Malta’s financial watchdog has received letters of intent from 21 crypto exchanges to be licensed under the Virtual Financial Assets Act.
The Malta Financial Services Authority (MFSA) has received queries from 21 cryptocurrency exchanges seeking licensure under the Virtual Financial Assets (VFA) Act.
21 firms out of 34 potential VFA providers are crypto exchanges
According to an official announcement on Nov. 1, the 21 exchanges are among the 34 prospective VFA service providers that sent their letters of intent to the Maltese financial regulator in order to acquire a VFA Services Licence.
The MFSA clarified that, until Oct. 31, crypto providers have been operating under the transitory provisions specified in Article 62 of the VFA Act. In order to continue their operations in or from Malta, those firms will be now required to apply for authorization with the MFSA.
VFA license applicants to fall under one of four categories
According to a report by Finance Magnates, applicants will be classified at the discretion of the MFSA into one of four categories that define the requirements of license holders. The regulator is also planning to enforce administrative penalties for compliance violations, the report states.
In the official announcement, the MFSA said that it will soon be contacting the applicants to schedule a preliminary meeting. Once the meeting is held, applicants will have 60 days to submit a full application back to the authority.
18 VFA agents registered so far
According to the announcement, the MFSA has received 30 applications for registration of VFA Agents, with 18 of them having been registered. The list of the registered agents is available on the MFSA website.
The VFA Act is part of Malta’s blockchain-related legislation adopted in July 2018 alongside the Malta Digital Innovation Authority Act and the Innovative Technological Arrangement and Services Act. In September, the MFSA published its strategic plan claiming that it will actively monitor and manage business-related risks related to cryptocurrency firms.
Yesterday, the regulator warned of a new Bitcoin (BTC) scam scheme dubbed “Bitcoin Future,” noting that it shares the same features as a previously identified fraudulent entity called “Bitcoin Revolution.”
Cointelegraph brings you live coverage of Mark Zuckerberg testifying before the United States House Financial Services Committee on Facebook’s Libra.
Disclaimer: This article will be updating live for the duration of the Oct. 23 hearing. Please check in for the latest from the hearing.
In a much-anticipated meeting of politics and tech, Facebook CEO Mark Zuckerberg has finally made his way to United States regulators. He will be testifying before the House Financial Services Committee on Facebook’s Libra. The planned stablecoin has been the subject of much controversy since it’s June whitepaper. Days after, Chairwoman of the committee Maxine Waters called for a moratorium on Libra’s development.
According to Zuckerberg’s prepared remarks released yesterday, he plans to assure the committee that Facebook will not launch Libra anywhere in the world without having satisfied U.S. regulators. Expect the representatives of the committee to be skeptical of this claim.
10:07 The Hearing begins
Chairwoman Maxine Waters began the hearing by calling the committee to order. Rep. Waters’ skepticism of Facebook’s intentions are well-documented.
In her opening remarks, Representative Waters suggested that the best course of action would be “if Facebook concentrates on addressing existing deficiencies and issues before proceeding with Libra.” The Chairwoman named staff discrimination, anti-trust concerns, consumer trust, and the 2016 elections as preeminent among these.
Ranking Member Patrick McHenry began his comments by declaring that “Today is a trial on American innovation.” In a comment on modern dependence on technology, he noted that most of the members of congress were checking their phones “right now.” To Zuckerberg: “Fair or not fair, you’re here to answer for the digital age.”
After beginning his remarks with an appeal to the vast global unbanked, Zuckerberg said that “The financial industry is stagnant. There is no digital financial architecture to support the innovation that we need.” He went on to say “I don’t know if Libra is going to work, but I believe in trying new things.”
10:25 Questioning begins
In her questions to Zuckerberg, Chairwoman Waters referred to an earlier ban on cryptocurrencies on Facebook, accusing the company of changing its tune only when it realized how much it could dominate the market.
Rep. McHenry’s line of questioning began by asking about China, especially concerned with the rise in China’s technology companies. Zuckerberg: “Today, 6 out of 10 of the top tech companies are coming out of China and certainly don’t share our values.” This seems to play into a longer-term argument that Libra is the U.S.’s best chance against China’s crypto development. McHenry pushed the question, however: “Why not just do a Facebook version of Alipay?”
Switching back to domestic regulator concerns, Rep. Mahoney asked Zuckerberg what he meant by approval from all U.S. regulators, given the number of agencies and entities in play. “We’re committed to getting all of the appropriate approvals,” Zuckerberg answered.
Rep. Mahoney further asked Zuckerberg to commit to keeping Libra from all wallets that maintain lower standards of know-your-customer (KYC) and anti-money laundering (AML) controls than those that Facebook is promising for its Calibra wallets. Facebook’s CEO said “I can’t sit hear and speak for the whole of the Libra Association, but you have my commitment from Facebook.”
Referring to the recent departure of several major companies from the Libra Association, Rep. Wagner pushed Zuckerberg to admit that Libra is “a risky project.” She questioned the prospect of Facebook’s end-to-end encryption while citing recent figures saying that 16.8 of 18.4 million reported instances of child sexual abuse online came via Facebook. Zuckerberg agreed that this is a problem but attributed those numbers to the company’s reporting structure: “We actually do a better job than everyone else of acting on it and finding it.”
