Cryptocurrency Regulation Update (June 2018)

This piece is part of a monthly series covering regulatory updates related to cryptocurrencies (here are the updates from March, April, and May). Although prices have come down in recent months, recent statements from regulators reflect a deeper acknowledgement of the technology underlying cryptocurrencies and their future potential (in particular, comments from the IMF). This piece provides important regulatory updates since the May piece, broken down by developments in the United States and the rest of the world.

United States

1. IMF’s “Monetary Policy in the Digital Age” Acknowledges Appeal of Cryptoassets (June 3rd): In a positive statement, the IMF acknowledged the appeal of cryptoassets. Indeed, the subtitle of the piece is “Crypto assets may one day reduce demand for central bank money.” The piece starts by acknowledging the current challenges faced by cryptocurrencies, saying “For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities.” However, the tone quickly changes as the piece continues, adding that “But continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.” This is a startling acknowledgement of the appeal of cryptocurrencies and their ability to compete with fiat currencies.
2. SEC Names Valerie A. Szczepanik Senior Advisor for Digital Assets and Innovation (June 4th): As explained by the announcement, “In this newly created advisory position, Ms. Szczepanik will coordinate efforts across all SEC Divisions and Offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings and cryptocurrencies.” This appointment reflects the increased attention that the SEC is dedicating to the space. It is to be seen what view of the space Szczepanik will take, though she has been involved for many years, previously leading the SEC’s distributed ledger working group which was founded in 2013.
3. SEC Creates Fake ICO Website to Educate Investors (May 16th): The SEC created a fake ICO site, HoweyCoins.com, as a way to demonstrate to investors that it is easy to create a fake project and website. As explained in the SECs press release, “Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic — because the offer isn’t real. The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.”
4. CME Launches Ethereum Indexes (May 14th): The CME announced that it will launch two indexes to track Ethereum — one published once daily (CME CF Ether Reference Rate) and the other updated live (CME CF Ether-Dollar Real-Time Index). This news has lead to speculation the the CME may eventually turn the indexes in a futures product (for context, the CME launched Bitcoin futures in December, a year after launching Bitcoin indexes). Prices of both indexes will be calculated by UK-based exchange Crypto Facilities based on transaction data from Kraken and Bitstamp.

South Korea

1. South Korea Raids Largest Cryptocurrency Exchange (May 11th):South Korean prosecutors raided the offices of Upbit, one of the world’s largest cryptocurrency exchanges. The exchange hosted about $1.6 billion in cryptocurrency trades in the past 24 hours, making it the biggest in Korea and the fourth largest in the world among fee-charging venues tracked by Coinmarketcap.com. Regulators in South Korea have long been concerned about the potential for cryptocurrencies to be used to facilitate illegal activity via money laundering.

China

1. Government Releases First Public Crypto Ratings (May 17th): The Chinese Ministry of Industry and Information Technology released its inaugural cryptocurrency ratings this Thursday, May 17. Undertaken by the Ministry’s CCID Research Institute, the ratings evaluated 28 currencies, judging them on criteria that examined fundamental technology, applicability, and innovation. While ICOs remain banned in the country, the government has previously made public statements about the promise of the technology. As Chinese outlet CEN stated, “It is reported that the index released this time is the world’s first technology-focused public chain assessment index, which will be issued periodically on a monthly basis. The issuance of this index will help to fully grasp the status quo of global public-chain technology development, timely track the direction of public-chain technology innovation, and help promote the innovation and application of blockchain technology.”

Japan

1. Japan Working to Create a Template for Cryptocurrency Regulation (May 11th): Japan is working to build a clear framework for how digital currency exchanges and initial coin offerings (ICOs) should operate within the country. Following the Mt. Gox hack in 2014, Japanese regulators have taken an active role in attempting to guide and police the space. The Financial Services Agency (FSA) has a structure for regulating and approving exchanges, which it has done since September 2017. The next near-term priority is addressing the ICO market, where regulators are concerned about how projects will use investor’s funds and how projects should properly disclose the risks involved.