Blockchain & cryptocurrencies can achieve more robust trust through the legal system
Yes, “blockchain regulation”sounds like oxymoron “awfully good”.
Our civilization, the human world could not exists without laws and rules that shape our everyday life
Finding balance in the pixel-based “brave new world” is hard for governments and lawmakers. There is a bunch of questions which are not regulated yet and therefore they require an adequate and full legislative initiations. The primary use of blockchains is as a distributed ledger for cryptocurrencies. Blockchain and cryptocurrency grabbed the imagination of startups and investors. Decentralized structure, user autonomy, peer to peer focus, elimination of banking fees, low transaction fees, accessibility are just few of their potential benefits.
At the end of Q2 2021, that total score stands at 24, suggesting that global adoption has grown by over 2300% since Q3 2019 and over 881% in the last year. Vietnam, India and Pakistan heads the top 20 countries in the 2021 Global Crypto Index.
The explosive popularity of cryptocurrencies increased scrutiny from governments and the regulation is clearly evolving. There are a number of questions from a compliance perspective you need to ask to define what is applicable to your project. Regulation varies by jurisdiction and remains uncertain. Different regulations, policies and interpretations apply in different countries which sometimes differ substantially in nature, content, scale and operation from the largely state-based system of governance.
US regulatory framework
On 9 March 2022, the US administration announced the Executive Order on ensuring responsible development of digital assets aiming at establishing uniform rules for digital assets, including protective mechanisms for investors and consumers. The document states that: “The United States has a strong interest in promoting responsible innovation that expands equitable access to financial services, particularly for those Americans underserved by the traditional banking system, including by making investments and domestic and cross-border funds transfers and payments cheaper, faster, and safer, and by promoting greater and more cost-efficient access to financial products and services.”
The Order requires various federal agencies to provide certain reports on 180 days after the date of the Order. This means that such reports are due this week, right after Labor Day.
The United States Department of the Treasury issued a framework for international engagement on digital assets, which involves collaboration across the G7, the G20, the Financial Stability Board (FSB), the Financial Action Task Force (FATF) , the International Monetary Fund (IMF), The World Bank and other organizations.
EU regulatory framework
Europe is a step forward with the Draft proposal for a Regulation on Markets in Crypto Assets (MiCA). The Regulation has the great potential to reshape the European crypto industry providing legal certainty and clarity with uniform rules across EU.
The EU wants to be a leader in blockchain technology, becoming an innovator in blockchain and a home to significant platforms, applications and companies.
The European Commission’s strategy wants to support a ‘gold standard’ for blockchain technology in Europe that embraces European values and ideals in its legal and regulatory framework.
This ‘gold standard’ for blockchain includes:
- Environmental sustainability: Blockchain technology should be sustainable and energy-efficient.
- Data protection: Blockchain technology should be compatible with, and where possible support, Europe’s strong data protection and privacy regulations.
- Digital Identity: Blockchain technology should respect and enhance Europe’s evolving digital Identity framework. This includes being compatible with e-signature regulations, such as eIDAS, and supporting a sensible, pragmatic decentralized and self-sovereign identity framework.
- Cybersecurity: Blockchain technology should be able to provide high levels of cybersecurity.
Licenses
Each jurisdiction has its own laws and regulations for establishing cryptocurrency exchange businesses.
In the USA, The Federal government issues cryptocurrency exchange licenses only to companies that are registered as domiciled in a State. You can apply for a license to operate a cryptocurrency exchange from any state but be aware that each state sets its own requirements.If the project involves transactions that cross state borders, you must have a license in each state.
Crypto exchange licenses in Europe are different in individual member states. Germany requires cryptocurrency exchanges to register with the Financial Supervisory Authority (BaFin). France requires cryptocurrency exchanges to register with the Autorité des Marchés Financiers (AMF). Italy requires cryptocurrency exchanges to register with the Ministry of Finance. Any crypto exchange that these regulators have granted a license is then allowed to operate as a single entity across the whole EU bloc.
Most EU countries require a license (Malta, Estonia, Lithuania, Finland, Netherlands and other).
AML & KYC
Wherever you operate, laws and regulations about Knowing Your Customer (KYC) is one of the key concerns if you want to avoid serious sanctions.
Lawmakers already have addressed this subject in specific regulations. For instance, the European Commission announced an “ambitious package of legislative proposals” intended to overhaul the EU’s AML/CFT framework.
The package is designed to help member-states detect and address suspicious activity, and close compliance loopholes that criminals exploit to launder money. The proposal consists of four legislative proposals:
1. Regulation establishing a new EU AML/CFT Authority;
3. A sixth Directive on AML/CFT (“AMLD6”), replacing the existing Directive 2015/849/EU (the fourth AML directive as amended by the fifth AML directive), containing provisions that will be transposed into national law, such as rules on national supervisors and Financial Intelligence Units in Member States;
4. A revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).
Key takeaways
- Lawrence Lessig’s point “code is law” should be broadly understood because both the legal system and software code can promote trust.
- Different countries worldwide are working towards developing their own set of rules and regulations around crypto so that investors and consumers to feel safe and protected.
- Developers cannot ignore the law and governments must appreciate the growing impact of blockchain with more explicit steps to accelerate the relevant legislative initiatives.
Jenny Gancheva
1LTT Blog © 2022
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