As institutional and consumer investors turn their attention to digital assets, the market becomes sufficiently large that regulators must also pay attention. And the structures suitable for a small number of technologically-minded experimenters are clearly not suitable for a major new part of the global financial ecosystem.
Until recently, digital assets were totally unregulated. Tokens and currencies, new blockchain-based projects and ICOs were launched with no higher a barrier to entry than a website and a white paper. But this wild-west approach isn’t suitable for a market with a $259bn cap. Institutional investors want professional financial services, governments want their tax revenue and regulators want to manage markets and weed out bad actors.
The laws governing digital assets
National regulators must decide how to understand digital assets — as currencies, securities, assets or something else? In practice most regulators have opted for a hybrid approach based on the asset’s market function rather than its description. Governments must also decide whether or not to ban digital assets outright, and whether to enter the market with their own offering. Finally, there are laws governing who can perform actions in the financial marketplace, such as those requiring licencing for solicitation of securities.
In this post, we’ll give an overview of the global digital asset regulation landscape.
An international framework
A global digital assets regulatory framework is taking shape. International financial authority the Financial Stability Board has appointed as head of its Standing Committee on Supervisory and Regulatory Cooperation Ryozo Himino. As head of Japan’s FSA, Mimino helped create a raft of digital asset legislation, and will now help steer international regulation. While the FSB’s authority is not worldwide it does provide international financial regulation to 24 jurisdictions, including Brazil, Argentina, the USA, South Korea, China and Japan as well as most of the major European countries.
Around the world, too, governments are changing the way they address digital asset regulation based on the standards published by the Financial Action Task Force, aimed primarily at combating money laundering. The G7 nations, together with Australia and Singapore, will help develop a new system which will collect and share personal data on individuals who make transactions in digital assets; once in place, the system is expected to be administered by the private sector.
Beyond efforts aimed at protecting the integrity of international money flows and preventing money-laundering, international regulations are few. Instead of a unified, global regime there is a fractured scene. Some major nations have banned digital assets all but completely, while others have more complex relationships with them. There are extensive, frequently-changing digital assets regulations at the level of individual nations and of blocs such as the Eurozone.
The Eurozone has bloc-wide regulations focused on preserving the integrity of its banking sector as well as providing protection for consumers and investors. There are also regulations at the national level.
Europe by country
Some European countries have a fraught relationship with digital assets. In general, they are not recognized as tender in any Euro country but in many states they are recognized as property and covered by existing investment and securities regulations. Some European countries provide tax relief and other incentives for digital assets companies.
From an ambivalent stance, China has moved to all but ban digital assets. Mining Bitcoin and other digital assets has been banned and digital assets trading is suppressed. Simultaneously, China is planning to launch its own Central Bank Digital Currency.
India is likely to regulate digital assets rather than opt for an outright ban, but the story has been complicated. Several times in recent years, India’s parliament has indicated its intention to ban digital assets, only to back away from the brink. Now new legislative developments offer clarity.
In a continent characterized by infrastructure deficit and state insufficiency, digital assets offer rapid, secure payments that attracts Africans. Legislation differs from country to country, as does enforcement capacity.
The United States
The USA’s bicameral, frequently-partisan legislative apparatus moves slowly, meaning regulators have often used the courts to establish purview over digital assets. Currently digital assets are treated very differently in the USA depending on their relationship with any underlying asset or expectation of future profit.
Asia-Pacific countries typically have positive attitudes to digital assets, since these are countries that generally have tech-forward economies. They’re also often in a ‘sweet spot’ where liberal, but well-enforced, financial regulations combine with effective infrastructure and tax regimes conducive to wealth management to create a natural home for fintech.
DeFi regulations around the world
Decentralized Finance (DeFi) is one of the digital asset world’s fastest-growing sectors. As a financial activity, it’s regulated differently in different regions, with profound implications for the future of the space.