Rep. Velazquez saw Facebook’s acquisition of Whatsapp a problematic template, saying that it began with similar promises of maintaining separation that led, 18 months later, to the companies being linked. “Have you learned that you should not lie?” Velazquez asked.
Calling back upon Libra’s appeal to the unbanked, Rep. Lucas suggested that many of those without traditional bank accounts don’t trust banks, nor “congresspeople, nor captains of industry for that matter.” Zuckerberg responded that the real test would be how Libra behaved once allowed into the free market.
Rep. Meeks also went after Libra’s claims to work with the unbanked by asking whether Facebook had invested in minority depository institutions or similar efforts to provide financial services to the unbanked in the U.S. Zuckerberg responded that he did not know. “I would guess that there are almost zero dollars there,” said Meeks.
11:00 Further questioning
In introducing himself to Mark Zuckerberg, Rep. Brad Sherman said he was “anti-cryptocurrency back when you were anti-cryptocurrency.” He attributed Turkey’s stop to the power of the U.S. Dollar and maintained that crypto as a whole threatened that power.
Referring to Zuckerberg’s claim that Libra will meet all regulatory concerns, Sherman said “You will deploy a horde of lobbyists to stop us from writing a new statute.” Sherman’s five minutes of questions contained not a single question.
Rep. Huizenga asked what would happen were U.S. regulators to oppose the launch of Libra and Facebook fulfilled its commitment not to launch while the Libra Association remained intent on launching. Zuckerberg answered: “Then I believe that we would be forced to leave the association.”
Rep. Scott accused Facebook of participating in redlining by enabling discriminatory targetting practices. Rep. Stivers followed up on the same question, asking if he could target Facebook advertising using age, sex and race today. Zuckerberg checked with his staff before answering no.
After carefully clarifying the relationship between Libra, the Libra Association and the 21 existing members of the association, Rep. Green asked how many of these companies are run by women, minorities or members of the LGBTQ community. Zuckerberg answered that he did not know the answer to any of these questions. Rep. Green was unconvinced and said that “the public needs to know whether this is an organization that is truly diverse or whether this is an organization run by a small group of persons, all of whom have similar characteristics.”
Zuckerberg and Rep. Barr discussed the potential threat of China’s digital renminbi and its involvement in the Belt and Road project. Barr went on to ask about censorship, asking Zuckerberg to commit to not censoring ads related to President Trump.
12:14 Recess and return
Rep. Perlmutter began the second half of the hearing by trying to focus on the new Libra and Calibra projects rather than Facebook’s history.
“Are you a capitalist or a socialist?” asked Rep. Williams. Zuckerberg, chuckling, answered capitalist, to which Williams said “I appreciate that.” The question followed Williams praising Zuckerberg’s entrepreneurial spirit and the founding of Facebook. In specifying rivals to the U.S. leading the way, China again took center stage.
Freedom of expression was at the top of Rep. Himes’ list of concerns. He applauded Zuckerberg’s speech on the subject at Georgetown University, but mentioned negatives like Facebook’s use in targetting Rohingyas in Myanmar and asked for a commitment to investing in the positive, especially education.
Rep. Hill asked, “Wouldn’t it be easier if there was simply a digital dollar?” Zuckerberg responded that using a digital dollar would be good for coping with U.S. regulation but would interfere with global usage.
The self-professed only blockchain programmer in Congress, Rep. Foster was focused on Calibra’s potential for anonymous trading. “As your code currently exists, would it be possible to transact anonymously with it?” Foster asked, which Zuckerberg did not answer directly. Foster was also concerned with the ability to reverse transactions, which has been a subject of tremendous debate in bringing crypto usage as a whole into the mainstream. Zuckerberg’s response was “I’m not saying we haven’t thought about it, I’m saying we haven’t nailed it down yet.”
Rep. Loudermilk extended Zuckerberg consolation: “Even some of your harshest critics today, I will venture to say, will post their comments and maybe parts of their testimony on Facebook.”
As with Rep. Green, Zuckerberg was unable to answer a series of questions from Rep. Beatty on diversity in Facebook’s hiring. She also reiterated concerns about redlining. Referring to COO Sheryl Sandberg, currently chairing Facebook’s civil rights task force, Beatty dismissed the initiative. “I don’t think there’s anything about civil rights in her background,” she said.
Rep. Davidson, who spoke with Cointelegraph ahead of today’s hearing, asked about Zuckerberg’s views on broader implications for blockchain technology in the world. He further asked, “Do you believe Libra has the role of being centralized or do you think the money itself could be decentralized?”
“One of the things that you’re probably sensing from us is that the dollar is very important to us as a tool,” explained Rep. Vargas. “When something threatens the dollar, we get very nervous.”
Bitcoin brought about solutions to persistent problems that stood in the way of previous attempts to invent digital money, such as the risk of double spending. Some of its features, however, like the characteristic irreversibility of blockchain transactions, have created certain challenges for the traditional legal and financial systems. At times they may seem incompatible with cryptocurrencies, but that’s not always the case.
Matthias Lehmann, director of the Institute for International Private and Comparative Law at the University of Bonn, explores some of the challenges decentralized digital currencies pose to the current legal systems and proposes solutions in a recently published article. But Instead of focusing on transfers resulting from fraud, like the media often does, the German professor turns attention to “less reported” but equally possible transactions.
