A high level global view of crypto-asset regulation

The landscape generally

On a broad comparative analysis, there is an inconsistent approach to the regulation of crypto-assets. Broadly, the landscape for crypto-asset regulation can be divided into countries that:

• are yet to establish a position
• have essentially de facto criminalised crypto-assets (and exchanges) at a state level
• countries who are looking to crypto-assets as a potential avenue to avoid measures that restrict orthodox fiat currency movements such as financial sanctions, and
• Allow the transacting of crypto-assets but have varying degrees of regulation. For example, in the UK, the FCA has recently written a "Dear CEO" letter to financial institutions setting out what they consider to be “good practice for how banks handle the financial crime risks posed by [crypto-assets]”.

Within this final category, countries have adopted a variety of positions that mean it is challenging to identify a coherent stance towards the regulation of crypto-assets from an anti-money laundering and terrorist financing perspective. That said, a broadly consistent theme emerges in that that countries are considering the regulation of exchanges through which crypto-assets are transacted. Australia and South Korea particularly are at the fore-front of this initiative and have implemented regulations. The 5th EU Money Laundering Directive (passed into law on 19 April 2018) includes a provision for the regulation of exchanges. We therefore expect this approach to become well established among EEA countries in the coming year.

Types of jurisdictions

Given that crypto-assets are here to stay, it will be categories three and four above that will (for better or worse) drive innovation in this area.

In those countries considering regulation of crypto-assets, there is an important distinction to be made between the jurisdictions that are vying for the title, and role, of “innovative” jurisdictions.

There are presently two broad models for regulatory “innovative” jurisdictions to follow:

• Jurisdictions that we would term “marketing focused” or “hype based”. These jurisdictions have been effective in making a name for themselves in the market by actively publicising their purported acceptance of crypto-assets, but they are yet to take any particular steps to regularise their regulation or engage proactively with the community beyond press releases. We have seen a trend for financial institutions to adopt a cautious stance to these jurisdictions as a centre for their activities because they are seen as having a more relaxed approach to crypto regulation which, in turn, creates reputational risk. If anything, this relaxed approach could back-fire when other jurisdictions become true leaders in regulating these assets, providing the regulatory certainty needed for safe investment activity.

• Alternatively, there is the approach taken by Malta, Gibraltar and Japan, which have developed bespoke crypto-asset regulations. These regulations, instead of shoehorning crypto-assets into a class under pre-existing regulations seek to regulate the framework within which innovation can grow. Accordingly, these regulations inform how exchanges, brokerages and traders operate, and not the assets themselves.

In our opinion it is the latter type of jurisdiction, not the former, that will end up better placed to take advantage of this new asset class. We anticipate that it is this model which ultimately will provide the template for national regulation in the future.