The South African Reserve Bank (SARB) is reviewing its position on private cryptocurrencies to inform an appropriate policy framework and regulatory regime.
This review forms part of its financial technology programme to assess the emergence of financial technology (fintech) in a structured and organized manner, and to consider its regulatory implications.
“The main goal of the programme is to track and analyze fintech developments and to assist policymakers in formulating frameworks in response to these emerging innovations,” the SARB said.
This SARB cryptocurrency review will address regulatory issues such as clearing and settlement risks, exchange control impacts, monetary policy, and financial stability.
It will also consider “other matters” such as cybersecurity, it said in a press statement.
“Through collaboration with the other regulatory bodies, matters such as tax implications, consumer and investor protection, and money laundering activities will also be addressed,” the SARB said.
The SARB expects to complete the review in the second half of 2018.
Apart from reviewing cryptocurrencies, the SARB will also investigate and decide on the applicability of “innovation facilitators” — innovation hubs, regulatory sandboxes, and accelerators — for the SARB.
The SARB hopes to have concluded its assessment of the appropriateness of innovation facilitators by the third quarter of 2018.
Project Khokha — a distributed ledger technology proof of concept
The SARB is further set to launch Project Khokha which will experiment with distributed ledger technologies (DLTs).
The aim of this project is to gain a practical understanding of DLTs through the development of a proof of concept (POC) in collaboration with the banking industry.
The objective of the POC is to replicate interbank clearing and settlement on a DLT, which will allow the SARB and industry to jointly assess the potential benefits and risks of DLTs.
The POC involves the processing of wholesale payments using Quorum, an Ethereum enterprise DLT.
ConsenSys is the technology partner that will assist the SARB in the design, setup of infrastructure, and running of the POC.
“This does not imply a radical move to DLT for the country’s national payments infrastructure, but rather a structured approach to understanding the implication of using a tokenized asset on DLT technology to transfer value,” the SARB said.
A public report will be released to explain all the findings, risks and benefits of the associated project during the second quarter of 2018.
If 2017 was the year of the ICO, it seems as if 2018 is destined to become the year of regulatory reckoning. Things have already begun to heat up as countries around the world grapple with cryptocurrencies and try to determine how they are going to treat them. Some are welcoming, others are cautious. And some countries are downright antagonistic. Here is a brief overview of how 15 countries/unions from various regions are treating cryptocurrency regulations.
The United States, at the time of this writing, has no coherent direction on its cryptocurrency regulation other than that there will be some soon. The Securities and Exchange Commission (SEC) has warned investors of cryptocurrency investing risks, halted several ICOs and hinted at the need for greater cryptocurrency regulation.
The Commodity Futures Trading Commission (CFTC) became the first U.S. regulator to allow for cryptocurrency derivatives to trade publicly, then organized meetings to talk about possibly changing the rules for cryptocurrency derivatives clearing (one of the meetings was postponed due to the federal government shutdown).
Secretary of the Treasury Steve Mnuchin has indicated a preference for minted fiat currency over cryptocurrency. Speaking on January 12, 2018, at the Economic Club in Washington, D.C., Secretary Mnuchin warned those in attendance that he and other regulators were looking into the possibility that cryptocurrency could be used in money-laundering activities. The secretary then announced to the group that the Financial Stability Oversight Council (FSOC) had formed a working group to explore the cryptocurrency marketplace and that he hoped to work with the G20 to prevent bitcoin from becoming a digital equivalent of a “Swiss bank account.”
Defending his stance to World Economic Forum attendees on January 25, 2018, Mnuchin explained that his number one focus on cryptocurrency was “to make sure that they’re not used for illicit activities.”
On January 26, 2018, U.S. Treasury Deputy Director Sigal Mandelker echoed the secretary’s sentiments after a visit to China, South Korea and Japan. At a press conference in Tokyo, she applauded the three Asian countries for keeping tabs on cryptocurrency trading, stating, “We feel very strongly that we need to have this kind of regulation all over the world.”
It should be noted that non-U.S. investors may have concerns over clearing licensing hurdles put up individually by the states. If the U.S. treats cryptocurrencies as currency, it seems more likely that the actions by the federal government and federal regulatory agencies would preempt states’ licensing. However, if treated as “securities” (the SEC has not completely cleared the issue up), cryptocurrencies, especially ICOs, would have to clear “blue sky laws” on a state-by-state basis.
The Financial Consumer Agency in Canada does not consider cryptocurrencies to be “legal tender,” excluding all but Canadian bank notes and coins from that definition. The True North, however, is not all harsh on its cryptocurrency regulatory stances. In fact, it appears to be the most transparent country in this list when it comes to understanding laws surrounding the digital currency industry (aside from Switzerland, which wants to be “THE crypto-nation”).