Lehmann highlights two groups of problems – ‘endogenous,’ associated with faulty transfers where the sender commits a mistake or lacks legal capacity to make the transfer, and ‘exogenous’ problems, when a need for correction may arise because of events taking place outside of the blockchain. The latter category includes insolvency proceedings, for example, or succession of crypto assets. The distributed ledger technology (DLT) was designed to prohibit double spending, but it cannot reverse faulty transfers and does not allow for a transfer of title outside the blockchain, the scholar notes.
These are common problems and they are pretty standard in private law, the legal expert remarks. But imposing the ordinary rules of private law is not an option in the case of cryptocurrencies. That’s because of the irreversibility of blockchain transactions, on the one hand, and the difficulties in establishing the governing law, on the other. Instead of advocating the easy way out by rejecting what doesn’t fit into existing presumptions, Professor Lehmann suggests a workaround.
To fulfil its corrective function under such circumstances, private law may resort to implementing the concept of ‘obligation to make a transfer.’ The author further elaborates: “For instance, a person who has received a certain amount of Bitcoin by error could be obliged to send back the same amount. A transfer obligation may also be the remedy of choice to effectuate the rights of an insolvency administrator or the heir of an estate.” Other existing laws can be applied to permissionless networks too, like the law of torts in the case of a coerced transfer and the law of restitution to return crypto assets sent by mistake.
Matthias Lehmann thinks the validity of a blockchain transfer should not be assessed using the ordinary concepts of property law and insists that when a correction is needed, transfer obligations will do the job. Thus an “overly assertive role of the law that would make the DLT inefficient and ultimately unviable” can be avoided. The proposed solution corrects the results of a transaction “only to the extent necessary, using the forms and procedures of the DLT” and “dispenses with the need for identifying one national law governing the blockchain by distributing the applicable rules among the various affected legal systems.”
Daily Fixing Formula Proposed for Bitcoin
Decentralized digital currencies are also criticized by the establishment for their volatility which, according to the apologists of the fiat system, makes them inappropriate for a number of applications that require a stable unit of account. The rapid and sometimes significant change in market prices makes it hard to accurately gauge the value of items priced in cryptocurrency, they claim for instance, despite the existence of products and services that already bridge the gap between young, free crypto markets and traditional markets dominated by centrally managed fiat systems.
One of the characteristics of the crypto space that distinguishes it from the traditional financial world is that bitcoin doesn’t have a fixed exchange rate against other currencies such as those determined by central banks for fiat currencies. However, a reference figure like that is sometimes needed, for example, in court cases involving financial relations or when estimating someone’s tax obligations for holdings in a currency different from the national fiat.
The Russian Association of Cryptoindustry and Blockchain and the Russian Bar Association have recently proposed a solution. The two organizations came up with a formula to set an ‘official,’ so to speak, exchange rate for a particular cryptocurrency. Price data acquired from several digital asset exchanges every 30 seconds will be used to calculate a daily weighted average and the result will be published once every 24 hours. Taking that value as a benchmark, reference exchange rates against the U.S. dollar and the Russian ruble can also be determined and used in accounting.
Do you think traditional legal and financial systems can adapt to incorporate cryptocurrencies? Share your thoughts on the subject in the comments section below.
A German law professor has argued that permissionless networks such as Bitcoin pose the greatest challenge when it comes to applying private law to the blockchain.
A German law professor has argued that permissionless networks such as Bitcoin (BTC) pose the greatest challenge when it comes to applying private law to the blockchain.
In an Oct. 18 article entitled “Who Owns Bitcoin? Private (International) Law Facing the Blockchain,” Professor Matthias Lehmann, chair of the Institute for International Private Law and Comparative Law at the University of Bonn, argued against the role of property law concepts for the blockchain in most scenarios.
Blockchain’s irreversibility and a-nationality
Professor Lehmann begins by identifying two categories of legal problems that can arise in implementations of blockchain — both of which are lesser discussed, he suggested, than widely-reported cases such as fraud or coercion.
These are either endogenous problems — i.e. faulty transfers inside the ledger, such as erroneous transactions — or exogenous problems, such as the opening of insolvency proceedings. He argues that blockchain is “incapable of dealing with both”:
“Neither does it provide a mechanism to reverse faulty transfers, nor does it allow for a transfer of title outside the blockchain. DLT was designed to avoid the risk of double-spending, yet it does not solve other problems that are standard in private law.”
Two particular properties of the blockchain make imposing the ordinary rules of private law onto the blockchain particularly tricky, he claims: first, the irreversibility of the ledger and second, the a-nationality of the technology.
Private international law holds that the state legal system with the closest connection applies to a given case, yet given that the blockchain is not connected to any particular state, identifying this connection is complex.
Whereas for permissioned networks with a governing authority and a number of identified nodes, several proposals for how to connect the blockchain to a legal system have been made:
“They do not […] provide an answer for permissionless networks where the coder is unknown, such as Bitcoin. In the latter case, there seems to be no other solution than to renounce the identification of one particular governing law.”
Steering clear of an overly assertive role of the law
Professor Lehmann’s solution is to argue for the application of different national laws in order to correct blockchain records where necessary. He proposes, specifically, the use of a transfer obligation under a given applicable national law in most instances so as to deal with the matter of irreversibility.
