Cryptocurrency: The Regulations that Divide Us
Jeremiah Vun discusses the regulation of cryptocurrencies across the world, suggesting a path forward to ensure regulatory collaboration on an international level.
The father of modern economics, Adam Smith, once said:
"There is no art which one government sooner learns of another than that of draining money from the pockets of the people."[1]
Smith sought to persuade his readers of his economic philosophy: that governments should not intervene in market activity, and free trade should be encouraged.[2] Cryptocurrency is the only solution to date that facilitates non-intervention and free trade through enabling global transactions free from interference from intermediaries like governments or banks.[3]
The G7 Working Group on Stablecoins believe that a global stablecoin (a crypto asset that self-stabilises) could be the answer to a global medium of exchange.[4] However, and at the same time, the working group also advised that no global stablecoin project should begin until there is legal certainty and sound regulatory governance.[5]
Keeping in mind that the end goal is a global regulatory framework, paradoxically, independent attempts by individual jurisdictions to regulate stablecoins or other cryptoassets bear the risk of generating more legal uncertainty.
Take the UK and Germany for example. The UK regulates each classification of cryptoassets independently, according to its class.[6] Germany, on the other hand, defines all cryptoassets as “units of account” and regulates all cryptoassets under Germany’s Banking Act, regardless of its type.[7] In this example, although both countries have made attempts to set clear regulatory boundaries, doing so independently from one another inadvertently creates two approaches to crypto regulation that are fundamentally different. Such dissimilarities are commonplace among other jurisdictions as well.[8]
Even basic terminologies vary between jurisdictions. Cryptoassets used as a digital means of exchange like Bitcoin are referred to as “exchange tokens” in the UK, “currency tokens” in Israel, “payment tokens” in Germany, “payment-type crypto-assets” by the European Securities and Markets Authority (ESMA) and “cryptoassets” in Abu Dhabi.[9]
Looking towards a global regulatory framework, this presents significant problems for future lawmakers. Contradicting regulations may dissuade countries from assenting to international conventions. Assenting jurisdictions may do so in name only.[10] And non-standard regulations have cascading effects which lead to greater ideological disparity on how to best regulate crypto assets.
One could make the case, however, that it is not uncommon to adopt and implement international legal frameworks, say, from a convention. However, one must bear in mind the compounding nature of non-conformity, the notorious unreliability of conventions with regard to implementation, and the strict need for a reliable set of rules to govern what could be, for the first time in history, a truly global currency.
A global view is therefore necessary when drafting local regulations. Legislators must take into serious consideration regulations designed by other jurisdictions. Particularly ones that have invested more time and resources into developing their legislative frameworks. In this regard, it may be worth considering which jurisdiction is the most developed with regard to crypto regulation.
The US
In the US, individual states each have different attitudes toward cryptocurrency regulation.[11] Wyoming, for example, is known for its crypto-friendly policies, while New York is known for its onerous and restrictive crypto laws. At the federal level, even the US Securities and Exchange Commission (SEC) regulates independently from the Financial Crimes Enforcement Network (FinCEN) and the US Federal Reserve Board, each having issued their own independent guidelines.[12]
The UK
The UK’s latest approach to the regulation of e-money tokens is described in the HM Treasury’s consultation paper entitled “UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence”.[13] In it, the UK confirmeds that e-money tokens are regulated by the Electronic Money Regulations 2011.[14] The UK government also expressed its support of stablecoin for cross-border payments and proposed to introduce a regulatory regime for stablecoin transactions.[15] The UK is continuing to receive responses to the consultation paper.
The EU
The European Union (“EU”) appears to be the furthest ahead in the development of a regulatory framework. The EU has been building on its comprehensive Markets in Crypto-assets (MiCA) proposal since September 2020. The MiCA regulations specifically govern e-money tokens, stablecoins and utility tokens.[16] Financial instruments which include security tokens are expressly excluded from MiCA and are subject to applicable security instruments like the Markets in Financial Instruments Directive.[17] Under MiCA, a handful of tokens would be further classified into a group of “significant” tokens, a list of tokens determined by the European Banking Authority (“EBA”). These “significant” tokens are subject to more stringent regulation.[18]
On top of being the most ahead with regard to regulatory development, the EU is also uniquely suited to lead the path toward a global regulatory framework for three additional reasons.
1. It has considerable influence in global political and economic spheres.[19]
2. The EU consists of 27 member states and is no stranger to drafting legislation, directives, conventions, and treaties applicable to multiple jurisdictions.[20]
3. The EU’s official approach to drafting already takes into consideration multilingual and multicultural users while maintaining simple and precise language.[21] The same approach must be taken for a global regulatory framework, thereby, making the EU the most qualified body to produce one.
