Blockchain and Cryptocurrency : regulation needs to be accelerated

The cryptocurrency regulation is often defensive and risks chasing after what happens in the sector: the differences between continents, the US Congress report because the European MiCa regulation in 2025 could already be outdated.

2021 brought many innovations in the blockchain and cryptocurrency sector, with an increasing interest in particular applications such as Non Fungible Tokens, Decentralized Finance (DeFi) tools , and in particular, DAO – Decentralized Autonomous Organizations , and new phenomena that plan have taken hold by replacing the previous mechanisms, such as the IDO – Initial Decentralized Offering.

Changes supported by greater awareness of the tools that a decentralized and distributed system can offer, even if, in truth, we cannot always speak of true decentralization, as there are often subjects who manage real “marketplaces”, such as Uniswap or OpenSea.

However, these phenomena do not seem to have yet found full regulation by the legislators of the various countries, which evidently, also due to their novelty and particularity, tend to act very cautiously, so as not to have an excessive impact on the innovation they bring.

Blockchain and cryptocurrencies: the US Congress report

To understand the regulatory situation in the world, it is certainly useful to consult the report ” Regulation of Cryptocurrency Around the World “, updated in December 2021 by the Research Directorate of the Law Library of the US Congress.

The report is based on a double track: a) verifying the legal status of cryptocurrencies in the various countries and b) verifying whether there is an existing legal framework that governs them from a fiscal point of view and the discipline against money laundering.

The first aspect is aimed at examining whether the use of cryptocurrencies is allowed or prohibited, implicitly or explicitly through a standard, in the various countries of the world. What emerges from the report is that less than a dozen countries have issued explicit bans on the use of cryptocurrencies, located above all in the Middle East and with the important presence of China, whose Central Bank issued a circular on 15 September 2021. sense.

Numerous other countries, located mainly in Africa and the Middle East (such as Saudi Arabia, Turkey, Kazakhstan) and in parts of Asia (Vietnam, Indonesia) are classified as countries that have imposed “implicit” bans, that is, they have adopted a restrictive measure against banks or other financial institutions to deal in cryptocurrencies or to offer services to individuals and businesses relating to cryptocurrencies, or have prohibited the operation of providers of virtual currency exchange services (the so-called exchanges).

The adoption of these measures, especially by the most important countries, has had repercussions on the cryptocurrency market from time to time. On the other hand, it has already been highlighted for some time that measures of this kind in reality, in a decentralized system, are of little effectiveness, especially with regard to private individuals who want to trade and hold cryptocurrencies, as they can always rely on the distributed ledger for keep track of transactions and the amount held.

The second point of attention of the report relates to the existence, obviously in countries where there is no explicit or implicit prohibition, of regulations or in any case provisions that govern in some way the taxation of cryptocurrencies and impose on banking and financial operators the compliance with AML / CFT rules, that is the legislation against money laundering also for the purpose of countering terrorism.

The analysis shows that the overwhelming majority of countries in which cryptocurrencies are not prohibited have adopted a regulation on both these aspects, with all European countries aligned in this sense (with the exception of Bulgaria alone, where only Bulgaria has regulated the obligation to apply the anti-money laundering regulations).

Some countries, such as Turkey, despite having implicitly banned the use of cryptocurrencies, have nevertheless issued provisions for their fiscal and AML regulation, while in others, where the ban exists, only recognition obligations have been introduced (and any reporting) to combat money laundering.

A particular case is that of Brazil, in which an “Instrução Normativa” was issued by the Ministry of the Economy for taxation purposes, but the bill presented in June 2021 with which it is intended to include cryptocurrencies in the ‘ bed of the discipline for the fight against money laundering.

Blockchain and cryptocurrencies: how they are regulated in different continents

The report about cryptocurrency regulation does not actually exhaust the regulatory aspects relating to cryptocurrencies and the blockchain. As is well known, the offer of cryptocurrencies to the public has, in recent years, been the subject of numerous interventions by the market control authorities , both in Europe and overseas.

In particular, attention was focused on the traceability of these offers to the regulations relating to the offer of financial instruments (or financial products), with the consequent extension of the regulations in force.

UNITED STATES OF AMERICA

On this point, it is now established that the US SEC – Securities and Exchange Commission tends to include in the concept of “security”, and therefore of financial instrument, any type of cryptocurrency: utility, payment or real security.

The basic consideration, perhaps a little excessive, is the tokens still represent a form of investment for the mere fact of being intended for circulation on a secondary market, and as such, they must fall within the Security Act.

In truth, even in the United States, there is an interpretative contrast between the supervisory authorities: in the face of the clear position of the SEC, however, the CFTC – Commodity Futures Trading Commission considers Bitcoin as a commodity, while the Treasury frames cryptocurrencies within the currency category.

During 2021, precisely because of this lack of transparency, there were two important proceedings initiated by the SEC , against Ripple Lans Inc. and Coinbase Global Inc. which, however, have not yet brought greater clarity on the regulatory plan.