Property law concepts should be avoided, he argues, unless a choice of law has been embodied in the code of the ledger. He claims that such an approach steers clear of an overly assertive role of the law and corrects the results of the ledger only to the extent necessary, by using the forms and procedures of the technology itself.
He also claims that it dispenses with the need to identify “one national law governing the blockchain by distributing the applicable rules among the various affected legal systems.’
This March, the former IBM chairman and current chairman of the United States nonprofit The Center for Global Enterprise claimed that no solution had yet been found to make public blockchain networks compatible with European data privacy laws.
Russian regulator Roskomnadzor institutes a block on Cointelegraph’s website in the Russian Federation.
Cointelegraph’s website has become widely inaccessible in Russia as authorities added the domain to a registry of blacklisted sites.
Although Cointelegraph has been publicly on a list of blocked sites since 2017, it was only yesterday, October 16, that the Russian Federal Service for Supervision of Communications, Information Technology and Mass Media, more commonly known as Roskomnadzor, implemented the block on a technical level.
The developer of a popular Russian anti-censorship browser extension, who wishes to remain anonymous for security reasons, confirmed the block to Cointelegraph. “The URL was added to Roskmonadzor’s blacklist file mailed to ISPs yesterday,” the developer told Cointelegraph. “It’s an XML file that’s privately distributed among ISPs so that they can enable blocking.” The relevant section of the file reads as follows:
“Why this website was only added recently — I don’t know,” the developer added.
Johann Bihr, the head of the Eastern Europe & Central Asia Desk at Reporters Without Border, told Cointelegraph: “The blocking of your website is one more sign that Russia’s online censorship system is becoming more powerful.”
Cointelegraph has checked with many Russia-based readers, and most of them are unable to access the site. Some readers have retained access, while still others are seeing periodic outages on Cointelegraph’s site, suggesting that not all ISPs have fully implemented the updated XML file.
For its part, Roskomnadzor and regulators at large have not provided an explanation as to why they recently decided to enforce the block on Cointelegraph, but it follows a general trend of a more assertive internet censorship policy.
Other blocks from Roskomnadzor
In April of last year, Roskomnadzor took issue with encrypted messaging application Telegram, blocking 20 million IP addresses in the Russian Federation in an effort to stamp out use of the app. Those efforts were largely regarded as unsuccessful.
Johann Bihr explained to Cointelegraph:
“Since their largely failed Telegram blocking last year, the Russian authorities have been actively working to enhance their online censorship system. A major turning point was the ‘Sovereign Internet’ law signed by President Putin on 1 May, which is taking Russia much closer to the Chinese model. This law will be implemented gradually from 1 November onwards, and Roskomnadzor has been installing and testing these new tools in the past few months.”
In 2015, Roskomnadzor blocked seven websites involved in crypto, including bitcoin.org.
A 2016 ruling against storage of Russian citizens’ data outside of the country led to a Roskomnadzor block on LinkedIn that continues to this day.
The United States Commodity Futures Trading Commission has charged a Nevada company with violations relating to an $11 million Ponzi-like crypto scam.
The United States Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action against Nevada-based Circle Society.
Defendants guaranteed investors 300% return
On Oct. 16, the CFTC announced that it was charging Circle Society and its owner, David Gilbert Saffron, with “fraudulent solicitation, misappropriation, and registration violations relating to an $11 million binary options scheme.”
According to the charges, the defendants misappropriated at least $11 million worth of Bitcoin (BTC) and U.S. dollars from individuals in the United States to “trade off-exchange binary options on foreign currencies and cryptocurrency pairs, among other things.” CFTC Chairman Heath P. Tarbert said:
“Fraudulent schemes, like that alleged in this case, not only cheat innocent people out of their hard-earned money, but they threaten to undermine the responsible development of these new and innovative markets. America must be a leader in this space, and we will only succeed if these markets have integrity.”
The defendants duped at least fourteen people into joining a pool operated by Circle Society, a fraudulent entity created by Saffron, which guaranteed up to 300% returns. Saffron is alleged to have retained the participants’ funds in his own personal cryptocurrency wallet and used them to pay new participants “in the manner of a Ponzi scheme.”
The CFTC will seek civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, and trading and registration bans, but is aware that there might not be sufficient funds or assets to cover all the losses.
Tarbert says Ethereum is a commodity
Cointelegraph previously reported that CFTC Chairman Tarbert had said that he believes Ether (ETH) is a commodity and that ETH futures trading is becoming a reality. The CFTC previously stated that Bitcoin is a commodity, but Ether, the second-biggest cryptocurrency by market capitalization, had not been mentioned before. Tarbert explained:
“We’ve been very clear on bitcoin: bitcoin is a commodity. We haven’t said anything about ether—until now […] It is my view as chairman of the CFTC that ether is a commodity.”
United States law enforcement agencies analyzed Bitcoin transactions to locate and subsequently shut down a global child pornography site.
United States law enforcement agencies analyzed Bitcoin (BTC) transactions to locate and subsequently shut down a global child pornography site.
Per an Oct. 16 press release, the U.S. Department of Justice announced the shutdown of the largest-to-date child sexual exploitation market called Welcome to Video which was operated by South Korean national, Jong Woo Son. The site offered child pornography videos for sale using Bitcoin.
