In recent years, the regulatory environment surrounding digital currencies and distributed ledger technologies (DLT) has been in a state of constant flux.
In the beginning, digital assets existed on the margins, with bitcoin being something that was advocated by technologists and Libertarians.
However, this changed over time, as cryptocurrencies and blockchain technology drew far greater interest, fueling a hype-driven bull market in 2017 and early 2018.
In 2019, lawmakers, industry representatives and government officials all continued to push for a more mature regulatory environment.
While there were many important developments, this article will highlight the top five.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
1) China Leads The Way
China led the way last year, its president making headlines in October when he emphasized the many applications of blockchain technology and stated that it is “it is necessary to seize the opportunity” presented by this innovative distributed ledger.
The next day, China’s parliament approved a cryptography law (scheduled to become effective Jan. 1, 2020) designed for “regulating the utilization and management of cryptography, facilitating the development of the cryptography business and ensuring the security of cyberspace and information,” according to the Constitution and Law Committee of the National People’s Congress.
However, in November, Chinese city Shenzhen issued a warning or “risk reminder,” which emphasized that certain illegal crypto-related activities have been making a comeback.
The warning stated that “with the promotion” “of blockchain technology, the hype of virtual currency has risen, and some illegal activities have shown signs of resurgence.”
Shortly after, it was reported that government offices in Chinese city Shenzhen had been investigating “virtual currency trading venues,” finding a total of 39 businesses that were “suspected of illegal virtual currency activities.”
The crackdown on the digital currency space was not limited to government action, as Weibo, which has been referred to as “Chinese Twitter,” banned the accounts of major exchange Binance and platform Tron, according to Bloomberg.
These developments took place as China made steps toward issuing a central bank digital currency (CBDC). Some believe that the nation’s government enacted the new cryptography law to lay the foundation so the People’s Bank of China (PBOC) could implement a digital fiat currency.
In December, it was reported that the PBOC was “expected” to test its CBDC in Shenzhen and Suzhou. The plan was to evaluate the digital currency to see how well it performed in real-world use cases like healthcare and transportation.
As a result of all this, it would seem that China made progress toward issuing its CBDC but also cracked down on digital currency activity.
Therefore, it looks like China is looking to benefit from blockchain technology and digital assets, but avoid the associated problems like speculation and illegal activity.
Multiple analysts weighed in on this situation.
“In the same way that China is trying to remain communist in terms of government and become capitalist in terms of its economy, it is certainly trying to have its cake and eat it, too, with respect to crypto/blockchain,” said Tim Enneking, managing director of Digital Capital Management.
Josh Lawler, partner at Zuber Lawler & Del Duca LLP and technologist with an interest in blockchain and DLT, added the following:
“China is historically very concerned with the flow of funds” out of the country “and would look at much of the cryptocurrency trading activity as a hole in their restrictive architecture.”
Going forward, digital currency enthusiasts should watch for “continued deliberate policy decisions that will facilitate use cases while minimizing speculation and currency movement outside of the country,” said Lawler.
2) Libra Struggles With Intense Scrutiny
Facebook announced Libra, its proposed payment system, in June, quickly generating countless headlines. The project, which would allow participants to send each other money using a native digital currency, drew significant scrutiny from regulators.
Lawmakers in the House and Senate questioned David Marcus in June, voicing their concerns about the many potential risks associated with Libra.
In September, the governments of Germany and France voiced their concerns about the Libra project. “We believe that no private entity can claim monetary power, which is inherent to the sovereignty of Nations,” the two governments said in a joint statement.
Further, lawmakers on the House Financial Services Committee questioned Mark Zuckerberg later that month, highlighting Facebook’s various challenges.
The intense scrutiny that Libra has encountered thus far illustrates the power of regulators.
While the digital currency space has repeatedly emphasized decentralization, decentralized systems may have a hard time operating if they are banned by the governments of major economies.
“The Libra case is a perfect example that not all digital currencies are the same, and that the organizations and governance models around a digital currency are just as important as the technologies underpinning them,” said Dan Simerman, head of financial relations for The IOTA Foundation.
“Governments should be concerned about what sorts of actors are joining the space under the pretenses of ‘decentralization’ and ‘financial freedom,’ as Bitcoin is quite different from Libra in its makeup,” he noted.
“In order for digital currencies to become truly widespread, organizations need to work with the governments of the world rather than try to circumvent them,” said Simerman.
3) The SEC Keeps Shooting Down Bitcoin ETFs
The U.S. Securities and Exchange Commission (SEC) continued to reject proposals that would allow bitcoin exchange-traded funds (ETFs).
