to show how preposterous this race for control is becoming.
On-chain authentication and identity management
A business case exists for providing authentication of users, thanks to distributed ledgers. The use case exists, of course, for on-chain applications (as users always sign what they are doing cryptographically), but also, why not for off-chain usage.
The concern for identity verification is stringent, primarily for exchanges and financial services providers, even if more advanced checks will be required, depending on the risk tolerance of the business service provider.
Hence, the facilitation of such an authentication service that complies with KYC (as well as AML and CFT) is necessary to make the onboarding of platforms users seamless and efficient—the opposite of what it is today. Ideally, performing the authentication service setup properly, once by the users and by any actors in the environment, could then be referred to and used to access various private offers.
Two directions exist in this respect:
• Independent initiatives have begun to propose such a service, such as Authenteq in Iceland.
• KYC can be incorporated into the blockchain infrastructure, as is the intent in NEO, Concordium, Belfrics, and others.
An efficient KYC service has not yet been implemented, but the sector is working on this. Let’s hope that the efficiency achieved in this domain will further unlock the potential of DLTs. The ultimate in this field would, of course, be for zero-knowledge-proof mechanisms to be able to handle this service.