Crypto-assets Regulation Around the World (part 2 of 3)

At Grant Thornton Cyprus we are constantly monitoring developments in the blockchain and crypto space. Our multidisciplinary team covers all aspects of digital asset professional services and is ready to accommodate customized solutions based on your needs. In our effort to educate our partners, our network of associates, and the public at large, we are launching a series of articles covering the most important updates from the DLT world. 

Global crypto acceptance increased by 15.7%, with more than 106 million crypto users in January 2021. As crypto-assets gain more popularity, regulators claim that it is vital to protect consumers and investors, preserve market integrity, and diminish criminal activity such as money laundering and terrorist financing related to crypto-assets in illegal markets. In this article, we will continue to explore the world’s crypto assets regulations and look at how they are being dealt with in the USA.   

Most developed countries are under the supervision of the Financial Action Task Force (FATF), with more than 200 countries and jurisdictions committed to implementing them. The FATF has developed International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (FATF Recommendations), with the aim to generate the necessary political will so that these are implemented into national legislation. The FATF Recommendations are the basic international document and the basis for creating effective Anti-Money Laundering (AML)/Combating the Financing of Terrorism (CFT)/ Countering Proliferation Financing (CPF) systems. The FATF and G20 countries’ crypto-asset regulation is crucial in analyzing various crypto-regulations around the world.  

The FATF first published the Draft Updated Guidelines for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers in June 2019. Then the FATF completed the process of making changes to its own standards, focusing on AML / CFT in the field of using virtual assets. In July 2020, the FATF promised to update the manual. 

In a revised document on March 19, 2021, the FATF updated guidance in six main areas: 

1. Definitions of virtual assets and their providers (VA and VASP respectively) to prevent situations where the asset is not covered by the standards.
2. Guidelines on how to apply the FATF standards to stable coins.
3. Additional instructions on the potential transaction risks and risk mitigants of peer-to-peer (P2P) transactions.
4. Updated guidelines for the regulation and licensing of virtual asset providers (VASPs).
5. Creation of a guide for the public and private sectors on the implementation of the "Travel Rule".
6. Formulation of principles for the exchange of information and cooperation of supervisory authorities in the field of virtual assets.

The FATF says it wants to maintain a level playing field for VASPs based on the financial services they provide, in line with existing standards applicable to financial institutions and other entities subject to AML / CFT, and to minimize the possibility of regulatory arbitration between sectors and countries. The FATF states that it is in consultation with private sector stakeholders before finalizing amendments to the Guidelines. In addition to this process, the FATF is also considering the implementation of the revised FATF Standards for VA and VASP, and whether further updates are needed through a second 12-month review. 

According to the recent Financial Action Task Force (FATF) update from the 23rd of March regarding virtual assets guidance, Decentralized Exchanges (DEXs) and other decentralized finance (DeFi) platforms will not be excluded from regulation.  

Five important updates

1. FATF declared DEXs, non-fungible tokens (NFTs), DeFi platforms used in crypto escrow and decentralized application (dApp) owners and operators will be regarded as Virtual Assets (VAs) or Virtual Asset Service Providers (VASPs) and as consequence should fall under AML/CFT requisites. 
2. Even if P2P transactions are not fully regulated by FATF’s AML/ CTF requisites, P2P transactions and non-custodial wallets still omit risks, because they are being used as an alternative to VASPs to sidestep AML/CTF regulations posed on VASPs. So, governments must introduce a range of actions, such as guidance for risk-based due diligence (assessment/examination of financial records before entering the transaction) or reassess P2P processes’ future harm on AML/CTF rules. During VASPs transactions, “Travel Rule” enforcement will be requested by originating VASPs in order to assess the beneficiaries’ credibility or business procedure based on the VASP's individual risk analysis. Like in case of P2P transactions, VASPs should run due diligence or financial analysis test of their VASPs co-operator before submitting the transaction. 
3. FATF refreshed proposals regarding VASPs licensing and registration, which implies that VASPs will have be licensed and registered under specific jurisdiction – the country of production. VASPs services and products are expected to be recorded under country of origin’s laws. Jurisdiction of VASPs will enable the government authorities to identify individuals involved in VA activities and trace down operations held without proper licensing and registration. 
4. Stable coins and the FATF Standards: FATF guideline suggest treating stable coins as virtual assets and to refer them under FATF Standards. The FATF Standards do not cover government-issued Central Bank Digital Currencies (CBDCs), as they are not declared as VAs yet.
5. VASP Supervisors' Knowledge Exchange and Cooperation Principles. Each country must appoint a VASP supervising authority, the authority must be aware of all VASP activities: in which country VASP was registered, how many jurisdictions it holds, how many shares each of these jurisdictions has. FATF will be focused on detecting risky P2P transactions, which might involve non-custodial wallets, on easing regulations on VASPs and countries. FATF suggests that VASPs address how to mitigate ML/TF risks. Countries are advised to diminish risky P2P wallets use and to protect VASPs according to AML and CTF rules. With the help of blockchain analytics tool.

