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Section 2: Regulatory policies update

Arguably the most important event of the last three months happened the second half of March when finance ministers meeting to prepare the G20 summit clearly stated that there was no reason to regulate Bitcoin and other DLT tokens as it did “not represent any threat for the world economic stability.” I have to admit that I have been a bit disappointed in this: clear legal views on cryptos would have paved the way for proper valuation of these assets, that are somehow still exotic and in the middle of nowhere due to this refusal by finance ministers to qualify them more than that.

Indeed, probably the number one concern and source of fear impacting the crypto market in the first months of 2018 has been the uncertainty of state regulations. Of course, knowing what comes first, either downtrend activating all opponents to claim their views or pessimistic information causing prices to curve is difficult. However, we can recognize that both happened at the same time in January, and regulation fears fading out can well have caused the rebound, whether you believe in tracing curves on graphs or not.

On the one hand, speculators may have thought temporarily that no regulation proposal in March was good news, but on the other hand, uncertainty remains. Moreover, now there is a deadline for July 2018 for regulatory proposals – so maybe the anticipated impacts will only be delayed!

What is striking these days is to observe the diversity of regulation consideration and enforcement in terms of impact, importance, and nature. To give an overview of each time, we will focus on isolated initiatives.

The American administration is making official the addition of blockchain addresses on its Specially Designated Nationals and Blocked Persons (SDN) list. This is a sign that administrations are adapting quite quickly to the change in technology. To be noted, then, this can have a much wider effect. If administrations prevent their citizens from trading with certain addresses on the blockchain, then the tokens that address holds are ‘less’ spendable than the other regular ones. So, in the end, they have less value; and in a case when the blockchain is transparent and auditable, then the tokens are very well identifiable, and their users will not be able to get rid of them regularly anymore! A sort of then a new market for those very tokens could be created, where states laws would be completely disregarded. This would introduce additional complexity to the systems and introduces back some control from states to the crypto-monetary system. This is where the anti-money-laundering and anti-terrorism-financing policies will be enforced in the crypto sphere.To be conservative and to avoid any trouble, some banks including in the USA just close accounts of people involved in any cryptocurrency activities.

There is an example of a bank in Chile being obliged by court judgment to re-open accounts of crypto exchange: the law is as it is, and token trading activity does not break the laws, so there is no ground to close their access to the legacy banking system.
European Union decided like many other countries to impose identity identification on exchange platforms, which wallets belong to who is going to be information disclosed to official administrations.

Japan is thinking about restricting exchanges of privacy-oriented tokens such as Monero and Zcash

France changed the tax regime applicable to cryptocurrencies value gains, to make it a bit less unfavorable in fear that DLT talent would fly away from home and create then run their businesses in Switzerland.

All of this shows that as cryptocurrencies are now in the radars of regulators, as they start to be part of the real world, officials also start to take very concrete decisions concerning them. The nature of those decisions differs widely, in terms of broadness or preciseness of the measures, in terms of the magnitude of impact, in terms of the fields concerned, and in terms of openness (or not) that the country has already shown it embraces. The aspects treated can concern very small detail of extending a principle already applicable by law to cryptocurrencies, or can be a general ban of a usage.

We can probably say that measures that we see coming to light are ones that in a given public administration some teams in charge of the specific area have been able to instruct and push properly. This requires that a given team in charge as usual of its perimeter realized that it will be impacted by DLT early on, understood the technology, its implications and forecasted future usages / impacts on the perimeter, thought of the alternatives to deal with it from the legal point of view, proposed one best way it could argument, and took time to validate it with other ministries concerned, discuss it with foreign counterparts. Quite a long and tedious process indeed, depending on the tech appetite of the various governmental teams, and more or less long to agree when it requires intergovernmental and international coordination.

So the regulations being released nowadays are the ones that require coordination, could be decided independently, and they come as they are without order due to heterogeneity in the maturity of regulatory teams. No overall views exist yet, for a given government taking a general approach is not yet launched, let alone transnational agreements.

Furthermore, we evolve in a globalized environment, especially cryptos by construction, and so do regulators have to admit and take into account in their work. Extraterritoriality of laws may become a central issue as tokens issuance is by nature a decentralized venture. As businesses/companies have legal existence and a physical address, the way they pay taxes and liaise with their investors will be a greater and greater deal for States when it becomes possible to do this based from tax heaven. Most probably, fierce new economic battles are going to be waged to figure out where blockchain businesses operate and have to declare incomes, in addition to deciding which laws apply depending on where tokens are listed – if this makes any sense at all! Of course, it can be thought and developed world governance where United-Nations-Organization-emanated-body could collect crypto-taxes and vote budgets for the good of the People. However, this would still need to be designed and defended, and meanwhile, the situation is as it is, with countries trying to act in the best way to defend their interests and hopefully allow their citizens to pursue happiness. Moreover, for these laws are needed. It cannot be just a jungle, simply because in the J-J. Rousseau sense, humans are in a society that is founded by a social contract, and the majority will no doubt always agree that one individual cannot spoil the others just because he or she has been lucky enough at some point in time. However, I am diverging here!

The point is to say that regulations will come pragmatically as their need becomes more and more urgent in the places and frames concerned. It looks somehow that regulation is for most of them attracted to a limited number of topics. On the one hand, most of the attention is dedicated to ICO, in a race to create in the various financial places the conditions for the issuance of securities-tokens to be official and efficient. Moreover, then, on the other hand, anti-money laundering and anti-terrorism financing is the justification for the regulations emerging to require a strict control on DLT token users.