Crypto brings authorities closer to catching criminals
To trace Bitcoin blockchain transactions and identify users, IRS-Criminal Investigations (IRS-CI), Homeland Security Investigations and other agencies applied software provided by blockchain analysis company Chainalysis. IRS-CI Chief Don Fort commented:
“Through the sophisticated tracing of bitcoin transactions, IRS-CI special agents were able to determine the location of the Darknet server, identify the administrator of the website and ultimately track down the website server’s physical location in South Korea.”
An analysis of the server indicated that each user had received a unique Bitcoin address upon registration on the website, which eventually amounted to over one million Bitcoin addresses and thus not least than one million users. The release further reads:
“The virtual currency accounts identified in the complaint were allegedly used by 24 individuals in five countries to fund the website and promote the exploitation of children. The forfeiture complaint seeks to recover these funds and, ultimately through the restoration process, return the illicit funds to victims of the crime.”
As a result of the investigation, authorities seized nearly eight terabytes of child pornography videos, which makes it one of the largest such confiscations. 337 people were arrested in connection with the ring. 23 of the site’s victims were rescued in the United States, Spain and the United Kingdom.
Better building trust-based relations with crypto businesses
As of July, Chainalysis suggested that the amount of Bitcoin spent on illegal transactions this year could hit a record high of $1 billion, even as the ratio of illegal to legal transactions was shrinking. Oftentimes, marketplaces were involved in the distribution of drugs and/or illegal pornography.
Earlier in October, the European Union Agency for Law Enforcement Cooperation (Europol) released its 2019 Internet Organized Crime Threat Assessment report, in which it stated:
“Law enforcement must continue to build trust-based relationships with cryptocurrency-related businesses, academia, and other relevant private sector entities, to more effectively tackle issues posed by cryptocurrencies during investigations.”
A Canadian judge has dismissed a motion to set aside an asset freeze in a civil forfeiture case involving the purported FUEL token.
A Supreme Court judge in British Columbia (BC), Canada, has denied a motion to set aside an asset freeze, which was requested by the defendants in a multimillion dollar cryptocurrency fraud case.
The defendants had filed to set aside an interim preservation order that was issued by the British Columbia Civil Forfeiture Office in order to prevent case-related assets from being sold or accumulating debt.
Vancouver news daily The Province reported the ruling on Aug. 19. According to the report, the defendants, Lisa Angela Cheng and Kevin Patrick Hobbs, stand accused of committing fraud, tax evasion and money laundering.
Alleged $22.5 million fraud via FUEL tokens
The Forfeiture Office alleges that the defendants’ companies, Vanbex Group Inc. and Etherparty SmartContracts Inc., launched and ran an investment offering with a token called FUEL, but only ever intended to pocket the proceeds for themselves.
Additionally, the Forfeiture Office alleged that the defendants received $22.5 million in crypto fraud, and were attempting to liquidate their assets in response to an investigation by the Royal Canadian Mounted Police.
The BC Civil Forfeiture Office previously seized the defendants’ Coal Harbour luxury townhouse, their two Range Rover SUVs and funds in Bank of Montreal accounts alleged to be the proceeds of the crime.
The townhouse was recently listed for sale at $5.9 million and the SUVs are worth as much as $67,500 each, per the report. BC Supreme Court judge Elliot M. Myer ruled:
“Looking at the matter overall, I do not think the defendants have demonstrated that the seizure is clearly not within the interests of justice.”
U.S. Securities and Exchange Commission wins asset freeze
As previously reported by Cointelegraph, the United States Securities and Exchange Commission recently won an asset freeze requested from a U.S. District Court. The court subsequently ordered a temporary freeze of $8 million, which were raised by the defendants Reginald Middleton and his companies Veritaseum, Inc. and Veritaseum, LLC. The defendants stand accused of violating U.S. federal securities laws and performing manipulative trading via activities involving their Ether (ETH)-backed VERI token.
Global investor sentiment toward the crypto industry seems to have shifted in recent years. Here’s how the regulations surrounding this space look in 2019…
As the global investor community starts to become increasingly aware of what crypto has to offer, it appears as though this burgeoning asset class is becoming more and more accepted. This is probably best highlighted by the fact that after experiencing bearish conditions all through 2018 (with Bitcoin even stooping at one point to around the $3K mark), the digital currency market as a whole was able to swiftly regain its former momentum and make an impressive comeback.
Since 2016, a number of countries have either banned digital currencies altogether (such as China, Pakistan and Egypt) or have placed various legal impositions on the asset class (thereby making it quite difficult for people to facilitate their daily monetary transactions using these currencies).
Other states around the world have an open mind toward crypto and are currently looking to amend the way in which they regulate Bitcoin and its contemporaries in order to nurture the industry while minimizing issues related to tax evasion and money laundering.
This new system will allegedly have its digital foundations laid by the end of 2020 and will be up and running a few years following that. Per a recent statement issued by the G-7, once the aforementioned platform is deployed, it will be managed exclusively by firms operating within the private sector.
Cryptocurrency regulations around the world
Here are the legal frameworks employed by various countries to either foster or curb the use of this ever-evolving asset class. Below is the map outlining the countries that have made an official outline of their stance toward crypto.