After weeks of hearings, which included testimony from experts like Andreas Antonopoulos, the Canadian Parliament approved Bill C-31 on June 19, 2014, the world’s first national law on digital currencies. The Canadian government has been communicative in its regulatory stances on cryptocurrency ever since: the Canadian Securities Administrators (CSA) sent out a regulatory notice on August 24, 2017, confirming “the potential applicability of Canadian securities laws to cryptocurrencies and related trading and marketplace operations and to provide market participants with guidance on analyzing these requirements.” If you want a clear and concise interpretation of this notice, check out this article.
More recently, the head of the Central Bank of Canada, Stephen Poloz, was quoted as saying on January 25, 2018, that “I object to the term cryptocurrencies because they are crypto but they aren’t currencies … they aren’t assets for the most part … I suppose they are securities technically … There is no intrinsic value for something like bitcoin so it’s not really an asset one can analyze. It’s just essentially speculative or gambling.” It should be noted that as part of the North American Securities Administrators Association (NASAA), Canada joined an association-wide “cautionary directive” on the risks of cryptocurrencies, with all representatives from every province in the country believing there is a “high risk of fraud.”
Venezuela is not a major world economy or a large portion of the cryptocurrency investing community. The country’s regulatory stance on cryptocurrencies, however, is noteworthy because the government, under the restrictive regime of Nicolás Maduro, is seeking to skirt economic sanctions imposed on Venezuela by announcing its own oil-backed “petro” cryptocurrency.
Under Maduro, the country has been divided for years by protests and clashes between opposition parties and the government. Venezuela started off 2017 seemingly seeking to crack down on cryptocurrencies as the Venezuelan Bolivar remained relatively unusable. And even as recently as December 13, 2017, the Maduro government sought to regulate cryptocurrency mining as the newly minted superintendent of cryptocurrencies, Carlos Vargas, announced the compilation of a detailed registry of cryptocurrency miners in the country.
In a country where the fiat currency is worth little and sanctions from the U.S. continue to mount, a state-sanctioned cryptocurrency may cause Venezuela — a typically restrictive regime — to become one of the most progressive countries on cryptocurrency regulations (even if only to further sales of petro).
Japan isn’t particularly liberal toward digital currency regulation; it’s merely winning the race to attract the best from Asia’s cryptocurrency industry, as China and South Korea have been creating hostile/uncertain environments. Whether or not Japan will allow for a cryptocurrency-themed J-pop band, the Japanese government has certainly been more welcoming of cryptocurrencies than its Asian neighbors.
Recent events may have tempered Japanese enthusiasm for cryptocurrencies, however. The hack of a Japanese exchange on January 26, 2018, resulting in the loss of $530 million worth of NEM coins, has prompted backlash from the community and closer oversight from the Financial Services Agency (FSA).
China has been taking ever-increasing actions to clamp down on all things cryptocurrency. Starting off by banning ICOs, China ordered a bank account freeze associated with exchanges, kicked out bitcoin miners, and instituted a nationwide ban on internet and mobile access to all things related to cryptocurrency trading. The People’s Republic of China appears to be the most stringent cryptocurrency regulator of the major economies regarding cryptocurrencies. This is an odd about-face given that, in 2017, Chinese bitcoin miners made up over 50 percent of the worldwide mining population and that cryptocurrency adoption in China increased at a rate higher than any other country.
Though strict, the regulatory actions of the People’s Republic of China, under the stewardship of Xi Jinping, makes contextual sense as the country has recently been focused on stemming capital outflows and stomping out corruption.
Where to begin with South Korean regulation? The country boasted a significant cryptocurrency presence in the past and was initially thought of as the country of refuge from the crackdowns occurring in China late last year. However, discord surfaced in January 2018 amongst top Korean officials on future regulatory actions for the digital currency industry, with declarations, clarifications, misinformation and ultimately some limited implementation. The uncertainty and potential negative regulatory impacts have now been cited as the cause for marketwide sell-offs on Red Tuesday as well as on January 30, 2018, when Korean officials began enforcing a January 23, 2018, rule disallowing anonymous accounts from trading cryptocurrencies.
To add external regulatory drama to the political dissonance demonstrated by a government less than a year out from ousting their former president, regulatory prospects for South Koreans have also been hindered by New York State’s Department of Financial Services (DFS), as they reportedly requested customer information on accounts associated with cryptocurrency trading among six commercial Korean banks with branches in New York on January 26, 2018.
Until recently, the finance and banking center of Asia has been relatively lax compared to many of its Asian counterparts on cryptocurrency regulation. The Monetary Authority of Singapore (MAS), like many financial regulators, warned of risks of speculating in the cryptocurrency markets during the December 2017 peak in bitcoin prices. And Singapore’s International Commercial Court heard a trial that same month over a bitcoin trading dispute, seems to legitimize the economic stakes in dispute.
