9 regulatory changes in the crypto space in 2021
We guess you`re not a naive romantic who still thinks that cryptocurrencies will remain unregulated. The crypto community is witnessing how the rules of the legal field for crypto are becoming tougher and tougher.
In this article, we summarize some key developments in the field of global regulation of crypto assets.
- Ban on mining
In recent months, several provinces of China and some countries, such as Iran, have taken steps to ban the process of mining crypto assets due to electricity consumption.
The mining industry is thriving in countries with cheaper electricity. Mining is controversial, because depending on which token you are mining, the electricity consumption for processing each transaction can often be much greater than that used in a normal transaction with a fiat currency. Bitcoin is one of the crypto assets with the highest level of electricity consumption in the world. This has raised many of ESG’s concerns about investing in BTC, especially because ESG and sustainability are increasingly seen as important factors by investors, regulators, and compliance professionals.
These problems, as well as some problems with the reliability of the network caused by a large volume of production, for example, in Iran, where the government cited recent power outages as the reason for the ban. This has prompted the governments of other countries, in particular China, to move to completely ban this practice for reasons related to energy and the environment. Many crypto assets are now promising to increase the efficiency of their mining to reduce concerns about ESG, but it is difficult to say which tokens have proved effective at this, which means that investors cannot be sure of the environmental consequences of their investments.
- The NFT boom
In the end of 2020 and in the beginning of 2021, we saw an explosion in the popularity and value of NFT. NFT is a non-interchangeable token, which means that the token and what it represents are not interchangeable with similar tokens. Currently, there are two main uses of NFT: the first is that the token acts as an authentication of a non-interchangeable element using the technology of the decentralized registry of the Ethereum blockchain. This will allow the sale of collectible items, such as sports memorabilia or works of art, with a verifiable control trail.
The second and more controversial type of NFT is a token, which is a basic element, but does not grant exclusive ownership or often any ownership rights. A good example of this is the “NBA Top Shot” market, where the NBA has created a market for NFTs representing clips from basketball games, which can then be sold to other users, but do not grant any ownership rights to the clip itself. This market is no different from physical sports collectible cards, only with clips, not static images, and is traded exclusively at their collectible value, with some tokens being sold at a price of up to $ 280,000.
NBA Top Shot is based on the existing business model of collectible sports cards. However, some NFTs have moved into new territory for collecting, creating NFTs for popular viral videos, GIFs and memes. These latter types of NFT cause suspicion and discontent among regulators, since many believe that the NFT market is a speculative bubble with no intangible value. There were also comparisons of how large amounts of speculative money flowed into this market after the mention of blockchain, with the behavior of speculative investors during the ICO bubble, with most of these speculations coming from retail investors.
- El Salvador announces a tender for Bitcoin
El Salvador made history by becoming the first country to make cryptocurrency legal tender, as Congress voted to make Bitcoin legal tender. This will mean that all firms offering goods and services must accept PTS. In addition, it can also be used to pay tax deductions. It should be noted that sellers who do not have access to technologies sufficient to accept Bitcoins will be exempt from this requirement.
Many criticisms about the fact that crypto assets such as Bitcoin are legal tender are often associated with three problems:
- that the state will lose control over its money supply,
- that price volatility can harm sellers and consumers;
- increased risk of money laundering and financial crimes.
As for the first criticism, El Salvador has not controlled its money supply since 2001, when the government canceled the colon in favor of switching to the US dollar due to high inflation. This gave El Salvador a unique opportunity to experiment with cryptocurrencies as a legal means of payment.
In response to the second criticism, the government of El Salvador will guarantee the convertibility of Bitcoins into US dollars during the transaction for sellers through BANDESAL, the country’s development bank.
The Government of El Salvador has promised to introduce appropriate safeguards against the risk of money laundering and financial crimes, but at this stage no proposals have been put forward.
This new law was promoted by the president of El Salvador, friendly to the crypto industry, Nayib Bukele, who also recently got into the news because he suggested that the country’s volcanoes could be used to provide clean energy for Bitcoin mining.
- South Korea
The Financial Services Commission (FSC), the financial regulator in South Korea, has introduced several new rules regarding the crypto space, which have far-reaching consequences.
The first of these changes is that national banks will be required to consider the exchange of crypto assets as a “high risk” for the purposes of AML, including the requirement to refuse to provide services to any exchange that does not comply with strict identification measures and measures for reporting suspicious activity.
The Securities and Exchange Commission of Thailand recently approved new rules for the exchange of crypto in the country. These new rules will prohibit exchanges based in Thailand from offering access to certain types of assets.
Many believe that the new rules are rather vague about which tokens fall under the ban, since the categories specified in the rules include “Meme Token”, “Fan Token” and “Non-interchangeable Token”. This may mean that it may be difficult to enforce the ban, since many tokens may correspond to the “Meme Token” category.
