Digital Assets

Digital Asset Custody and Trading Regulations: An Overview

Digital assets are increasingly coming to the attention of regulators and legislators at the national and supranational levels.

Gunnar Jaerv   Gunnar Jaerv · Published on 4 June 2020
   

The worldwide market in digital assets has grown so rapidly since they were first introduced that major institutional investors are entering the space, bringing with them significant financial investment and an expectation of stability and professionalism that the space is hurrying to match.

At the same time, regulators see a market growing rapidly in size but without significant regulation — ripe for exploitation by criminals and terrorists seeking ways to launder money and move it untraceably.

Thus, the usual course for nations to pursue is to seek to bring digital assets under the control of existing regulatory bodies, while simultaneously drafting new legislation, in both cases primarily focused on AML and CFT.

This can be seen in countries from Ukraine to the United States, and is similar in both common and civil law jurisdictions.

However, there is simultaneous pressure from another direction — the existing banking system. Central banks are jealous of their prerogatives and do not wish to see alternate currencies become recognized as legal tender; this is supported by many legislative bodies and some constitutions — Russia’s, for instance.

As well as multiple actors with their own concerns and points of view, there are also multiple types of digital asset. The blanket term conceals large differences in kind and function between coins, which stand only for themselves, and various types of token.

Some tokens stand for shares in an asset, while others are properly understood as securities; knowing the difference hasn’t always been easy in the past, and some ICOs have found themselves illegally trading in securities without even realizing it.

Digital assets can be divided into three categories: currencies, securities and utilities.

Currencies: These don’t represent anything but themselves. Bitcoin, Ether, and other famous Coins come under this heading. So do currencies that are pegged to a real-world asset, whether that be gold or the US dollar, but aren’t exchangeable for it.

Securities: If you’re buying a share in future expected profit from someone else’s work, you’re buying a security. A security is an investment contract, and the standard view is that it’s the function of the contract, not the form, that matters; whether it’s a paper contract or a digital token, if you’re buying a share of future profits, you’re buying a security.

Utilities: Tokens that stand in for information are utilities tokens. Think of internal currencies in blockchains, used to ascribe CPU time or other kinds of resource access within the system.

There’s also the issue of taxation: it’s not always easy to know how to pay taxes on digital assets, and many states are moving to clarify things in this area.

In most cases, tax liability is determined by the way digital assets are legally defined and recognized. Since they’re typically seen as stores of wealth rather than recognized as currencies, digital assets are typically subject to taxes on transactions. In the US, this extends to all transactions — information must be submitted to the IRS even on trades where no-one made any material gain.

In other jurisdictions, taxes are levied differently, and in many jurisdictions there is little clear tax information as yet.

In general, we can say that 2018 was the year when governments and regulators around the world became aware of digital assets, 2019 the year when they began moving to regulate them, and 2020 is likely to be the year when regulations become more accurate and universal. Countries are already making some effort to implement regulations consistent with other nations, and that’s likely to continue.

We can also see that the focus of the most advanced digital assets regulatory frameworks is shifting from basic AML and CFT efforts, coworking to provide investors with a level of legal and regulatory protection equivalent to that offered by the traditional financial system.

Beyond this, however, we need to get specific. That’s why we’ve compiled a guide to digital asset regulations around the world.

Disclaimer


This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.