Digital asset regulation has changed rapidly in the last few months, with profound effects on wider markets as well as on the digital assets space itself.
In some countries, stricter regulation will disbar whole classes of investors from the space altogether, or drive some investors into grey-market solutions. In others, digital assets have been outright banned, or investors, exchanges and projects carry on a precarious existence while legislatures debate the legality of the industry.
China: Bitcoin banned?
China’s relationship with digital assets has always been ambivalent. On one hand, the Chinese regime favours high-tech solutions and likes security and traceability — both of which come baked into blockchains. But on the other hand, digital assets have historically had major price fluctuations and consequently been seen as high-risk/high-reward investments. These considerations, as well as environmental repercussions, may have reverberated louder in China than in some other countries, says HSBC’s global head of FX research Paul Mackel.
China’s latest move comes on the heels of a May ban on provision of digital assets services by Chinese banks, on the grounds that “recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order”.
China has progressively narrowed the scope for digital assets companies to operate, culminating in a ban on mining in three key provinces — Sichuan, Inner Mongolia, and Xinjiang — that shaved over 5% off the Bitcoin market cap and transfigured the international mining scene.
The country’s rulers continue to strongly discourage mining and other digital assets-related activity nationally too. In the 51st meeting of the State Council Financial Stability and Development Committee, Liu He, member of the Political Bureau of the CPC Central Committee, Vice Premier of the State Council, and Director of the Financial Committee, said it was important to:
“Crack down on Bitcoin mining and trading behavior, and resolutely prevent the transmission of individual risks to the social field. It is necessary to maintain the smooth operation of the stock, debt, and foreign exchange markets, severely crack down on illegal securities activities, and severely punish illegal financial activities”.
China’s centrally-directed financial policy continues to regard digital assets as a bad risk. But Bitcoin miners have historically seen China as a good one.
With relatively low electricity costs combined with a reliable grid, China was a key location for Bitcoin mining; the concentration of mining in-country was even cause for concern among Bitcoin investors and observers, who pointed out that however decentralized Bitcoin’s blockchain may be, its mining pool was subject to strong centralization.
That trend had begun to alter in the months leading up to China’s ban, with the pool diversifying away from the core of Chinese mining companies that once mined over 60% of all new Bitcoins. But this was largely a result of proliferation within the Chinese mining industry rather than major input from other countries.
In consequence, there will be major knock-on effects from the new position in Beijing. Not least is the sudden availability of processing power formerly devoted to mining BTC. Bitcoin miners are selling, and producers suddenly have fewer buyers, so GPU prices are crashing worldwide.
Miners, meanwhile, are turning their attention to other countries. Dubai-based IBC group has begun moving its operations to United Arab Emirates, Canada, the United States, Kazakhstan, Iceland and several South American countries, and — tellingly — its headquarters to Toronto.
Hong Kong: retail investors barred
Hong Kong has introduced plans for a new licensing scheme for VA (Virtual Asset) businesses, aimed at reducing the risks to retail investors and the wider economy arising from digital assets investing. The Hong Kong Financial Services and the Treasury Bureau plans to make this law in the 2021-22 legislative session, and will offer a 180-day transition period for compliance.
Only professional investors, defined by Hong Kong law as those with a portfolio over HK$8 million ($1.03 million), will be permitted to invest in digital assets. The plan has aroused resistance from digital assets companies, who point out the contribution they make to Hong Kong’s economy and the strict regulations with which they already comply.
USA: possibility of new regulations
The USA’s approach to digital assets regulation remains unpredictable and fragmentary. As a new administration finds its feet and shows its priorities, regulators appear to be putting digital assets on the back burner at the federal level. The SEC released its rule-making agenda on June 11 this year, including increasing focus on stock buybacks, market structure modernization and disclosure — but with nothing in the press release or the rulemaking list itself about digital assets. Nevertheless, SEC chair Gary Gensler has frequently discussed the need for digital asset regulations, showing particular concern for potential fraud. And FinCEN recently hired its first digital assets advisor.
At the state level, legislatures and statehouses have been quicker to move in response to some worrying revelations about leading stablecoins. In particular, Tether, ostensibly backed 1:1 by USD, was in fact backed by a portfolio of considerably riskier assets including short-term loans; explaining the situation, the company said it would “admit no wrongdoing”, but New York State Attorney General Letitia James has banned Tether and an associated exchange, Bitfinex. If Tether is unable to regain legislators’ confidence, similar moves could follow at the state level across the USA, with significant results for Bitcoin since 75% of BTC trading is done via Tether.
Federal action may be coming via Congress, too. US Senator Elizabeth Warren, who chairs the Senate Banking Committee’s Subcommittee on Economic Policy, has called on the SEC to concentrate more on digital assets, and on Congress to address what she called “regulatory gaps”.
India: if not a ban, then what?
India has been moving back and forth on a full digital asset ban for some time. While the legislature and courts contend, the Indian people are voting with their wallets: Indians have invested $6.6 billion in digital assets as of May this year, making India the world’s 11th most invested country.
It’s expected that India’s burgeoning, youth-skewed population will be more rather than less interested in digital assets in the future, but the Indian state seems to be opposed. The Finance Minister said in March that the country was no longer considering an outright ban (like that struck down by India’s Supreme Court in March 2020) but would instead be taking a “calibrated” approach to the issue.
Since then, India’s legislative environment has been one of mixed messages. A yearly reporting requirement from the Ministry of Corporate Affairs has been considered by some as an encouraging sign, and possibly a step toward a tax regime and regulation. But at the same time, India has restricted digital asset businesses’ access to banking services and launched an investigation into India’s biggest digital assets exchange, WazirX, for alleged money-laundering.
Exchanges operating in India might be obliged to pay an 18% surtax — even if they aren’t based in India, while India-based exchanges already pay it. This is levied on the basis of data services rather than being explicitly oriented toward digital assets, but could become an instrument in the hands of Indian regulators frustrated by legislative and judicial hold-ups.
Paraguay: the Coin of the realm?
El Salvador moved to make Bitcoin legal tender in May to a chorus of technical caveats, exciting more interest in the commentators of the wider world than the citizens of El Salvador. Now Paraguay may move in a similar direction. As of writing, the country’s plans are unclear, but Paraguayan Congressperson Carlitos Rejala told the country via Twitter that he was preparing to unveil “Esta semana empezamos con un proyecto importante para innovar a Paraguay frente al mundo!” (an important project to innovate Paraguay before the world). We should know more on July 14 this year.
Iran: Foreign-mined coins to be banned?
The Central Bank of Iran has made clear that it would prefer only digital assets mined in Iran to be used for payments. And a new bill drafted by the Iranian Parliament Commission on Economy, “Support for cryptocurrency mining and organizing the domestic market for exchanges”, could pass soon.
If it does, it would make Iran’s Central Bank the authority on digital asset exchanges in the country. It could ban all digital assets except Iran’s own Central Bank Digital Currency (CBDC), as well as making the Ministry of Industry, Mine and Trade responsible for overseeing digital asset mining — conducive to the country’s aim of ensuring that all digital assets used in Iran are mined locally.