Countries that take up the middle ground:
The U.S. is undoubtedly one of the global leaders when it comes to crypto adoption and use. As things stand, investors have the option of purchasing not only Bitcoin but over 45 other digital assets across the country. The U.S. Financial Crimes Enforcement Network, or FinCEN, has classified cryptocurrency exchanges as being “money transmitters” and are therefore bound by certain niche laws. In a similar vein, the IRS too has classified crypto assets as being property with value — and thus are taxable commodities.
The laws surrounding crypto differ from state to state, and even national-level regulators have varied opinions when it comes to how cryptocurrencies should be treated. For example, while the Securities and Exchange Commission (SEC) considers digital assets to be securities, the Commodity Futures Trading Commission (CFTC) classes them as commodities (thereby allowing users to publicly trade cryptocurrency derivatives).
Last year, the U.S. Congress released a Joint Economic Report (JER) to indicate that within the next 12 months or so, the country will move toward a more streamlined regulatory approach to crypto.
Another country that is home to a large number of established crypto startups and business ventures is Canada. The global powerhouse boasts of two different cities that are considered to be Bitcoin hubs (i.e., Vancouver and Toronto) and makes use of its existing Anti-Money Laundering (AML) and counter-terrorist financing laws to govern this relatively young asset class.
The country’s legal system requires firms dealing with digital currencies to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Local banks are not allowed to open or maintain accounts for clients dealing with digital currencies (i.e., if they are not registered with FINTRAC).
Quebec’s financial regulator — the Autorité des Marchés Financiers — governs a number of local ATMs and exchanges in accordance with the Money Services Businesses Act, which requires money transmitters to verify the identity of their customers and maintain records of their client’s activities.
The U.K. is widely considered to be a global leader when it comes to crypto adoption and innovation. And while digital currencies are not banned across the region, they are still not considered to be legal tender. Also worth mentioning is the fact that no value-added tax, or VAT, is applicable on the purchase of various cryptocurrencies across the U.K. Rather, a surcharge is applicable on goods or services that are acquired in exchange for Bitcoin or other similar crypto assets.
Any profits or losses incurred by investors in relation to their crypto holdings are subject to capital gains tax.
A self-regulatory trade association named CryptoUK is seeking to improve the U.K.’s existing industry standards (surrounding Bitcoin) by implementing a code of conduct that includes a number of niche provisions related to individual privacy, data security and AML.
The Reserve Bank of Australia seems to have an open mind toward the crypto industry — with the regulatory body stating that it does not prevent people from making use of digital currencies. If that wasn’t enough, back in 2017, the Australian government declared that Bitcoin would be treated like regular money and will no longer be subject to double taxation.
While the regulatory status of crypto is still quite murky in the region, France recently passed a bill that will see a new legal framework established to govern cryptocurrency operations — such as initial coin offerings (ICOs) — across the nation.
The German Federal Financial Supervisory Authority (BaFin) classifies cryptocurrencies as being “units of account” that can be used for payment purposes. However, individuals/firms indulging in token purchases (for commercial purposes) need to obtain authorization from the regulatory body in advance. Lastly, BaFin prescribes a case-by-case assessment for firm’s looking to conduct an ICO — thereby indicating that it has an open mind toward such nascent fundraising methods.
A strong stance to forbid:
Early last year, China issued an umbrella ban on any crypto activities taking place within its borders. Additionally, there is also an access ban that has been placed on all local/international crypto exchange platforms by the government. According to Zhou Xiaochuan, ex-governor of the People’s Bank of China, local financial institutions have been instructed by regulators that digital currencies should not be recognized as tools for retail payments.
The South Asian country seems to have adopted quite a hostile stance toward the crypto industry at large — especially over the last year and a half. For example, India’s central banking authority, the Reserve Bank of India, issued a circular in 2018 advising all private banks to refrain from processing any crypto-related transactions.
Crypto friendly nations
The Swiss government has remained open to the idea of crypto/blockchain from the very start. For example, the local regime provides a lot of financial impetus (such as low tax rates, tax exemptions) to crypto startups looking to set up their operations.
Switzerland’s finance regulator classifies digital currencies as assets that need to be declared on one’s annual returns and are subject to the country’s existing wealth tax scheme.
Per a report released last year, the Swiss “Crypto Valley” (i.e., the canton of Zug) houses a plethora of crypto/blockchain-related businesses that are estimated to be worth $44 billion.
The small island nation does not have any predefined laws that directly tackle Bitcoin and other digital assets. However, a couple of years back, the country’s prime minister, Joseph Muscat, brought into effect an economic strategy that was designed to help lure more investments to Malta from all over the globe.
Additionally, due to Malta’s relaxed tax laws, a number of big name crypto firms (including Binance) have set up shop in the country (primarily to bypass some of the legal hassles that crypto businesses encounter throughout most of Europe’s major nations).
This tiny European country houses one of the biggest cryptocurrency exchange platforms — Bitstamp — within its borders. In terms of how cryptocurrencies are defined, the local government views them as “intangible assets” that are not subject to income tax until they are exchanged for fiat. Additionally, all crypto-related transactions are exempt from VAT within Luxembourg.
The Asian powerhouse is known for its business-friendly, low-tax regulatory framework. In recent times, the Singaporean government has signed a number of laws that are designed to allow crypto businesses to flourish within the region.
