Blockchain – a global perspective | PKF Malta

At present there are a number of advanced economies which are about to embrace and regulate the Blockchain technology. This article gives a short perspective on some countries that have progressed in varying degrees to regulate the technology.

Starting with the UK Government it does not officially recognise cryptocurrencies, though the government acknowledges derivative products based on crypto assets and regulates initial coin offerings (ICO).

Mark Carney, governor of the Bank of England, has expressed his concern about the need to have all digital currency activities within the purview of the FCA. An inquiry was set up by the UK parliament’s Treasury Committee dealing with digital currencies and distributed ledger technology (DLT). The FCA replied to the inquiry that its main concerns in the cryptocurrency market are manipulation, money-laundering and price volatility. Barclays Bank has recently opened an account for Coinbase in the UK.

Twenty-four crypto firms operating within the UK’s jurisdiction are being probed by the FCA to see if their activities still require authorisation notwithstanding. It is not known to what extent the FCA will probe these companies; whether simply by discouraging consumers to use their services or else seeking a full-scale ban of their services.

South Korea’s Financial Supervisory Commission (FSC) last September placed a ban on ICOs, declaring they could be detrimental to investors. On the other hand, the Minister responsible for Science and ICT is investing heavily in promoting the use of Blockchain technology, which goes beyond simple cryptocurrencies. An area where the South Korean Government wants to see it flourishing is in the healthcare sector for the handling of data information, notably health records and medical supplies. The Government is aware there is a lacuna in its regulatory systems handling Blockchain, cryptocurrency and ICOs. In fact, the Bank of Korea declares it does not recognise cryptocurrencies as legal tender and yet is evaluating them in tandem with the Bank of International Settlements. Based in Switzerland, the Bank of International Settlements was established in 1930 and is the remit of sixty central banks from all corners of the world. Its raison d’être is the promotion of international cooperation within its field. In a further drive for abuse control, anonymous cryptocurrency transaction bank accounts have been banned. The “Code of Conduct Guide to Cryptocurrency” issued by the South Korean Anti-Corruption & Civil Rights Commission prohibits public officials from assisting or investing in cryptocurrencies.

The South Korean Blockchain Association has been promoting cryptocurrency exchanges’ self-regulation. It suggests: i) the segregation of clients’ digital coins from those of the cryptocurrency exchange, ii) review abnormal transactions straightaway, iii) highlight new cryptocurrencies, iv) hold a minimum equity of US$1.85 million and v) regularly publish audit and finance reports.

The situation in Singapore ties up with 2016 when the Monetary Authority of Singapore (MAS) partnered with R3, a Blockchain technology company, marking the Singaporean authorities, in particular, the Central Bank, to embrace and unlock the potential offered by this new technology. The first step of the MAS’s project was in the issue and transfer of funds. Rather than denouncing Blockchain technology, the MAS argues that it can improve financial transactions’ transparency and be more efficient. This falls under Singapore’s long-term project ‘Ubin’. Towards the end of the year 2017, the project entered the second phase which was the software development of three prototypes.

Three years ago the Inland Revenue Authority of Singapore (IRAS) had introduced new tax guidelines for businesses using currency applications falling under the Blockchain technology regime. The IRAS had made it clear that businesses accepting virtual currencies would be subject to the normal income tax regulations. The purchase and sale of goods or services using crypto currencies need to be recorded at the market value of the crypto currency at the time and taxed accordingly on the resulting profits. Since the IRAS does not apply capital gains taxes, business ventures making a profit from crypto currencies bought on a long-term investment basis will be free from taxation.

Singapore’s deputy prime minister and chairman of the MAS has made it clear, in the light of rumours that might affect Singapore’s reputation, that its money laundering and terrorism financing laws are within international standards both with respect to fiat and virtual currencies. The element of anonymity, for example, cannot be ignored even if in practice it is not the case that cryptocurrencies are totally anonymous. The MAS’s approach, inter alia, is to increase intermediaries’ obligations with respect to money laundering and terrorist financing threats.

Singapore has played the role of a hub in the Far East and can again capitalise on its geographical advantage by attracting cryptocurrency investment. Investors can refer to both local and foreign as well as individuals acquiring issued cryptocurrencies and corporations issuing Singaporean digital tokens.

Compared to other Asian jurisdictions Singapore is affording cryptocurrency investors a sense of legal clarity of what is permissible.

Moving on to China, the Institute of International Finance which is an entity of the People’s Bank of China, has reported that cryptocurrencies are amongst its present top priorities. It acknowledges the rising demand for cryptocurrency services and profits whilst being aware that it may pose certain risks to the local yuan. For this reason, it is continuing to expand its research and development in the sector. The risks feared by the Chinese government are the: volatility of cryptocurrencies; potential for criminal abuse; and lack of legislative experience.

China has banned ICOs; informed local exchanges to stop trading in cryptocurrencies; and is discouraging bitcoin mining. It is still permissible to trade in Bitcoin and other cryptocurrencies but in line with China’s restrictions, this is limited to over-the-counter markets only. The rationale behind China’s measures is probably due to concerns about the increase of shadow banking giving rise to unregulated money lending. China is not to be labelled as being anti-cryptocurrency, in fact, it wants to have its own cryptocurrency thus probably intending to become as self-sufficient as possible. Cryptocurrency miners had ironically flocked to China due to various convenient factors amongst which low energy prices and labour wages.

Another interesting jurisdiction is United States (US) where a number of states have issued legislation that acknowledges or embraces Blockchain technology. Some pieces of legislation are more ambitious than others but they all have one objective in common which is to attract Blockchain companies to settle in their state. One point of controversy is to what extent does implementing legislation in the Blockchain arena attract of detract ventures in the industry? The state of Wyoming has been one of the most pro-Blockchain technology legislators of the US. Their Blockchain-friendly measures include: differentiating between tokens and state securities; the exemption of cryptocurrencies from property taxes; altering money transmitter regulation in favour of cryptocurrency exchanges and; allowing limited liability companies to get registered on a Blockchain. However, it is not clear what are the consequences of having different states enacting separate pieces of legislation in this field. This diversity of legislation could complicate matters for Blockchain operators. It is of concern that different states are enacting legislation independently of each other causing fragmentation when viewed from a federal perspective. One state may have a legal definition of ‘Blockchain’ that is not exactly similar to that of other states. Such legal definitions are fundamental particularly when litigation issues arise and multiple legal definitions can only lead to confusion.

Since last year, the state of Illinois has called for a consortium to agencies is located in all parts of the US to collaborate for the sake of uniform innovation in the Blockchain arena. Not all states are keen to invest in Blockchain technology as some fear it is too disruptive. Amongst the forerunners of cryptocurrency legislation are notably the states of California and New York which is unsurprising considering they both host some of the major global cryptocurrency corporations. On the other hand of the spectrum, one notes Massachusetts’ lack of cryptocurrency regulation and Washington’s condition that cryptocurrency exchanges need to be backed up by cash reserves, which is a considerably conservative measure.

However, the federal government has chosen not to enact legislation in the field of Blockchain and neither has it officially expressed any intention of doing so. For example, Arizona has legislated in favour of recognising smart contracts whilVermont allows Blockchain data to be accepted as evidence; the state of Chicago has introduced Blockchain technology-based real estate records; and Delaware is working on the registration of company shares in Blockchain form. The granting of a license for cryptocurrency trading platform operator LedgerX to become the first US regulated digital currency options exchange and clearinghouse is the closest to federal regulation has progressed so far.

The author is associate researcher – Blockchain at PKF Malta

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