The blockchain technology has entered a stage of development hinting that in the next two-tree years we can expect to witness the testing of commercial-scale products based on it. Therefore the widespread adoption of the blockchain is expected to depend on the regulatory and legal framework, on the interest and initiatives of governmental and, financial services organizations as well as start ups willing to develop blockchain-based business solutions.
cryptocurrencies as a financial instrument
The regulatory and legal cryptocurrrency landscape is constantly changing since the industry is new and influenced by unstable regulatory environment. So far the US, the EU and most recently China, Japan and Russia show definite steps toward implementing a legal framework that is expected to influence the cryptocurrency usage and exchange. So far governmental organization’s and central banks’ main focus is clearly on designing rules that require compliance systems able to guarantee the transparency and safety of transactions. This is evident from the most recent legal and regulatory changes on key cryptocurrency markets.
The EU legal and regulatory framework is focused on preventing the usage of cryptocurrencies to fund terrorist activities. Therefore the proposed “Action Plan for Strengthening the Fight Against Terrorist Financing” in July 2016 by the European Commission provided a set of strict rules on cryptocurrency regulation within an expanded framework of EU’s AML directive that guaranteed tighter regulations on digital currency platforms.
By acknowledging digital currency trading as electronic money transfer, the US Government requires cryptocurrency exchanges to follow Anti-Money Laundering (AML) laws, imposed by the organizations in charge of enforcing the policies and regulations for financial companies operating within the US borders - the U.S. Treasury Department and the FinCEN (Financial Crimes Enforcement Network).
First Japan and then Russia have most recently changed their local regulation in order to acknowledge cryptocurrencies as a financial instrument.
The Japanese bill recognized cryptocurrencies as “property of value” - a means of payment, trading and exchange. The bill distinguishes between digital currencies like OneCoin and “electronic” money. By defining cryptocurrencies as commodity it makes them the subject to various taxes - a subject, discussed by regulators in many countries and possibly a glimpse of how cryptocurrencies will be perceived in much more countries in the nearer future.
Contrary, the Chinese central bank enforced strict guidelines on cryptocurrency exchanges and suspended withdrawals, requesting up-to-date compliance system with strict KYC and AML processes in place. As the country’s regulators keep updating their policies in order to prevent people from avoiding capital controls and restrict the capital outflow, media reports suggest that the new requirements that should be installed are expected to collect user information and report any suspicious trading activities to the authorities.
In a staggering contrast to its previous cryptocurrency regulations, Russia has changed its previous legal framework and enforced regulations, moving closer to acceptance of digital currencies as a legitimate financial instrument in the beginning of April this year.
In an interview with Bloomberg, the Russian Deputy Finance Minister Alexey Moiseev said that authorities intend to recognize cryptocurrencies in 2018 but he also pointed out the need for rules against illegal transfers and money laundering. He also emphasized the need for transparency (i.e. knowing the identities of the people making transfers), especially the need for people in the network to know the identities of the people doing the transfers.
Read More: Russia Caves In on … (Bloomberg, published April 11th, 2017)
The dynamics of cryptocurrency regulations suggest that cryptocurrencies have the potential to be accepted as financial instrument on much more locations if providers aim to ascertain that they have compliance and transparency processes preventing users from using cryptocurrencies for dubious activities. This also means that countries that would accept cryptocurrencies as financial instrument will enjoy higher trade volumes.
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