- The Basel Committee
The Basel Committee on Banking Supervision has presented a new proposal on the prudential attitude of banks to assets held in crypto assets. The proposal will apply a risk weighting factor of 1250% to crypto assets owned by banks, which in practice will mean that for every pound of sterling in the crypt held by the bank, 1 pound of sterling in capital will be required. This will put cryptocurrencies in the category of the highest risk for banks and may limit the number of trading operations that banks can undertake if the rules come into force in their current form. The proposal also states that crypto assets with a value tied to real assets, such as stablecoins, are likely to have lower prudential requirements, but no specific proposals have been made at this time.
- The EU puts forward a proposal for a new regulation of the crypto space
In September 2020, the European Commission published a proposal for the Regulation of Crypto Asset Markets (MiCA). A stablecoin is an asset that pegs its value to the value of a more traditional asset, such as a fiat currency or commodity. According toCoinmarketrate.com , the most popular stablecoins are pegged to the US dollar, with Tether being by far the largest stablecoin used. These tokens serve two purposes: the first is intended for individuals in countries where inflation quickly devalues the currency, such as Venezuela, or where the currency usually loses value, for example, in Brazil. These tokens allow people to save the value of their money in a much simpler and more convenient way than it was possible before.
The second use case is for individuals who want to use the crypt as a means of exchange, although this is impractical for coins such as Bitcoin, due to price instability. This use case allows users to use the privacy and decentralized nature of the blockchain to make payments without the risk of volatility associated with the main tokens.
Surely, stablecoins are associated with a number of risks and problems, such as the use of crypto assets for the anonymous purchase of illegal goods and services. This has led to the fact that several regulators around the world, including the EU, are considering the possibility of applying regulation to stablecoins. Many stablecoin providers are accused of a lack of transparency regarding the provision of tokens.
Tether stated that all tokens are 100% backed by US dollars, but an investigation by the New York Attorney General showed that this was not the case, and that the reserves were overstated by about 850 million US dollars. This has been a big problem for many stablecoin providers, and represents an obstacle on the way forward, since it will be difficult for these tokens to constantly maintain 100% support. But, any departure from this should be accompanied by further regulation to protect consumers.
MiCA’s proposals will begin to regulate stablecoins by creating a new regulatory term “asset-linked token”, which will cover many types of stablecoins that are currently not regulated, since they are not subject to the”Electronic Money Directive”. Any company offering asset reference tokens will have to become regulated and based in the EU in order to be able to offer such tokens. The initial proposals for MiCA were criticized for the fact that the definitions and the regulatory perimeter of the directive partially coincide with the electronic money regime. The instruments defined as “e-money tokens” may also potentially cover some major stablecoins, and the proposals may need to be adjusted to prevent any confusion about which regime is applied.
In addition to regulating stablecoins, which is the main focus of the new regime, MiCA will focus on determining which types of tokens will be regulated, creating a single market for all member states. It will also be required that some crypto service providers become regulated in accordance with the rules, and for this they will submit new marketing requirements for tokens issued in the EEA. Issuers in the EEA will have to issue a technical document that will contain information regarding the token and certain characteristics.
- SEC Regulation
The chairman of the Securities and Exchange Commission, Gary Gensler, announced his plans to strengthen regulation in the crypto sphere, especially with regard to investor protection. Gensler said that he understands that many investors prefer to invest in crypto assets for speculation due to their volatility and low correlation with traditional markets.
Gensler also said that he considers most tokens to be securities, and as such, they should fall within the scope of regulation of the Securities and Exchange Commission. He also stated that he believes that crypto exchanges should be regulated organizations, which has recently become a common topic around the world. Crypto marketing, especially for retail investors, will also be another priority for Gensler. He plans to update the relevant rules of the Securities and Exchange Commission to properly deal with the growing number of investment platforms for mobile applications, which often include gaming features and are seen by some as encouraging investors to bet on investments.
- Regulatory measures in China
The Central Bank of China will support strict regulation of cryptocurrency activities. He will monitor the companies involved in financial platforms to ensure that they act in accordance with the rules.
The central bank will seek to prevent serious financial risks, reduce the number of high-risk financial institutions in some provinces and accelerate the creation of a financial stability law proposed by the bank’s deputy governor Liu Guiping in March.
The bank announced that its monetary policy will be flexible, targeted, reasonable and adequate.
Leo Xin of Pinsent Masons, the law firm behind Out-Law, said: “According to our observations, banning cryptocurrency markets in China will help the central bank of China to promote its digital yuan plan unhindered and help preserve financial sovereignty. In addition, the digital yuan will become a key tool for the internationalization of the yuan”.
In May, China banned financial institutions and payment companies from offering services related to cryptocurrency trading, and warned investors not to participate in cryptocurrency trading. China shut its local cryptocurrency exchanges in 2017.