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10 years of blockchain
Bitcoin in Review Going into 2020
Crypto Regulation Around the World Part 3
A smaller market in comparison to the largest hubs in the United States and South-East Asia, Europe is not at the centre of the crypto world, yet it holds a significant position.
Fitting their conservative approach, European institutions have remained on standby regarding crypto regulation during the last decade. As mentioned in the first part of this series, Switzerland is an exception — since it has adopted an open and pro crypto policy. Gibraltar and Malta have also tried to create favourable conditions for businesses in the crypto arena and have become known as “crypto havens.”
Recent developments also reflect a growing interest in crypto and blockchain among local European governments. Germany and France, in particular, have taken a few steps towards clarifying the crypto status quo, as have some institutions in the European Union. It will be interesting to see whether Brexit will prompt the United Kingdom to adopt its own individual policy regarding crypto.
The United Kingdom and Gibraltar
The United Kingdom’s approach towards Bitcoin and the crypto world can be described as “neutral.” While it has not implemented any special restraints on this market, at the same time, it has also not promoted any initiatives to support it. The UK has published a relatively clear framework outlining its policy on the crypto arena, even though it still hasn’t fully developed this framework.
Remarkable Views About Crypto from the Bank of England
Mark Carney, Governor of the Bank of England — an entity right at the heart of England’s establishment — has expressed extraordinary and unprecedented views about crypto. Like his colleagues around the world, Carney has often expressed skepticism about cryptocurrencies, yet, he has also presented pro crypto positions.
Last August, Carney said that a digital currency “could dampen the domineering influence of the US dollar on global trade. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.” It was reasonable for Carney to focus on issues such as the trade war between the US and China and he was, of course, promoting a very institutionalised form of crypto. Yet, it was a real precedent for the head of the Bank of England, representing one of the largest economies in the world, to suggest that digital currencies were a potential solution. In addition, Carney and the heads of central banks in countries such as Switzerland, Sweden and Japan have recently formed a research group that will examine the use cases of Central Banks Digital Currencies (CBDC).
Regulating Bodies and Crypto
The Financial Conduct Authority (FCA) is the responsible regulator of crypto, and has divided the crypto arena into three main categories, similar to the regulations in other countries. The first category includes “exchange tokens” — cryptocurrencies, such as Bitcoin and Ethereum, that are described as tokens that “tend to be a decentralised tool for buying and selling goods and services without traditional intermediaries.” Cryptocurrencies are explicitly unregulated. Activities in crypto exchanges are not officially restricted, but face problems vis-à-vis local banks.
The two remaining categories are utility tokens and security tokens which fall under the heading of “regulated tokens” or cryptoassets. Only those utility tokens which are defined as e-money are regulated, while all security tokens are regulated. According to certain interpretations, such e-money tokens might include stablecoins that are traded against fiat money. Security tokens are described as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically”. Cryptoassets are subject to FCA regulations and must follow Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. Taxation on cryptocurrencies comes under the category of capital gains tax for individuals or under income tax for traders and other businesses.
Gibraltar – Small But Mighty
Gibraltar, the tiny British Overseas Territory on Spain’s southern coast, has taken advantage of its position of self-governance and adopted a policy that aims to attract crypto businesses. In 2018, The Gibraltar Financial Services Commission (GFSC) activated regulation for Distributed Ledger Technology (DLT), which covers many businesses in the crypto and blockchain sectors. As a result, Gibraltar has become popular among crypto exchanges and businesses and even the local stock exchange has allowed the issuance of tokenised securities.
The European Union and new laws Governing Crypto
The European Union (EU) and the European Central Bank (ECB) usually look at the crypto and blockchain markets from afar. Trade in cryptocurrencies is considered “legal,” but there are hardly any initiatives in the arena. This somewhat distant attitude has left these issues to the discretion of the various countries, and each has adopted a different policy.
Recent developments may indicate a change in attitude in EU institutions, for better or worse. It may be the maturing of long-term processes or the recognition that they cannot sit on the sidelines any longer regarding this developing industry. In January, the EU amended new legislation that is expected to have a significant effect on crypto exchanges in member countries. The new law, which is part of the Anti-Money Laundering directive, requires exchanges to follow strict and comprehensive KYC regulations. It requires many adjustments on the part of crypto exchanges and may put an extra burden on their activities.
Another recent development had its source in the ECB. After a few declarations about a lack of interest in issuing CBDC, the ECB recently joined a multinational group that is researching the issue, clearly understanding the growing importance of digital and distributed forms of money.
Germany went through many years of ambiguous policies regarding the status quo of crypto. However, new regulations which are being implemented in 2020, add both clarity as well as difficulties for business in the arena. A newly proposed law is expected to enable German banks to sell and store Bitcoin and other cryptocurrencies, activities that were previously banned and are still the exception in the traditional financial system around the world.
Another new policy will require crypto businesses to be licensed by the local financial watchdog, the federal financial supervisory authority (BaFin). Similar licences already exist in countries with advanced crypto policies, such as Switzerland or Japan. While local crypto exchanges are expected to meet stringent requirements, the new regulations also give them a more stable status than before.
Taxation, for the most part, comes under income tax, although cryptocurrencies are exempted from capital gains tax if they are not sold for at least 12 months. In 2018, after years of discussion, the German Ministry of Finance clarified that cryptocurrencies are exempt from VAT. At the same time, it also defined them as a means of payment, but not as currencies or legal tenders. In general , German authorities see cryptocurrencies as investment assets.
France — a Crypto Enthusiast?
Like Germany, France has also recently started to implement its crypto policy. New initiatives by the French government even suggest it is almost becoming a crypto enthusiast. The local financial regulator, the Financial Markets Authority (AMF) has published new regulations for crypto businesses, including AML and KYC demands. The AMF has also specified requirements for a non-mandatory licensing process for digital asset service providers (DASPs), including “custody of digital assets for third parties; purchase or sale of digital assets against legal tender or other digital assets (broker/dealer); operation of a digital assets trading platform (stock exchange); other digital assets services such as the reception and transmission of third-party orders, third-party portfolio management, advice, underwriting and placing on or without a firm commitment basis.” The requirements include a well-defined business framework, sufficient insurance and technological capabilities.
The Central Bank of France has announced a pilot plan for CBDC that will be launched in the course of 2020, and its leaders state that they want to become the first major economy to issue CBDC — meaning they will have to move quickly to overtake China which is already in an advanced stage in this project. Taxation comes under the category of capital gains tax, but recently the French Finance Minister announced that crypto-to-crypto trading will be tax free.
Malta – A Crypto Haven
This island in the Mediterranean situated between Sicily and the North African coast, and the smallest member of the EU, is among those territories around the world that have gained the reputation of a “crypto haven.” The country’s leaders, including the prime minister, are constantly advertising crypto businesses and expressing their willingness to support them. In addition, a low tax policy is applied on crypto businesses.
Malta was the first country in the world to adopt clear and positive guidelines for crypto businesses. The Malta Financial Services Authority (MFSA) is responsible for the registration of crypto businesses, including AML and KYC requirements. But as a member of the EU, Malta is also required to follow the new restrictive EU demands that took effect this year and are expected to make life a little harder for local crypto businesses.