On January 9, 2018, Singapore’s Deputy Prime Minister Tharman Shanmugaratnam said that “the country’s laws do not make any distinction between transactions conducted using fiat currency, cryptocurrency or other novel ways of transmitting value.”
MAS fintech chief Sopnendu Mohanty on January 24 2018, did state that he does not foresee a Lehman Brothers-like financial meltdown with Bitcoin at this point in time, adding that there is “a great indication that regulators are getting serious about this whole cryptocurrency market.”
Mohanty also stated regulators would need to apply consumer protections for digital currencies like bitcoin for it to continue to grow. While there has been no statement yet from the Monetary Authority of Singapore, the $530 million hack that attacked Japanese exchange Coincheck on January 26, 2018, targeted Singaporean-based NEM coins.
India, once viewed as a burgeoning, friendly environment for cryptocurrencies, has been clamping down on cryptocurrencies in 2018. India’s tough stance stems from similar concerns that other, more stringent regulatory regimes have cited: money laundering, illegal activity proliferation, sponsorship of terrorism, tax evasion, etc. While the cash-reliant country is facing stern regulations, participants of the local cryptocurrency industry do not believe India can “ban” cryptocurrencies through regulations in the same way China has.
In the wake of the August 2017 financial scandal surrounding the Commonwealth Bank of Australia, the Australian government sought to follow in Japan’s footsteps by strengthening its anti-money laundering laws and regulating digital currencies. This differed slightly from the view in 2015 that the Aussie government would seek a “hands-off” approach to cryptocurrencies. Still, the lack of more concise regulation has purportedly had a negative impact on the country as the end of 2017 saw Australian cryptocurrency brokers halt Australian dollar deposits. December 2017 also saw an issuance from the Australian Taxation Office (ATO) which hinted at the way potential future regulation could go. The ATO guidance stated:
Transacting with bitcoin is akin to a barter arrangement, with similar tax consequences. Our view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.
Australia, however, has supporters of digital currencies in government, as August 2017 saw senators from both major parties (Labor and Coalition) stepping forward to call on the Reserve Bank of Australia (RBA) to accept cryptocurrencies as an official form of currency. Therefore, the future of further cryptocurrency regulation remains uncertain but potentially industry-friendly in the land down under.
United Kingdom/European Union
While Brexit is scheduled to force the U.K. and the European Union to part ways in March 2019, the United Kingdom and the EU remain united in their plans to regulate cryptocurrencies. On December 4, 2017, The Guardian and The Telegraph reported that the U.K. Treasury and the EU both had made plans aimed at ending anonymity for cryptocurrency traders, citing anti-money laundering and tax evasion crackdowns.
The European Union plan would require cryptocurrency platforms to conduct proper due diligence on customers and report any suspicious transactions. Likewise, the Treasury of the United Kingdom stated that they are “working to address concerns about the use of cryptocurrencies by negotiating to bring virtual currency exchange platforms and some wallet providers within anti-money laundering and counter-terrorist financing regulation.” The Treasury did, however, add that “there is little current evidence of [cryptocurrencies] being used to launder money, though this risk is expected to grow.”
While one European Union commissioner, Pierre Moscovici, stated in an interview with Bloomberg on December 18, 2017, that the EU was not looking to regulate bitcoin, the commissioner’s statements seemed out of sync with prior and consequential messaging. Two days later, Moscovici’s message was seemingly countermanded by Valdis Dombrovskis, vice president of the European Commission (the Executive for the European Union), when he told reporters in Brussels that:
There are clear risks for investors and consumers associated to price volatility, including the risk of complete loss of investment, operational and security failures, market manipulation and liability gaps.
Calls for greater cryptocurrency regulations echoed across Europe in January 2018. On January 15, 2018, French Minister of the Economy Bruno Le Maire announced the creation of a working group with the purpose of regulating cryptocurrencies. Similarly, Joachim Wuermeling, a board member of the German Bundesbank, called for effective regulation of virtual currencies on a global scale.
On January 22, 2018, Dombrovskis furthered his regulatory agenda for cryptocurrencies by writing three of the EU’s watch dogs warning them of a bubble in bitcoin. On January 25, 2018, embattled U.K. Prime Minister Theresa May joined the fray, echoing the sentiments of International Monetary Fund head Christine Lagarde and U.S. President Donald Trump. When speaking to Bloomberg during the World Economic Forum at Davos, the prime minister stated, “We should be looking at these very seriously — precisely because of the way they can be used, particularly by criminals.”
While the U.K. and EU have not announced finalized regulations of cryptocurrencies, an expected announcement is likely due in the spring.
Switzerland, known for its progressive attitudes toward individual rights in banking, has kept a similar attitude toward cryptocurrency regulation. The Western European country is conspicuously absent from the European Union and appears to have an open attitude toward the cryptocurrency industry.