Further, than just being adverse to considering cryptos as money at all, the general position of central banks is to say that there is no need yet for a blockchain fiat currency. However, still, some central banks are more or less seriously considering to issue their fiat on the blockchain, the last of which is Sweden where cash payment is becoming very unusual.

Implications of issuing a central bank coin would be huge; we cannot in such a paper here study it all. However, (and admitting that no ‘public’ crypto comes to disrupt central-bank-fiat meanwhile completely) we can project that it would renew the relationship between citizens and the central bank. Payment solutions would have to become a state-provided facility somehow, and therefore part of current commercial banks roles would become useless. Some innovative monetary policies such as ‘helicopter airdrop’ would become possible as everyone could have a central bank account. Financial services would refocus on their added value but with a business model to be completely rethought.

Countries would have different interests in issuing their fiat money on DLT. Developed countries would maybe do it for efficiency reasons; other may pursue capital control; while less advanced countries with loose banking systems may turn into the open field for experimentation of usage of public blockchain tokens as effective money.
As of today, the perspective of central bankers using DLT to issue money is still far away.

Regulators are in charge of various fields; let us see what is to be expected from each one.

Status of cryptocurrencies to be legal tenders or not. The result here is that very few countries have taken a firm position for or against, and most governments have declared that cryptos were no legal tender or that the sole legal tender on their territory was the fiat central bank treasurer signed one. Therefore, strictly speaking, Japan Switzerland and Australia are among the sole countries where you can legally use crypto to buy things. This is unlikely to change in the short term. Maybe countries that currently prohibit it will change position to neutral, but we hardly see a general movement towards recognition of Bitcoin in common life, at least not before general usage become even possible. Macro-economic implications of generalized monetary usage of cryptos can be thought of are tremendous as the reader knows, and with no doubt will trigger reactions from governments. What seems is that the timeframe for that is somewhat delayed, depending on the dynamic and extent or adoption by the populations.

ICO tokens and more widely, tokenized financial assets issuance and exchanges. A great deal of discussion is going on on this field right now, to converge hopefully on a common understanding of what ICO tokens are, what they imply for the issuer and the buyer. Here again, some countries have purely banned it, some are trying to give them an attractive framework as soon as possible them as this can be a competitive advantage to welcome businesses. Shortly, as there is no real technical issue in this, we can believe that ICOs will completely replace IPOs and financial bonds emission, so all jurisdictions will end up working with it, with variations to more or less make it easy and advantageous concerning neighboring jurisdictions. ICO status and handling are going to be a burning issue in 2018 until it definitively gets mainstream.

The legal value of information stored in a blockchain. 
Again here no technical issue, it is a matter of adapting to new technology, and with little financial implications.

Status of cryptocurrencies regarding declaration and taxation of capital gains/losses 

Same: nothing especially difficult to handle, but competition between nations to attract wealth. Moreover, for what is payment of taxes based on blockchain and smart contracting each time some money is earned somewhere with the States part of it receiving its fee, it may come in the future but is again technical adaptation to potential ways of doing.

Know Your Customer rules as AML & ATF impositions extended to crypto-asset brokers, exchange platforms, financial services providers, including potential bans on privacy coins. This one is currently a generalized concern that is very impacting and has the potential to be very much debated between governments and their populations. This KYC AML-ATF can lead to fighting privacy coins, can be the embryo for total controls of capitals by individuals, and can be a way of pressure on nations that will want to host the libertarian privacy view of blockchain. In the short term though, this is this part of the regulation that is going to be the pain point for exchanges and users. So KYC issues are going to be for quite a time in the focus of regulators in an ever debated question to control entirely or not the crypto-sphere.
Protect citizens against hacking and coins thefts. In the order of 10M€ in cryptos are stolen every day in scams or hacks. That is over 3 Bn€ a year – it hurts. The position may end up being either the user declares himself and uses transparent blockchains, and the coins can be traced, or he does not and has no recourse from the police. Crime prosecution will have to be equipped with the means to prosecute offenders in the crypto field. They are linking to the previous point.

Prevent capital outflow. This has been mostly true for China. One would argue that otherwise, it goes against the sense of history. But as and if cryptos gain popularity, other countries may see that their population escapes the use of the currency used to collect taxes, so to prevent depreciation of these assets states might start to consider enforcing similar measures, confining probably in general ban.

Prevent the ecological catastrophe of electricity waste in mining. This looks like a secondary issue still, but in the long run, if PoS does not solve some of the problems, regulators will have to handle it.

On the long run
Some thoughts on the long run as well: in the current trend, cryptocurrencies are being opposed by officials because they would supposedly allow for tax evasion and criminal activities facilitation. However, this is what basic cash is currently allowing. So, there will be a touchy future debate about deciding in our societies if money circulation should be tracked down, to which extent, or if the private sphere extends to payment. In Europe with GDPR and other individual privacy protection initiatives, full public traced payments is an option will surely be fought back: I want to be able to invite a woman dining without a risk for my wife to be aware of it, I want to have the option to pay for Céline Dion concert without my colleagues to make fun of me. So if full state control is rejected, this means that a frontier will have to be found to be still able to audit what businesses do for instance.