Cryptocurrencies: how do we strike the right balance?
There is a great buzz around cryptocurrencies currently, and wide speculation about how these will revolutionise payment and banking systems of the future. At SGG, we are excited to see how these will potentially transform the landscape, but we are also alive to the potential risks, noting that the value associated with cryptocurrencies has been on a rollercoaster ride over the past few weeks.
If we consider how cryptocurrencies are being regarded across the globe, there is currently no international agreement on how a cryptocurrency should be legally classified or regulated. In the United States, there is a three-prong test to determine whether a token is a security: is it an investment? in a common enterprise? with an expectation of profits from others’ efforts? If the answer is yes to all three, it is seen as a security, if not it is seen as an asset. In other parts of the world, Hong Kong and Singapore do not regard cryptocurrencies as legal tender, and Mauritius has urged caution about their use.
If we look at the position in Europe, the Netherlands has not officially made a stance on the classification of cryptocurrencies and is currently perceived as a convertible digital asset with non-enforceable buying power. The DNB and AFM therefore warn all users profusely to not use it to purchase goods or settle debts. In Luxembourg, crypto transactions are governed by the Law on Payment Services in the same way as traditional payments in fiat transactions. It is therefore strictly regulated by the Financial Sector Supervisory Commission (CSSF) in the same way as any other financial activity and needs to be approved by the Ministry of Finance.
When it comes to anti-money laundering and combating terrorist financing, there is a patchwork of approaches at international level, and in the Netherlands digital currencies do not fall under the guises of the Financial Supervision Act (Wft) and are not seen as currency for purposes of the anti-money laundering and terrorist financing act (Wwft) which leads to a problematic situation.
So if we examine the implications of blockchain more concretely, where do we stand in relation to Initial Coin Offerings (ICOs)? ICOs are a means for a new start-up rendering a certain utility to its users through its blockchain, to raise funds by means of introducing a token which will hold a certain value, which value will be coupled with the amount of public interest, directly sparked by the actual perceived utility of the blockchain in a societal ecosystem. ICOs are currently unregulated in most parts of the world, due to the fast growing nature of the technology, and regulatory sandboxes to find sustainable regulatory solutions are now established in a number of countries, including Singapore, UK, Mauritius and now the Netherlands. There is some concern, however, that the climate in these countries is to ‘turn a blind eye’ and therefore create a wild west scenario for every person with a two-page White Paper to register an ICO and raise funding from the hyped interest in cryptocurrencies, and therefore create a platform for opportunists to legally exploit the market. The future, therefore, is taking a turn towards ultra regulation, as the remaining jurisdictions try to prohibit the influx of opportunists trying to cash in on the success of ICOs.
In my view, we need to find the right synergy between blockchain pioneers and regulators. There is a risk of the “Bull in a China Shop” parabol where innovators can make the mistake of challenging regulators head-on by sowing disruption from the get go. It is interesting to see the stance adopted by regulators in the UK and Singapore, in creating a safe environment by assisting the blockchain innovators actively in regulating new innovations therefore creating full transparency by the innovators in a safe harmless environment.
Overall, when it comes to cryptocurrencies and blockchain the term ‘digital disruption’ is rightly used, and the full implications remain to be seen. At SGG, we are excited to see what the future holds and look forward to working with our clients as they seek to innovate and apply ground-breaking solutions to the benefit of their businesses and customers.
Crypto Enthusiast, Senior Due Diligence and Regulatory Advisor focusing on Fintech/Blockchain Client Onboarding at SGG Group