Last year, the central bank of Singapore finalized the country’s new regulatory framework for payment services, which now includes cryptocurrency.
Singapore’s digital infrastructure is replete with a number of crypto and fintech firms that can help attract investors.
Per a decree passed by Alexander Lukashenko — the president of the Republic of Belarus — local residents have the right to buy/sell crypto assets as well as create their very own digital currencies. Not only that, the decree also allows crypto enthusiasts to indulge in activities such as:
Trade crypto assets in exchange for Belarusian rubles, foreign currencies or even other forms of electronic money.
In addition to all this, the government has exempt owners from paying any taxes on their crypto holdings till Jan. 1, 2023.
Some countries are ahead of the curve
While some countries are still struggling to devise economic frameworks that are inclusive of digital assets, there are also those nations that already make use of systems that require crypto service providers to be licensed by relevant local regulatory bodies.
In Japan, all cryptocurrency trading platforms need to be registered with the nation’s Financial Services Agency. Nineteen businesses have already obtained the necessary licenses required to commence their operations, whereas at least 110 more firms have expressed interest in registering for the same.
This East Asian country is another example, with the Financial Intelligence Unit (FIU) recently unveiling its plans to regulate local crypto exchanges by bringing them under a unified administrative umbrella. Also, South Korea administers its crypto industry by using a “real-name system,” meaning that any crypto user wanting to withdraw or deposit Korean won must be in possession of a real-name-verified account at the bank providing this service to the exchange. As things stand, only Bithumb, Upbit, Coinone and Korbit are providing the aforementioned services for their users.
The upcoming implementation of the California Consumer Privacy Act of 2018 has grave implications for businesses utilizing blockchain technology…
The California Consumer Privacy Act of 2018 (CCPA), which goes into effect on Jan. 1, 2020, has signaled a new push in the United States to strengthen and broaden privacy regulations, similar to the trends seen in the European Union through the passage and implementation of the General Data Protection Regulation (GDPR).
The CCPA affords covered consumers new privacy rights not otherwise enjoyed here in the U.S. Under the CCPA, an entity qualifying as a “business” must provide:
Abbreviated disclosures regarding the personal information that is collected from or about covered consumers (Cal. Civ. Code § 1798.100).
Certain other expanded disclosures regarding personal information collected from or about covered consumers (id. § 1798.110(a)).
Disclosures regarding the sale or disclosure of personal information for a business purpose (id. § 1798.115).
An opt-in requirement before selling a minor’s personal information (id. § 1798.120(c)).
The ability for covered consumers to access and/or delete personal information collected from or about them (id. §§ 1798.105, 1798.100(d)).
Subjected businesses must also implement measures to prevent discrimination against consumers who exercise their rights under the CCPA (id. § 1798.125). Because of these new obligations, the implementation of the CCPA may bring about drastic challenges for organizations that are utilizing blockchain technology.
What does the CCPA mean for blockchain?
Blockchain technology is being used to develop solutions and tools that provide individuals much greater control over their data. The technology’s often public and immutable ledgers promise to introduce a new level of transparency into how individuals’ data is being used. Blockchain technology (particularly when it is employed in a public/permissionless environment) is decentralized in a manner that often means that the way that data is stored, processed or otherwise used does not necessarily depend on a centralized authority or single “steward” or “controller.” In many ways, blockchain technology upends traditional models of collecting and storing personal data by enabling decentralization — thus removing third-party intermediaries.
However, most data privacy laws, including the CCPA, presume the operation of the traditional data model, which makes them difficult to reconcile with a decentralized or distributed data model. Thus, despite the fact that the CCPA aligns philosophically with many of the goals of blockchain technology (i.e., data integrity, cybersecurity and transparency), several inherent features of most blockchain technologies can pose compliance challenges — in particular, blockchain’s decentralized structure and the immutability of data entered into the blockchain ledgers.
Much of the uncertainty surrounding the CCPA (both generally and as it applies to blockchain technology) stems from the statute’s broad definitions. For example, the definition of personal information encompasses “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” (Id. § 1798.140(o)(1)). Despite calls for the legislature to provide further clarification — including those voiced during the state attorney general’s multiple public forums pending the passage of any additional amendments — the statute, as it is currently written, becomes effective on Jan. 1, 2020.
Notably, enforcement actions by the attorney general may be brought six months after the publication of final regulations or Jul. 1, 2020, whichever is sooner (Id. § 1798.185(c)). Civil penalties include injunctions and fines of up to $2,500 per violation and aggravated fines of up to $7,500 per intentional violation. Note that consumers are afforded a limited private right of action in situations when their personal information is “subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices.”
When are blockchain businesses subject to the CCPA?
The CCPA’s obligations are limited to “businesses,” which are defined as any for-profit company doing business in California that collects personal information and satisfies at least one of the following thresholds:
Receives an annual gross revenue in excess of $25 million.
Annually buys, sells, or, for commercial purposes, receives or shares personal information of at least 50,000 California consumers, households or devices.
Derives 50% or more of its annual revenue from “selling” California consumer personal information.
Note that “doing business” is undefined by the statute and could be construed to encompass a blockchain platform with nodes that operate in California or that collect data from Californian consumers (Id. § 1798.140(c)(1)).