EUROPE

The European situation, albeit more jagged, can perhaps be considered clearer, and less rigorous, than that of the United States. With various attempts to clarify, the supervisory authorities have outlined a regime that essentially requires the application of the rules already valid in Europe for financial instruments (MiFID II and other directives implemented in the various Member States) in the event that the tokens issued are attributable to one of the types of instruments envisaged in the specific attachment of MiFID II, while in the other cases (utility and payment token) the issue and offer to the public would, in any case, be permitted, in compliance with the rules applicable to the type.

Such linearity, however, is questioned by the very characteristics of the tokens, which in some cases are configured as hybrid instruments, being able to recognize rights in part similar to those ensured by financial instruments.

For these hypotheses, many European countries (including Italy) have launched the so-called regulatory sandboxes, aimed at allowing the temporary benefit of some exceptions to the applicable provisions for subjects who want to undertake activities (also) in the cryptocurrency sector, thus also avoiding legal uncertainty and the risks of undergoing prohibition measures activities.

In Europe, some countries (such as Malta, Switzerland, Gibraltar, San Marino) stand out for having tried to enact legislation particularly favorable to activities based on crypto-assets, with the clear aim of attracting entrepreneurs and operators of the sector.

Furthermore, the European Union, in September 2020, presented the cd. Digital Finance Package, which includes the MiCa Regulation , is a regulation text for the so-called crypto-assets, which provides a proposal for the regulation of CBDC – Central Bank Digital Currencies, i.e. cryptocurrencies issued directly by Central Banks, stable-coins (cryptocurrencies guaranteed by funds), and utility tokens.

Some criticisms have been leveled at the proposal, in particular referring to the equalization of utility tokens to other types with reference to the sanctions provided for in the regulation itself, but, as we will mention later, probably given the pace of development of the technology, the regulatory proposal will have to undergo some profound changes before being definitively approved.

ASIA

Some Asian countries deserve special consideration. Despite China’s ban on the use of cryptocurrencies, or perhaps precisely because of it, there are numerous entities in Asia that carry out activities related to cryptocurrencies.

Singapore, in particular, has taken a prominent role in the region, both due to low levels of capital gains taxation and because all cryptocurrency exchanges are regulated by the Payment Service Act (PSA).

This implies that in order to carry out activities involving cryptocurrencies, the granting of a real license is not required, but a more streamlined and simplified procedure can be used that operates, to make a comparison with our procedures, with a silent consent mechanism.

Blockchain and cryptocurrency regulation: emerging phenomena and legal problems

From the examination conducted above, a common trend clearly emerges on the part of legislators: that of moving along already known paths, which seek to impose obligations and controls on specific subjects in order to regulate their activity to protect the investor and consumer market.

But from the latest phenomena in the blockchain world, it emerges that initiatives are increasingly becoming part of completely different contexts from those that have so far been faced by the regulatory authorities.

Think of Non-Fungible Token (NFT) : in 2020 there were already some initiatives, but it was in 2021 that they found their diffusion. Being technology, NFTs also have a transversal vocation: they can be used in the world of art, video games, music, sport, fashion and many other sectors. As of the date of this writing, it is not yet completely clear what their discipline is and no legislator or authority has yet ruled on their nature and discipline or on that of the platforms that allow them to be exchanged.

Another novelty of great impact is that of the cd. DeFi, the Decentralized Finance. The platforms now allow anyone to initiate “Initial Dex Offerings”, i.e. offers to the public of tokens that are not managed by a subject that carries out virtual currency exchange activities (obliged by most countries, as mentioned above, to apply the AML rules), but are regulated through a series of specific smart contracts that totally decentralize the exchange of cryptocurrencies.

Think again of the cd. stacking, farming, “flash loans” and all those forms in which, again through automation guaranteed by smart contracts, periodic earnings are guaranteed against the deposit of cryptocurrencies. These are new phenomena that go beyond the financial sector into the real banking sector, in which savings are collected from the public for the purpose of disbursing credit to applicants while guaranteeing the collection of periodic interest in favor of ” lenders “(or rather,” depositors “).

In hindsight, these are activities that it is difficult for the legislator to be able to regulate because most of the time what is missing is precisely the subject, well-identified, recipient of the rule and of the related fulfillment that it imposes.

Surely, in 2022 there will be attempts by regulators to introduce clarification rules (as is already happening in Italy with regard to some legislative proposals for the fiscal discipline of investments in cryptocurrencies), but, in the opinion of the writer, the risk is that the timeframe of the law is excessively long compared to what happens in the sector.

A reasonable legislative policy in this area should, in fact, only lay down basic principles, in order to clarify what is considered permitted, and by virtue of which rules, and what is not, then leaving it to the second level regulation the discipline of concrete cases, with a view that is not “punitive”, but proactive and aimed at encouraging the creation of innovation in Italy and in Europe.

For these reasons, in all likelihood, the MiCA Regulation, which will come into force in 2025, will be largely outdated on that date and will not be able, if not in the face of profound changes, to place itself in the wake of that “technological revolution” that is repeatedly also invoked at the level of the European institutions

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