The way forward
Cryptocurrency is growing at an extraordinary pace. On 31 December 2019, at the start of the COVID-19 pandemic, the total market capitalisation of altcoins (cryptocurrency other than Bitcoin) was 61 billion USD.[22] A year later, on 31 December 2020, this figure tripled to 224 Billion USD.[23] Five months later, in May 2021, this figure grew seven-fold to 1.6 trillion USD.[24] These exponential figures show the efforts of cryptographers who are continuously looking for creative solutions to make cryptocurrency a viable global trade solution through the creation of alternative coins. The likelihood of a blockchain-enabled global currency existing in the medium to long term is therefore strong.
Dr Anne Smith’s study on early constitutional borrowing and the positive harmonising effect it had on international human rights is a great example of how a global legislative approach can influence future international regulation.[25] It is therefore crucial, in my view, that cryptocurrency regulators exercise foresight by taking an international approach, more so than any other area of law today.
Written by Jeremiah Vun.
[1] Smith A, An Inquiry into the Nature and Causes of the Wealth of Nations (1st edn, W Strahan and T Cadell, London 1776) [2] Richard E Gift and Joseph Krislov, ‘Are There Classics in Economics?’ (1991) 22 The Journal of Economic Education 27, 28-30 [3] HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021) para 3.8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 31 June 2021; G7 Working Group on Stablecoins, ‘Investigating the Impact of Global Stablecoins’ (2019) ii; Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (2008) https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf accessed 26 June 2021 [4] G7 Working Group on Stablecoins, ‘Investigating the Impact of Global Stablecoins’ (2019) ii [5] ibid iii [6] HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021) para 1.12 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 30 June 2021 [7] Apolline Blandin and others, ‘Global Cryptoasset Regulatory Landscape Study’ (2019) 86 https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2019-04-ccaf-global-cryptoasset-regulatory-landscape-study.pdf accessed 1 July 2021; Ronny Rose and Clemens Zacher, ‘Cryptoassets: A UK and European Perspective on the Regulation of Cryptoassets’ (2020) 21 https://www.esma.europa.eu/document/advice-initial-coin-offerings-and-crypto-assets accessed 1 July 2021 [8] Osborne Clarke, ‘The Treatment of E-Money and Virtual Currencies across Jurisdictions’ (2018) https://www.osborneclarke.com/wp-content/uploads/2018/06/The-treatment-of-e-Money-and-virtual-currencies-across-jurisdictions.pdf accessed 1 July 2021 [9] Apolline Blandin and others, ‘Global Cryptoasset Regulatory Landscape Study’ (2019) 38 https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2019-04-ccaf-global-cryptoasset-regulatory-landscape-study.pdf accessed 1 July 2021; European Securities and Markets Authority, ‘Initial Coin Offerings and Crypto-Assets’ (2019) 81 https://www.esma.europa.eu/document/advice-initial-coin-offerings-and-crypto-assets accessed 28 June 2021 [10] Olga Avdeyeva, ‘When Do States Comply with International Treaties?’ (2007) 51 International Studies Quarterly 877, 882 [11] Joe Dewey, ‘Blockchain and Cryptocurrency Regulation 2021: USA’ (Global Legal Insights, 2021) https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa accessed 22 July 2021 [12] Susannah Hammond and Todd Ehret, ‘Compendium – Cryptocurrency Regulations by Country’ (2021) [13] HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 31 June 2021; [14] ibid para 1.12 [15] ibid paras 3.6 – 3.9 [16] European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-Assets, and Amending Directive (EU) 2019/1937’ (2020) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0593 [17](2014/65/EU) (“MiFID”II) [18] Klaudius Heda and others, ‘European Commission Introduces Draft Regulation for Markets in Crypto Assets (MiCA)’ (2020) https://www.debevoise.com/-/media/files/insights/publications/2020/11/20201103-european-commission-introduces-draft.pdf accessed 17 July 2021 [19] Laura Silver, Moira Fagan and Nicholas Kent, ‘Majorities in the European Union Have Favorable Views of the Bloc’ (2020) https://www.pewresearch.org/global/2020/11/17/majorities-in-the-european-union-have-favorable-views-of-the-bloc/ accessed 17 July 2021 [20] European Union, ‘EU Law’ (2021) https://europa.eu/european-union/law_en accessed 17 July 2021 [21] European Union, ‘Joint Practical Guide of the European Parliament, the Council and the Commission for Persons Involved in the Drafting of European Union Legislation’ (2015) para 1.1 - 1.2 https://eur-lex.europa.eu/content/techleg/KB0213228ENN.pdf accessed 20 July 2021 [22] CoinMarketCap, ‘Total Cryptocurrency Market Capitalization (Excluding Bitcoin)’ (2021) https://coinmarketcap.com/charts/ accessed 26 June 2021 [23] ibid
[24] ibid
[25] Anne Smith, ‘Internationalisation and Constitutional Borrowing in Drafting Bills of Rights’ (2011) 60 International and Comparative Law Quarterly 867, 889 - 890