Though the first prong of the CCPA threshold test is fairly self-explanatory, the second and third prongs are less straightforward. The mere act of hosting information on a blockchain could be considered “sharing” personal information, particularly when nodes are treated as “devices” under the second prong of the test. For example, the existence of 500 nodes on a blockchain network that all maintain a copy of the ledger may constitute “sharing” under the statute (although there is currently no regulatory guidance on this topic).
The definition of “selling” is also very broad. It includes “renting, releasing, disclosing, disseminating, making available, transferring, or otherwise communicating orally, in writing, or by electronic or other means” personal information for “other valuable consideration.” (Cal. Civ. Code § 1798.140(t)(1)). What constitutes “other valuable consideration” remains unspecified.
Therefore, it appears from the facial language of the statute that blockchain companies could be considered to be “selling” personal information simply by hosting and operating a blockchain platform through which people and entities can exchange personal information — particularly if the blockchain company charges a fee (whether in tokens operable on the blockchain or some other form of external consideration) to access the blockchain or derives other “valuable consideration” from the hosting and operating of a platform that facilitates personal information exchange.
Similarly, it is possible that node operators or miners in a blockchain environment who receive tokens or cryptocurrency in exchange for performing transaction validation or ledger confirmation services to the network would be similarly considered to be “selling” because they are “communicating […] by electronic or other means” personal information that is written to the blockchain. If a covered business is found to be “selling” personal information, additional notice, disclosure and other obligations will apply — even if the business has not engaged in what would traditionally be considered a “sale” for monetary consideration.
More, while pseudonymization may help obfuscate data, it does not render the subject data nonpersonal. Because the statute applies to personal information that is “capable of being associated with, or could reasonably be linked, directly or indirectly” with the individual, such techniques may prove insufficient due to the risk of reidentification.
How can a blockchain business best address compliance with the CCPA?
Businesses that deploy blockchain technology should carefully consider the extent to which personal information is written to blockchain-based ledgers and whether there are ways to mitigate the problems that arise from this appertaining to the demands and requirements of the CCPA.
For example, businesses might consider storing personal information off-chain (i.e., not on the blockchain) while using the ledger to track and mediate access to the personal information. This type of solution could enable the business to directly reference the off-chain personal information for reporting obligations under the CCPA while maintaining the integrity of its ledger, and without necessarily putting the data on-chain, such that the business could not delete that data upon request. In this scenario, deletion is simple: By simply taking the data off-chain, any immutable references on-chain become references to nonexistent data and are rendered meaningless.
However, off-chain workarounds can add unwanted complexity that is at odds with many blockchain platforms’ goals of simplicity and transparency. Furthermore, these workarounds often fail to solve the security concerns presented by having parallel data sources in the status quo that blockchain-based solutions so elegantly address.
If an off-chain solution is impractical, blockchain businesses could consider taking all data obfuscation steps available to depersonalize the data as much as possible (e.g., applying salting, encryption and hashing techniques to all on-chain data). However, data on the blockchain is almost always associated with a ledger’s public key (i.e., ledger address) and is therefore connected to the person or entity that was adding data to that address. Accordingly, public keys could be deemed “personal information” under the CCPA to the extent that they belong to or can be tied to a California consumer.
Finally, businesses should begin taking steps to comply with the CCPA as soon as possible: In a 2018 conversation at Perkins Coie LLP, Eleanor Blume, the special assistant to the California Office of the Attorney General, emphasized that companies would be evaluated on their CCPA compliance in part by the preventative measures they took in 2019.
The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This discussion is not intended as legal advice.
This article was co-authored by Joe Cutler, Charlyn Ho, Anna C. Mourlam, Marina Gatto and Thea Percival.
Joe Cutler is a core member of Perkins Coie LLP’s blockchain technology and digital currency industry group. Joe advises clients dealing with Bitcoin, blockchain and other cryptocurrency-related services in understanding and complying with applicable regulatory obligations, and in developing and implementing Anti-Money Laundering programs and other internal governance.
Charlyn Ho, counsel at Perkins Coie LLP, advises clients on legal issues related to technology and privacy, including those affecting blockchain platforms, e-commerce sites, mobile devices and applications, artificial intelligence/machine learning, virtual reality and augmented reality platforms, and Internet of Things devices. Prior to becoming an attorney, Charlyn served as an active duty supply corps officer in the U.S. Navy.
Anna C. Mourlam is a member of Perkins Coie LLP’s commercial litigation practice and represents well-known technology and e-commerce companies in high-stakes actions involving privacy, data security and digital currency litigation. When not litigating, Anna has experience counseling clients on GDPR compliance, EU-U.S. and Swiss-U.S. Privacy Shield Frameworks, and the CCPA.
Marina Gatto works with clients to build strong privacy programs to ensure compliance with a range of privacy laws as a member of the firm’s data security and privacy practice. She helps clients prepare their compliance with the CCPA, including leading trainings, conducting client interviews, data mapping, and revising policies and procedures. Marina also advises on GDPR compliance, as well as compliance with evolving automatic renewal laws.
Thea Percival was Perkins Coie LLP’s privacy and data security fellow for the summer of 2019. Thea is finishing her J.D. at the University of California, Davis School of Law, after which she will return to Perkins Coie in 2020. Prior to law school, Thea worked in the tech industry, managing corporate responses to law enforcement data requests.