Cryptocurrency Regulation Update (July 2018)

This piece is part of a monthly series covering regulatory updates related to cryptocurrencies (here are the updates from April, May, and June). Although prices have continued to fall over the past month, recent statements from regulators have been positive, particularly comments from the SEC clarifying that Ethereum is not a security. This piece provides important regulatory updates since the June piece, broken down by developments in the United States and the rest of the world.

United States

1. SEC States Ethereum Is Not a Security (June 14th): At an event in San Francisco, SEC Director of Corporate Finance William Hinman announced that the SEC would not consider Ethereum, as it exists today, to be a security. In his explanation, Director Hinman suggested that a project can start out as a security and later transition into something that is not a security. An explanation of what was said and what it means for the ecosystem can be found in “SEC Comments on Digital Assets as Securities.”
2. Square Receives a BitLicense in New York (June 18th): Square was granted a BitLicense in New York which will allow it to offer residents there the ability to purchase Bitcoin through its Cash app. Square first introduced the ability to buy Bitcoin through the Cash app in late 2017 but was unable to offer that ability to New York residents without first obtaining a BitLicense, a requirement for operating a virtual currency business issued by the New York State Department of Financial Services. The BitLicense was created to deal with the potential issues of fraud and money laundering that virtual currency businesses may facilitate.
3. Tether Receives Legal Statement of Full Collateral (June 20th): Law firm Freeh, Sporkin, & Sullivan conducted an analysis of Tether’s financial status and issued a statement of confidence that Tether is fully collateralized. To be sure, this is not the same as a full audit. However, it is a positive piece of news for Tether and the cryptocurrency market as a whole. This news followed a report from professors at the University of Texas who released research on June 13th suggesting that Tether has been used to prop up the price of Bitcoin at the end of 2017. This piece of news added further suspicion to a project that has been mired in controversy about its lack of transparency. Tether is a significant project because it is a popular trading pair for many cryptocurrencies and there are more than $2.5B units worth of Tether flowing through the ecosystem. If Tether is materially misstating its collateral, it could have serious negative repercussions for the market as a whole.

Rest of the World

1. China Explores Possibility of Digital Currency (June 26th): Filings from the People’s Bank of China suggest that the country is exploring the possibility of issuing digital fiat currency that has some of the features of a cryptocurrency (like a digital wallet with transaction tracking) while being linked to existing monetary policy and controlled by the government. This is a positive development and confirms comments from the IMF last month in its piece “Monetary Policy in the Digital Age” about the need for governments to continue improving existing currencies to stay competitive with cryptocurrencies. As author Dong He says in the piece, “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 conclusion and the steps taken by China confirm its sentiments.
2. India Reveals Limited Investigation Before Crypto Ban (June 13th): As reported by Quartz, the government of India conducted no formal investigation or research into the cryptocurrency space before enacting a blanket ban on cryptocurrency exchanges and users in April. Varun Sethi, a lawyer in New Delhi who filed a right to information regarding the ban, explained the situation by saying, “It seems as if the ban was arbitrary and it came into effect without any thought from the RBI. It has either answered in the negative or given conflicting answers to our questions asking what led to this ban.” This is positive news for the long-term potential of cryptocurrency in India given that it is likely that the rulings will be reviewed with greater information and potentially altered over time.
3. Russia to Classify Cryptocurrencies as Digital Rights (June 14th):Cryptocurrencies will be reclassified as “digital rights” in Russia in favor of competing terms like “digital money” or “digital currency.” As explained by Head of State Duma Financial Market Committee, Anatoly Aksakov, “We will need to change something in the Tax Code to describe how digital rights will be taken into account for tax purposes,” explained Aksakov. “That is, digital assets will be considered not as property, but as a new type of property digital rights.” Beyond tax considerations, it is to be seen what classifying cryptocurrencies as “digital rights” will mean for the way they are regulated in Russia.