Johann Schneider-Ammann, economics minister, told reporters on January 18, 2018, that he wants Switzerland to be “the crypto-nation.” According to an article by the Financial Times, Jörg Gasser, state secretary at the Swiss finance ministry, stated, “We want it [the ICO market] to prosper but without compromising standards or the integrity of our financial markets.”
To that end, on January 18, 2018, the Swiss set up an ICO working group with an aim to “increase legal certainty, maintain the integrity of the financial center and ensure technology-neutral regulation.” The working group will report to the Swiss Federal Council by the end of 2018.
Russia, like South Korea, can’t seem to decide how it wants to handle cryptocurrency regulations. In September 2017, Russian Federation Central Bank chief Elvira Nabiullina said the central bank was against regulating cryptocurrencies as currency (as a payment for goods and services) and against equating them with a foreign currency. This statement seemed to indicate a progressive hands-off approach was in store for the cryptocurrency industry in Russia.
However, on September 8, 2017, the deputy finance minister for the Russian Federation, Alexei Moiseev, told reporters at a Moscow financial forum that settlements of payments in cryptocurrencies “are not legal now.” The deputy minister continued, stating, “Obviously, now there is a legal vacuum, and accordingly it’s hard for me to say if these actions are legal or not.”
Until these statements, the position proposed by the Russian Federation was to allow only “qualified investors” to deal with cryptocurrencies. Russian President Vladimir Putin sided with the position of the Finance Ministry on October 11, 2017, when the president said that the use of cryptocurrencies carries serious risks, being an opportunity for laundering criminal capitals, evading taxes, financing terrorism and spreading fraudulent schemes that would victimize Russian citizens.
The Finance Ministry continued its strict regulatory posturing by suggesting a taxation on cryptocurrency mining ventures on December 28, 2017. The new year began with even more hints at a Russian crackdown on cryptocurrencies, as Putin again sided with the Ministry of Finance on January 11, 2018, when he remarked that legislative regulation of the cryptocurrency market may be needed in the future.
President Putin stated, “This is the prerogative of the Central Bank at present and the Central Bank has sufficient authority so far. However, in broad terms, legislative regulation will be definitely required in the future.” (translation by TASS)
Two weeks later, on January 25, 2018, the Finance Ministry published a draft law “On Digital Financial Assets.” The law, if finalized, would define tokens, establish ICO procedures and determine the legal regime for cryptocurrencies and mining.
Presidential candidate Boris Titov decried the proposed legislation on January 26, 2018, stating that the draft law was excessively strict. According to Titov’s press service, “The Finance Ministry’s proposals present a much tougher regulation than in Japan, Switzerland, Belarus [and] Armenia; that is, in all countries that have adopted some form of legislation. It would be better not to adopt anything than to adopt such legislation.”
Further muddying the waters was a concession by Deputy Minister Moiseev that the December 2017 Belarusian adoption of the “Digital Economy Development Ordinance” could cause capital outflows from Russia to neighboring Belarus if heavy crypto-regulation occurred in the Russian Federation.
Last year saw Africa’s largest economy struggle through a recession that caused a “crunch” to its fiat currency. Bitcoin trading boomed as Nigerians used cryptocurrencies to end-run currency controls restricting access to the dollar put in place to curtail the recession. January 2017 started off with the Central Bank of Nigeria (CBN) seeming to ban cryptocurrencies, only to have CBN Deputy Director Musa Itopa Jimoh walk back the position by stating, the “Central bank cannot control or regulate bitcoin. [the] Central bank cannot control or regulate blockchain. Just the same way no one is going to control or regulate the internet. We don’t own it.” Bitcoin trading boomed by 1500 percent during 2017.
Though the IMF report from December 2017 said the country has exited its recession, tepid GDP growth forecasts and reliance on crude oil exports make calls on January 25, 2018, from CBN Governor Edwin Emefiele to regulate cryptocurrencies seem tenuous. The CBN governor stated, “Cryptocurrency or bitcoin is a gamble … We cannot, as a central bank, give support to situations where people risk their savings to ‘gamble.’”
The governor of the Bank of Ghana, Dr. Ernest Addison, stated on January 22, 2018, that “Bitcoin is not yet legal tender” at a media briefing. While there is a bill before Ghanaian parliament which will allow for the use of cryptocurrencies (seemingly with companies registered as “Electronic Money Issuers” by the government), the current stance of bitcoin (and other cryptocurrencies) is, according to Graphic Online, one of “six countries that have outlawed [bitcoin].” Addison’s statements come weeks after a recommendation from the Ghanaian investment bank, Group Ndoum, suggested that the Bank of Ghana invest 1 percent of its reserves in bitcoin.