USA

US’ crypto regulation varies at the federal and state levels. Each state has its own rules when it comes to cryptocurrency and companies not only need to abide by the rules of the state, they belong to but must also comply with the regulations at a federal level. This requires having common national law. Until 31st December of 2020, there was no specific federal law on crypto regulation. Starting from 2021, US Congress decided to reconsider all the previous regulation rules and chose to alter them by assigning a federal agency as the primary federal regulator. As it is known, state regulatory bodies like Money Transmitter Regulations (MTR), Corporate Statutes, Consumer Protection Regulations (CFPL), Securities Fraud State Regulations (“Blue Sky” Laws) were responsible for the regulation at the state level. Today, the Securities and Exchange Commission (SEC), Commodities Exchange Act (CFTC), Bank Secrecy Act (FinCEN), Internal Revenue Code (IRS) act at the federal level. The U.S. Internal Revenue Service (IRS) started to treat virtual currencies as property, which is subject to capital gains tax. Further, these taxes can be leveled up to become collectible, if this proposal is accepted, tax obligations will be raised. Also, Treasury's Financial Crimes Enforcement Network (FinCEN) monitors Bitcoin's transfers for AML. The U.S. Internal Revenue Service (IRS) started to treat virtual currencies as property, which is subject to capital gains tax. Further, these taxes can be leveled up to consider virtual assets as collectible items and if this proposal is accepted, tax obligations will be raised.

On the 12^th of February, the Mayor of Miami suggested to pay municipal workers and collect taxes in cryptocurrency. More recently, cryptocurrency exchange named FTX will buy Miami’s NBA arena in bitcoins, worth of two million dollars annually. The FTX agreement will be a huge win in cryptocurrency exchange history. It is obvious that Miami is claiming to become one the most favorable bitcoin cities.

On the 8th of March 2021, U.S. Members of Congress introduced new legislation concerning the cryptocurrency regulation called “Eliminate Barriers to Innovation Act of 2021”. According to it, the Commodity Futures Trading Commission (CFTC) will be assigned to regard bitcoin as a financial commodity and regulate its usage in commodities trading firms, while Securities and Exchange Commission (SEC) will have jurisdiction over a particular token or cryptocurrency as securities offerings to establish an organized, comprehensive regulatory framework for digital assets in the U.S. Under the terms of the bill, Congress will create a working group within 90 days of the bill’s passage composed of SEC and CFTC representatives. Within a year, this group will be required to file a report analyzing current regulations and their impact on primary and secondary markets. The group will also monitor if there are any market manipulation and distortion and will secure transparent cybersecurity. The reason why this action was taken is that there is no federal oversight of bitcoin's spot markets. Companies at the state level allow one to buy and sell bitcoin and then exchange it back into a fiat currency which is mostly unregulated and is not subject to any type of IRS tax reports. Their primary regulator is the state they integrate with, which abide by their own money-transmitter regulations. Indeed, there is a need to clarify its tax status at the federal level and seek ways banks can coordinate and cooperate with crypto assets. The most efficient way of doing it will be to bring combined state-by-state agreements, which will also prevent the risks of scrutiny, that exchanges may undertake since they are entering the market more extensively. Therefore, national action needs to be taken around regulatory standards for exchanges and brokerages.

On March 18^th, 2021 Wyoming – US's most blockchain and bitcoin-friendly senate passed law on DAOs (Decentralized Autonomous Organizations), which implies that DAOs will be incorporated at state and federal status. From now on, DAO-based companies and businesses will be legally authorized to work within the state. Wyoming, which earlier set up crypto-focused banks, now is seeking out for ways it can enable creation of APIs, which will save thousands of dollars, as more DAOs will be able to register their organizations online, without government meddling.

The California Senate has introduced a bill that will permanently use blockchain technology for corporate records. California corporations are currently allowed to use blockchain technology to record information regarding the issuance and transfer of shares until January 1, 2022. The bill introduced on February 19 and submitted for consideration on April 7, will make these provisions permanent. The state Senate voted in favor of the law by 32 votes to 4 on the first reading on February 22. The bill will also amend the definition of blockchain technology to mean a decentralized system that stores "mathematically verifiable" data and uses distributed ledgers to “store specialized data in the permanent order of transactions recorded.” The above-mentioned definition is simpler and defines blockchain technology as “mathematically secured, chronological and decentralized consensus ledger or database.”  

If you have questions on the topic of the article, you can contact us for more information. Our team is ready to assist and help you understand the specifics of legal and regulatory requirements, depending on your jurisdiction of interest. Stay tuned for our next article explaining major terminology within the crypto ecosystem.  

References

• https://www.fatf-gafi.org/about/
• https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets.html
• https://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-consultation-guidance-vasp.html
• https://www.elliptic.co/blog/fatf-updates-virtual-asset-guidance-public-consultation
• https://www.sec.gov/
• https://www.fincen.gov/news/news-releases/fincen-statement-enforcement-bank-secrecy-act
• https://cftc.gov/LawRegulation/CommodityExchangeAct/index.htm
• https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies
• https://focusinvesting.biz/miami-becomes-the-first-bitcoin-municipal-in-the-united-states/
• https://www.cnbc.com/2021/03/26/crypto-industry-to-get-first-major-us-stadium-with-miami-dade-county-approving-ftx-for-heat-home.html
• https://www.congress.gov/bill/117th-congress/house-bill/1602/text?q=%7B%22search%22%3A%5B%22mchenry+AND+%5C%22digital+asset%5C%22%22%5D%7D&r=2&s=1
• https://www.wyoleg.gov/Legislation/2021/SF0038#-408
• https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB638
•