Although the emergence of cryptocurrencies was initially treated as irrelevant by governments in many jurisdictions, a recent study by the Cambridge Centre for Alternative Finance (CCAF) shows that a remarkable change has taken place in the last couple of years.
The study which represents data gathered through desktop research between November 2018 and February 2019 noted some unity and disparity in the way regulators around the globe treat the cryptocurrency industry.
For emphasis, the study states that it covered the regulatory landscape in 23 jurisdictions and believes the findings could help other regions find out the opportunities and challenges presented by the new form of money/assets.
The Unity In Crypto Regulation
Distinguishing Between Security Tokens and Other Forms of Cryptocurrency
As per the study, 82% of jurisdictions choose to regulate the crypto industry by making a distinction between tokens that qualify as “security” and those that qualify for an exemption. 80% of the regulators decide whether a token should be “security” by reviewing its specific features while the remaining 20% including the United States conduct a financial instrument test.
Upon determining that a crypto token qualifies as “security,” the study notes that regulators in the region bring it under existing securities law.
32% of the jurisdictions also use a defined classification for cryptocurrencies namely:
Payment tokens primarily used as a mean of exchange and payment
Utility tokens mainly offering holders access to a digital resource
Security tokens primarily represent an investment similar to traditional securities.
There is no doubt that the rise of Initial Coin Offerings (ICOs) in 2017 contributed to regulators emphasizing digital tokens as securities. However, the fact that a majority chose to embrace this form of regulation outlines a unity, that is, authorities no longer frown at the prospect of companies raising funds through the issuing of cryptocurrencies.
Regulating ICOs and Crypto Trading Venues
The study notes another form of unity which is that jurisdictions who enacted some form of regulation for the cryptocurrency industry focus on two significant areas — Initial Coin Offerings (ICOs) and Cryptocurrency Exchanges.
Such scope of regulatory focus certainly fits since these segments of the industry has seen the most activity in the last few years. They have also been the most frequent venue for cryptocurrency investors, a truth highlighted by the fact that any fraudulent activity around these entities adversely affects participants.
For instance, it is the ugly incident involving QuadrigaCX that led Canadian regulators to release proposed regulations for cryptocurrency exchanges. It is also the increase in the number of investors who lost money to fraudulent ICOs that led most jurisdictions to create rules for projects looking to conduct ICOs.
The unity, therefore, lies in the fact that sooner or later, regulatory oversight will drastically reduce the number of fraudulent cryptocurrency firms that target unsuspecting users.
The Disparity in Crypto Regulation
Terminology For Cryptocurrencies
As the first section of the study notes, different publications by regulators about cryptocurrencies, reflect a common misunderstanding of which term to use for the new invention.
For instance, regulators have used either of the following terms to define cryptocurrencies, with some of them even using three different names in the same piece of document:
Bitcoin, DLT asset, Virtual currency, Virtual asset, Cryptocurrency, Digital financial asset, Digital currency, Digital assets.
Although the authors note that the use of the term virtual currency has become more prevalent following a report by the Financial Action Task Force (FATF), some regions still use the other terminologies.
Such a situation may not necessarily mean that regulators have different ideas about what a cryptocurrency is. However, it creates a disparity in how the public understands cryptocurrencies. According to the study, that is also the reason why some regions end up releasing unclear regulations for the young industry.
Few Countries Have A Sophisticated Crypto Regulatory Framework
Only countries such as Gibraltar, Malta, Thailand, Bermuda, and Switzerland boast a sophisticated regulatory framework for the cryptocurrency industry. While this can be considered a win because the crypto industry was non-existent a decade ago, it highlights a significant disparity.
Most of these regions see low-level of cryptocurrency activity according to the study, while areas that boast the highest number of cryptocurrency activity has resorted to amending existing laws to suit the new industry.
Will the creation of a sophisticated regulatory framework in jurisdictions with the highest number of crypto industry participants lead to more growth? Very likely.
Hence, the disparity is that the regulations may be coming in the wrong places, thus impeding the growth of the crypto industry. Hopefully, that situation will change soon with Russia and France recently approving some regulation for cryptocurrencies.
In the months ahead, more countries are expected to roll out regulations for the cryptocurrency industry. However, the non-existence of a globally unified framework for the sector will always mean that some rules across borders will align itself while some will not.
Will such a situation delay the growth of the cryptocurrency industry? Well, there is a chance. Hopefully, though, it will not be significant enough that we notice and at the same time, it will directly provide the clarity that the industry needs to reach mass adoption.