By Tsering Namgyal
The lack of standard language for crypto assets across global regulators and jurisdictions is hindering a harmonized regulatory response and, in some cases, even leading to regulatory arbitrage, research by Cambridge Institute of Alternative Finance at University of Cambridge Judge Business School has found.
The landmark report, Global Cryptoasset Regulatory Landscape Study, looked at the regulatory response to crypto assets across 23 jurisdictions between November 2018 and February 2019.
“There is no standard usage of terminology across regulators and a variety of terms have been used to refer to crypto-assets in official statements,” warned the report, which was supported by the Nomura Research Institute (NRI), a Japanese think tank.
“Notably, the term virtual currency used most frequency in official documents, although it has often been used interchangeably with cryptocurrency and digital currency.”
As per the report, securities laws, banking and payment laws, and or anti-money laundering laws, have so far received the most regulatory attention in relation to regulating crypto asset-related activities.
National watchdogs might want to thoroughly examine how other laws might be applicable, such as tax or property law.
According to the report, crypto assets can fall within the regulatory perimeter of more than one national watchdog. Such overlaps are found, for example, in Australia where there are four regulators with the mandate to maintain the stability in the financial markets.
The UK’s situation is a bit better because it has “UK’s Cryptoasset Taskforce” that helps coordinate the policy response amongst three bodies, namely the Financial Conduct Authority, the Bank of England and HM Treasury (Finance Ministry).
The situation becomes a bit more nebulous if different regulators claim that activity falls under their regulatory remit, as in the case of the United States.
Such a lack of regulatory clarity could have serious implications, the report warned.
“When a Canadian exchange was declared bankrupt and likely to have lost $190mn in investor assets in early 2019, investors were surprised to learn that the country’s first licensed exchange was not actually supervised by any regulator,” the reported noted.
Average investors are often not in a position to figure out the difference between a license from an anti-money laundering watchdog, in this case, Financial Transactions Reports and Analysis Centre of Canada (Fintrac), and supervision by a securities regulator.
Interestingly, the most advanced regulatory frameworks are often found in countries with a less rigid attitude towards financial regulation and a low level of domestic crypto asset activity.
In contrast, nearly half of the jurisdictions with a high level of domestic crypto asset activity have adopted a “retrofitting” approach to regulation – amending existing laws and regulations to bring crypto asset activities under the scope of existing laws.
The vast majority of examined jurisdictions (82 percent) have distinguished crypto assets that exhibit characteristics of a security from other types of crypto assets. Consequently, activities dealing with crypto assets that qualify as security are automatically brought under the ambit of securities law such as the US, Hong Kong and Singapore.
Regulators hitherto have primarily focused their attention on initial coin offerings (ICOs) and exchange trading – functions that mimic activities in the conventional financial markets.
However, other key activities specific to crypto assets, such as alternative token distribution mechanisms (e.g. airdrop, fork) and the creation of crypto assets through mining, have been overlooked.
This may have a significant impact depending on how the crypto asset market develops, the report warned.
The report also found that regulators worldwide often follow the examples or models set by their counterparts elsewhere.
The US Securities and Exchange Commission’s (SEC) investigation into the Decentralized Autonomous Organization (DAO) and its conclusion issued in July 2017 that it was in fact securities based on a so-called Howey Test has helped frame the conversation worldwide on how to classify certain digital tokens as securities, or not.
Similarly, an early typology on digital tokens issued by the Swiss regulator Financial Market Supervisory Authority (FINMA) issued in November 2017 has also been influential in other jurisdictions on how to classify various avatars of digital assets.
Three main regulatory approaches
When it came to issuing regulatory frameworks, there have often been three main types of regulatory responses, which are namely the application of existing regulation to crypto-assets, amendment of existing rules (“retrofitted regulation”), and bespoke or new regulation, and bespoke regulatory regime.
To illustrate using examples, Australia applied Information sheet (INFO 225) on ICOs and cryptocurrency, Estonia amended its Money Laundering Act and Terrorism Financing Act to cover certain crypto-asset activities while Malta issued a separate law for crypto assets, Virtual Financial Assets Act, and Mexico issued a Law to Regulate Financial Technology Institution.
While Bitcoin was often used as an overarching term for cryptocurrencies before 2014, the usage of the terms “digital currency” and “cryptocurrencies” increase during the course of 2014.
However, the terms virtual asset, digital asset, and crypto asset began to become more popular in official documents during 2017 and 2018, the report found.
“The growing diversity in terminology could be interpreted as regulators gaining a better understanding of the nuances of, and differences between, various types of tokens,” the report said.