If you are a newcomer looking to firmly plant your feet in the industry of blockchain, then it’s important to know how to properly water your investment. How can you ensure your investment reaches its optimal potential? Much like the effects of environmental factors have on the growth of a plant, multiple political factors, including government-imposed laws and regulations, greatly influence the success of a blockchain business model.
Despite blockchain’s ability to secure data and fend off cyber attacks, many investors are apprehensive about adopting this technology if it falls into the so-called “grey” area of law in a specific country. And because blockchain is being both adopted and banned by different societal and governmental institutions, the world is in limbo.
Today, regulatory bodies are tasked with whether or not laws should be drafted for the use of blockchain. Let’s quickly review how the technology is regulated all over the world. Within that same light, we’ll also evaluate the impact of such regulations on the blockchain industry, and whether they are indeed needed.
Indirect and Direct Regulations
A multitude of countries worldwide, including the United States, Malta, and Belarus, have openly admitted to the need for proper blockchain regulations. Similarly, most countries that allow the use of blockchain and cryptocurrency trading are currently using indirect and/or direct tactics to regulate the industry.
Direct regulations: when laws governing the blockchain-related technology are officially introduced by the government.
Indirect regulations: when blockchain companies have to follow the general regulations imposed on tech companies as well as those specific to blockchain compliance.
However, doing the latter is not always feasible. For instance, with the recently introduced General Data Protection Regulation (GDPR) in the European Union, every citizen has the right to be “completely forgotten online” if / when they wish so, and delete their profile or account. Such an approach is not always easily implemented with blockchain, so the burden to comply with the law falls on blockchain companies in this case.
Let’s take a look at some of the countries that took a direct approach to blockchain regulations.
The United States
The United States is rightfully considered the most advanced country in the world in terms of blockchain and cryptocurrency adoption, with many businesses accepting cryptocurrency for their day-to-day operations. This also defines why blockchain and cryptocurrency regulations are so deeply connected here.
The complexity of U.S. laws lies in several governmental levels — federal and local (state) ones. While digital currency is recognized and legalized on a federal level, the laws may differ from state to state.
There are several federal agencies that regulate blockchain-related businesses in the United States. While they sound different, the following three classifications are very similar to each other and, in short, allow several agencies to collaborate on regulatory and enforcement matters:
- The U.S. Internal Revenue Service defines cryptocurrency as assets for taxation purposes
- The Commodities Futures Trading Commission (CFTC) defines cryptocurrency as a commodity
- The Securities and Exchange Commission distinguishes digital currency as a security
Interestingly, while the U.S. government has spoken on the extensive regulations of the cryptocurrency industry, it’s been fairly quiet on other blockchain-related business models. There are no clear regulations that are currently present in that department. However, SEC did release several statements over the last 12 months regarding the activities of fundraising through an ICO or token sale, deeming them as securities.
Federal Trade Commission (FTC) went further and created a Blockchain Working Group, which primary goal is to crack down illegal and fraudulent schemes arising in the marketplace from time to time. Additionally, the Group also focuses on three more goals:
- building FTC staff expertise in cryptocurrency and blockchain technology
- assisting internal and external communication on enforcement actions
- providing a forum for discussing potential influences on FTC’s objectives and how to respond to them
The group has been staying pretty active, and has brought several notable lawsuits over the years. In 2018, FTC had U.S. Federal Court to shut down a group of individuals involved in deceptive practices. In 2016, they also brought up a case against Butterfly Labs, for deceiving customers about profitability and age of the mining machines. However, FTC does not only enforce but educates as well. For instance, they’re the ones hosting public forums on blockchain, too.
To sum up, the U.S. government takes the same stance with the blockchain industry as it does with anything else: regulations first, business second.
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Governments and regulatory agencies around the world have taken notice, and have begun to pursue high-profile offenders and craft regulations to keep companies from taking advantage of investors.
Belarus was the first country in the world to create an official regulatory framework for the blockchain industry. In 2017, the president signed a decree focused on the blockchain and cryptocurrency-related innovations centered within the Hi-Tech Park (HTP), known as Belarusian ‘Silicon Valley.’
The bill is called “Digital Economy Development Ordinance” and has been in effect since March 2018. According to the bill, the HTP has been designated as a special sector in the country, with special tax and legal regime for blockchain and crypto businesses. Companies-residents of the HTP are not restricted in issuing, storing or trading digital tokens. Furthermore, blockchain-centered companies that are members of the HTP get a tax break for the next five years, until 2023.
The further blockchain law imposed by the government in 2018 focused on the prevention of terrorism financing, money laundering, and propagation of weapons of mass destruction by means of any blockchain-related activities.
Malta, also known as the Blockchain Island, believes the potential of blockchain is endless. As part of their initiative to embrace this technology, the country has recently introduced two blockchain-related acts, known as Malta Digital Innovation Authority Act (MDIA ACT) and Innovative Technology Arrangement and Services Act (ITAS Act). MDIA Act focuses on certifying blockchain and establishing standards for the industry, while the ITAS Act focuses on setting up digital ledgers and regulating the entry of new blockchains.
Gibraltar also was one of the first countries to adopt blockchain regulation. In fact, the initiative to regulate digital ledgers started back in 2014. Gibraltar’s regulation is applied to exchanges, wallet providers, and all other business models working on a distributed ledger technology (DLT).
The country’s DLT firms are regulated by the Gibraltar Financial Services Commission (GFSC). The DLT regulations came into effect on January 1, 2018, and provide nine main principles which each company working in the blockchain industry has to follow.
The Future of Blockchain Laws and Regulations
The history has proven that anything produced to scale requires a set of proper regulations in place, to ensure security and stability. Industry experts predict 2019 to become a historic year for blockchain. Ten years after its introduction, we are seeing more and more governmental and institutional involvement.
Cryptocurrencies are accepted for tax payments, blockchain is implemented for voting, the whole countries run on blockchain (spoiler alert: e-Estonia). The more blockchain will be developed, the more countries worldwide will be accepting a proper regulatory framework for it. It would be curious to see how many governments will join the path to regulating blockchain this year. Stay tuned!