Institutional Update (January 2018)

First published on hackernoon.com by Phil Glazer
Investing @ MGV. Previously @KKR_Co & @UCBerkeley Jan 21

Regulation of cryptocurrencies is in flux and may change in the following months. In the meantime, it may be useful to understand where various governments stand on the regulation of cryptocurrencies. This piece covers regulations and statements from the United States (SEC, CFTC, IRS), China, South Korea, Japan, and the European Union. Each represents a meaningful chunk of global participation in cryptocurrencies, and a regulatory change in one or more of these regions could move the market. This piece offers a broad overview and provides links where possible for further reading and analysis.

United States

Securities and Exchange Commission (SEC): As stated by the SEC, “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The SEC was created by Congress in 1934 as the first federal regulator of securities markets following the stock market crash of 1929, when it became clear that many companies had provided false or misleading information about their performance and future prospects to investors. Since then, the SEC’s main functions have been verifying statements from corporations and ensuring that securities institutions (like brokers, dealers, and exchanges) treat investors fairly and honestly.

The SEC has not approved any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies for listing or trading. SEC has not registered any initial coin offerings to date.

For more information regarding the SEC’s view on cryptocurrencies, refer to this statement from December 11, 2017.

Commodities Futures Trading Commission (CFTC): As stated by the CFTC, “The mission of the Commodity Futures Trading Commission (CFTC) is to foster open, transparent, competitive, and financially sound markets. By working to avoid systemic risk, the Commission aims to protect market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products.”

The CFTC has designated bitcoin as a commodity and announced that fraud and manipulation involving bitcoin traded in interstate commerce and the regulation of commodity futures tied directly to bitcoin are under its authority.

On January 19, 2018, it was announced that the CFTC filed charges against two cryptocurrency fraud cases. There are many Ponzi scheme attempts taking place and this form of regulation is readily welcomed.

For more comprehensive coverage regarding the CFTC’s take on cryptocurrencies, use this primer from October 17, 2017.

Internal Revenue Service (IRS): The IRS has ruled that bitcoin and other cryptocurrencies are viewed as property, and not currency, for tax purposes. Although some exchanges may properly issue a Form 1099, individuals remain responsible for keeping account of gains and paying taxes on them. Transactions in cryptocurrencies generate either short-term or long-term capital gains or losses and must be filed as such.

China

China has taken a series of steps to curb cryptocurrency activity. First, it banned initial coin offerings (ICOs) on September 4th, 2017, the equivalent of initial public offerings for new virtual currencies. China has also issued statements to local exchanges to stop trading in cryptocurrencies and outlined proposals to discourage Bitcoin mining. These moves may reshape the industry surrounding Bitcoin mining and drive up costs. Miners initially flocked to China because of its inexpensive power, local chipmaking factories, and cheap labor, but they may now have to relocate. Officials intend to block access to online platforms and mobile apps that offer exchange-like services for cryptocurrencies. Limiting cryptocurrency activity is a joint effort between the central bank, the cyberspace administration, and China’s Ministry of Industry and Information Technology. Bitcoin and altcoins can still be traded, but only in over-the-counter markets. Exchanges have relocated to Hong Kong to operate.

China is not against cryptocurrency as a technology, however. The People’s Bank of China has run trials of its own cryptocurrency, taking a step closer to being the first major central bank to issue digital money. China would rather take full control of digital transactions than let Bitcoin and altcoins flourish.

Financial institutions and third-party payment providers are banned from accepting, using, or selling virtual currencies. Although its use remains legal, the People’ s Bank of China has required exchanges to register with the appropriate regulatory authorities and has suggested it will closely watch the markets. The People’s Bank of China has allegedly warned banks from working with virtual currency-related businesses.

South Korea

On January 11th, 2017, the South Korean Ministry of Justice reportedly confirmed a plan to shut down all cryptocurrency exchanges. However, a statement was soon issued by South Korea’s Presidential Office that such a policy has not been finalized. The unclear situation has brought backlash from local residents and politicians, especially as reports surface that government officials have made significant money in cryptocurrency positions as prices move in response to government statements on regulation.

The government may reach a final statement on cryptocurrency regulation on January 25th, 2018. South Korea’s chief of the Financial Services Commission said: “(The government) is considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law.” Separately, Bank of Korea Governor Lee Ju-yeol told a news conference that “cryptocurrency is not a legal currency and is not being used as such as of now.”

Japan

On April 1, 2017, Japan’s Financial Services Agency enacted a new law authorizing the use of digital currency as a method of payment. The Virtual Currency Act described and identified what a virtual currency is, clarified that bitcoin is considered an asset, and that bitcoin can be considered a payment method. The act, however, did not declare bitcoin as a legal currency. The law follows months of debate which ultimately brought Bitcoin exchanges under anti-money laundering/know-your-customer (KYC) rules, and resulted in the categorization of Bitcoin as a kind of prepaid payment instrument. On Sept. 29, 2017, the Financial Services Agency (FSA) of Japan granted its first licenses for digital currency exchanges to 11 companies.

Of all the regions profiled, Japan seems to be the most progressive regarding cryptocurrency regulation and has sought to work with exchanges to regulate them instead of considering shutting them down entirely. Bitcoin has been an official legal payment option since April 2017 and 4,500+ stores in the country accept it.

European Union

The European Banking Authority issued warnings to the public about the risks associated with virtual currencies, and recently indicated it will apply anti-money laundering and anti-terrorist financing rules to virtual currencies.

Overall, little has been said beyond a desire to prevent money laundering and financing terrorist groups, though numerous statements have been issued that various government groups are evaluating the future potential of cryptocurrencies. The prevailing sentiment is that tougher regulations for cryptocurrencies will be coming in the near future.

The Future

Stay tuned. It is nearly the consensus that 2018 will be the year that significant additional regulation comes to cryptocurrencies, and where and how this takes place may significantly move prices. Over the long run, removing Ponzi schemes and related scams is probably good for the health of the market, but if it means locking out exchanges in China and South Korea, then prices may be headed lower for the near future.