The lack of uniformity among different jurisdictions’ cryptocurrency laws makes it difficult for crypto exchanges seeking to expand to new markets. While some countries are embracing and fostering innovation, others are more hostile to Bitcoin (BTC) and other cryptocurrencies. Further exacerbating the difficulty is the lack of regulatory certainty in many jurisdictions, including the United States. Below are four of the most significant international regulatory milestones so far in 2020.
The European Union’s AML rules now apply to cryptocurrency exchanges
The European Union’s Anti-Money Laundering and Combating the Financing of Terrorism rules now apply to crypto custodians, such as wallets and exchanges. On Jan. 10, the EU’s 5th Anti-Money Laundering Directive, referred to as 5AMLD, went into effect. 5AMLD defines cryptocurrency broadly as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.” Crypto custodians are included in 5AMLD as “obliged entities” and face the same regulatory requirements as other financial institutions.
Under 5AMLD, crypto exchanges must develop and implement Know Your Customer procedures, monitor transactions on an ongoing basis and file suspicious activity reports. Further, financial intelligence units in the EU, such as Germany’s Federal Financial Supervisory Authority or Italy’s Ministry of Economy and Finance, are required to collect identifying information about crypto’s owners. This has caused concern in the industry that crypto’s core principles of privacy and anonymity will be undermined. The new regulatory structure has already made waves, forcing some companies like Bottle Pay to shut down and others like Deribit to move out of the EU over the cost of compliance and privacy concerns.
The Canadian Securities Administrators issues guidance to crypto exchanges
In January, the Canadian Securities Administrators issued guidance to crypto exchanges to help them determine whether transactions are subject to Canada’s securities laws. The guidance follows up on the CSA’s March 2019 consultation paper that stated that exchanges must comply with securities laws if the crypto assets they trade are securities or derivatives. That guidance mentions that some crypto exchanges took the position that they were not subject to Canada’s securities laws because the crypto assets they traded were not securities or derivatives.
The CSA’s January guidance states that regardless of whether a crypto asset traded on an exchange is a security or a derivative, the exchange would still be subject to Canada’s securities laws unless it makes “immediate delivery of the crypto asset” to the user. When an exchange is “merely providing their users with a contractual right or claim to an underlying crypto asset,” it is subject to Canada’s securities laws.
The CSA’s guidance places crypto exchanges in a difficult position, as many users buy and store crypto on the same exchange and never transfer their crypto to an off-site wallet. This common practice would potentially result in the exchange being subject to Canada’s securities laws, regardless of whether the underlying asset is a security or a derivative.
India’s Supreme Court overturns the Reserve Bank of India’s “crypto ban”
In April 2018, the Reserve Bank of India — the nation’s central bank — banned all regulated financial institutions in the country from transacting with cryptocurrency exchanges. The ban was notable because at that time studies showed that almost 10% of all Bitcoin transactions occurred in India. In early March, the RBI’s ban was overturned by the Supreme Court of India after it was challenged by the Internet and Mobile Association of India, which represented several cryptocurrency exchanges.
The Supreme Court held that the RBI’s crypto ban violated Article 19(1)(g) of the Indian Constitution, which guarantees the right to “practice any profession or to carry on any occupation, trade or business.” Specifically, the court stated that a ban on a trade or business through “reasonable restrictions” is acceptable but a “total prohibition […] of an activity not declared by law to be unlawful” violates Article 19(1)(g). In coming to its decision, the court stated that “many of the developed and developing economies of the world […] have scanned crypto currencies, but found nothing pernicious about them and even the attempt of the Government of India to bring legislation banning crypto currencies, is yet to reach its logical end.”
The court’s decision partially rests on the fact that the RBI overstepped its power with an overbroad regulation of an activity that was not declared unlawful by the legislative branch.
While the decision is positive news for the crypto industry in India, there is still the danger that the government will enact hostile legislation.
South Korea passes cryptocurrency laws
In early March, South Korea enacted legislation amending the Act on Reporting and Using Specified Financial Transaction Information that allows its financial intelligence unit to apply AML and CFT rules to crypto exchanges. Pursuant to the act, crypto exchanges are required to partner with banks for customer deposits and withdrawals, which will allow exchanges to collect customers’ identifying information such as real names and social security numbers. Similar to the 5AMLD discussion above, regulators view collection of this information as crucial to tracking potentially illicit activity.
The dichotomy of different jurisdictions’ cryptocurrency laws is expected to continue with countries’ massively divergent views as to its efficacy, value and reliability.
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