In October, the government agency declined a proposal floated by financial services firm Bitwise Asset Management, emphasizing that it failed to meet the requirements surrounding market manipulation and illegal activities.
This was just the latest move by a government agency with a long history of rejecting proposals that would allow for bitcoin ETFs.
The first time the SEC shot down one of these proposed funds was 2017, a move that generated widespread media attention.
The government agency is unlikely to approve one of these funds soon, analysts predicted, noting that the SEC would require the exchanges involved to have surveillance sharing agreements.
“A Bitcoin ETF is unlikely to be approved in the near future unless stakeholders can prove that price discovery is organic and authentic, and that would require increased SEC involvement with the top crypto exchanges involved in Bitcoin’s price formation,” said Joe DiPasquale, CEO of cryptocurrency hedge fund manager BitBull Capital.
“The earliest” time that such a fund would receive approval “would be the end of this year, and even that is unlikely,” stated Enneking.
“Recent developments with futures markets (Bakkt, CME, etc.) actually increase the chances of an ETF being approved in the US,” he noted.
“What surprises me is that no other OECD country has approved an ETF to compete with any future US ETF and gain first-mover advantage,” said Enneking.
“I expect that to change this year.”
4) The SEC Goes After Token Sale Issuers
The SEC settled in September with Block.One, the creator of EOS, regarding its unregistered token sale that raised more than $4 billion.
The company raised this money by conducting an initial coin offering (ICO) between June 2017 and June 2018, according to the SEC’s order, but did not register this token sale as a securities offering.
Further, Block.One did not attempt to obtain an exemption from federal securities laws.
To address this matter, the company agreed to settle with the regulatory agency by paying a $24 million fine, which is less than 1% of the money raised during the ICO.
The SEC sued Telegram, which previously raised $1.7 billion by selling TON tokens, receiving a temporary restraining order against two foreign entities that conducted the aforementioned ICO.
Telegram fought back, filing a motion requesting that the court dismiss the SEC’s claims.
The government agency also sued Kik Interactive Inc. for its $100 million sale of Kin tokens, claiming that the company held an unregistered securities offering.
At the time, the SEC claimed Kik Interactive held the aforementioned sale in 2017 to raise money and restore its financial situation, after spending years losing money on its sole product, an instant messaging app.
By holding this token sale, the company was able to raise more than $55 million from U.S. investors, but the SEC claimed that the tokens sold had lost significant value.
Kick Interactive opted to fight this in court, filing a response that denied the allegations brought forth by the SEC and requested a dismissal of the government agency’s complaint.
Since the digital currency industry is still relatively new, and constantly changing, these legal developments might be a signal that businesses in the space will have a far easier time working with government agencies than fighting them.
“Given how lenient the SEC has been with crypto companies, working with the regulatory body appears far more productive than fighting it,” said DiPasquale.
“Even Block.one, which raised over $4 billion had a relatively small fine ($24 million – less than 1%),” he stated.
“However, companies fighting back can also push the SEC to accelerate regulatory developments and set clearer guidelines for the future,” emphasized DiPasquale.
5) Global Exchanges Pull Out Of Various Markets
In 2019, several exchanges announced plans to halt trading in markets around the world. In June, it was reported that Binance’s DEX was planning to have its website block users in 29 countries, including the U.S.
Later that month, Binance announced that it was creating Binance.US, designed specifically to offer crypto trading to those in the U.S.
The day of the first announcement, Binance CEO Changpeng Zhao tweeted that “some short term pains may be necessary for long term gains.”
In November, Jeremy Allaire and Sean Neville penned a blog post revealing Circle’s plans to spin out Poloniex so it could operate as an independent company and enhance its user platform.
A separate announcement revealed that as that month, U.S. investors would not be able to trade using the platform. U.S. residents were given until Dec. 15 to withdraw their assets.
Later that month, U.S. exchange Bittrex announced it was leaving 31 markets due to regulatory uncertainty, indicating that it would pull out of these areas on Oct. 29th.
The simple fact that exchanges are making efforts to comply with existing regulations (or ceasing their offerings in the U.S. because of regulatory uncertainty) is a great example of how the regulations surrounding digital currencies and DLTs continue to evolve.
Further, it helps show that these exchanges are willing to work with regulators, according to analysts.
“With the SEC actively taking note of digital assets and services available to US residents, crypto exchanges are beginning to take regulations more seriously,” said DiPasquale.
He added that “while their decision to pull out of various jurisdictions affects users, particularly from developing nations, it is a step that should motivate regulatory bodies around the world to reach consensus on the status of digital assets and guidelines governing their trading, usage, and taxation.”
Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether and EOS.
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