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Regulation

China’s Stricter Regulatory Stance on ICOs Signal Caution, Not Calamity

On February 4, 2018, at 10:10 p.m. China Standard Time, Financialnews, a rather small news agency under the administration of China’s central bank, the People’s Bank of China (PBOC), released an article that explicitly stated that “China will continue to watch virtual currency and activities related to it closely, and will take actions including shutting down commercial presences and exchanges within China’s territory to uphold China’s financial stability.”

This is the first time that China has sent a regulation signal to the public through an official channel since September 4, 2017, when the PBOC, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and other state-level government agencies in China issued a joint statement announcing that all ICOs should be regarded as “illegal financing activities.”

More importantly, both the Xinhua News Agency (the state media organ) and the news page of the Chinese government website reposted the news, further confirming its authenticity.

The announcement reads:

“Since the joint statement of September 4, China’s regulator still finds that many Chinese have begun to conduct activities regarding cryptocurrency overseas. Considering the risks of trading overseas that Chinese may face, the regulator will take more measures.

“The risks that have been mentioned by the joint statement still exist: illegal ICOs, fraudulent projects or even Ponzi schemes. If investors are considering projects set up overseas, the risks will be even higher since the losses are very difficult to recover.

“According to the source from PBOC, China’s regulator will adopt a series of regulatory measures including banning related commercial presences and shutting down exchanges at home and abroad to prevent financial risks and to safeguard financial stability. No exchange should be an exception. In the meantime, the possibility of introducing further regulatory measures shouldn’t be ruled out.”

However, it’s not yet clear what those further regulatory measures are, as China is still working to figure out the best ways to regulate the cryptocurrency market.

How Can We Interpret China’s Latest Policy Signals?

As eBits.Co eBits, bitcoin trading or cryptocurrency trading can’t simply be banned by any single government due to its decentralized nature. Banning it will only result in uncontrollable OTC trading that might result in more hidden-capital flight. This is the last thing that the Chinese government will want to see; therefore, the policy should be regarded more as a signal to intimidate bad actors and to remind potential investors of all associated risks, rather than interpreting it as the Chinese government’s final attitude toward blockchain technology and innovation.

The tightening of policy is to be expected, not just because current ICO projects tend to lack the requisite transparency in both project information and the financing phase, or because risks related to the security of assets on exchanges abound. The Chinese regulator has also come under fire lately for its slow response in other cases outside of the blockchain industry. For example, it has been criticized for not clamping down on Ezubao — a fraudulent peer-to-peer lending company that inflicted a great financial loss of $7.6 billion on everyday investors in 2014. 

Most recently, it has failed to tackle the problem of “campus lending” companies that provide college students with seemingly easy access to loans on the condition that they provide nude photos, which the companies later use to threaten the students to pay back the higher-than-normal interest. News of students who commit suicide because they are unable to pay back the money have been surfacing almost every week.

It is likely that China’s regulator will want to move a step ahead before any such extreme cases can occur in the cryptocurrency industry.

And Then There Is Blockchain Technology …

China’s national strategy and local development plans indicate that China still openly supports blockchain technology. (See our article eBits).

It would appear that the government is still observing whether or not the industry really will live up to its revolutionary promises and is deciding on the best way to encourage innovation while also avoiding speculation risks.

In order for the blockchain industry to succeed, it first needs to win regulators’ trust by actually solving commercial pain points to prove that token-oriented models are feasible, especially by using the token-economy business model. If no project can prove this and tokens still remain a tool of pure speculation, or even cause for financial instability, it remains highly unlikely that the Chinese government (or any other government, for that matter) will soften its regulatory stance. 

The onus, therefore, sits squarely on the crypto asset and blockchain community to live up to its promise and deliver the innovation that the modern world needs and expects.


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Regulation

Japan Toughens Oversight, Penalizes Cryptocurrency Exchanges

In its most sweeping crackdown yet, a Japanese regulator has penalized seven cryptocurrency exchanges, requiring two to halt operations for one month.

Japan’s Financial Services Agency (FSA) announced today, March 8, 2018, that it came down on the exchanges due to their failure to provide proper internal-control systems. All of the exchanges were ordered to step up efforts to improve security and prevent money laundering.

Business suspension orders were issued for FSHO and Bit Station, effective today. The FSA said FSHO was not properly monitoring trades and employees at the exchange had not undergone proper training. The FSA also alleged that a senior employee at Bit Station had used customers’ bitcoin for personal use.

The five other exchanges punished were GMO Coin, Tech Bureau, Mister Exchange, Increments and Coincheck. Coincheck was served with its second business improvement order since its security breach earlier this year, when $530 million worth of NEM (XEM) tokens eBits.

Coincheck to Repay Victims

In a news conference today, Coincheck also announced that it will begin compensating users who had their cryptocurrency stolen, beginning as soon as next week. The exchange was hacked on January 26, 2018, after a hacker used malware to gain access to an employee’s computer.

All of the 260,000 users impacted by the theft will be paid back in Japanese yen, based on NEM rates at the time of the theft, the Tokyo-based company said.

At the root of the problem, the cryptocurrency exchange had been keeping all its NEM in a hot wallet connected to the internet. In contrast, at any one time, U.S.-based exchange Coinbase keeps 98 percent of its funds in a more secure cold wallet. The vice president of the NEM Foundation, Jeff McDonald, also eBits eBits.Co that if Coincheck had been using a multisignature wallet, the problem would not have occurred.  

It is still not clear who was behind the Coincheck hack.

Tough Measures

The Coincheck hack was one of the largest thefts of cryptocurrency in the world since Mt. Gox, another Tokyo exchange, was eBits by hackers in 2014. What happened at Coincheck highlighted the risks of storing funds in cryptocurrency exchanges, and since then, Japan’s FSA has taken strong measures to protect its citizens and ensure the security of cryptocurrency exchanges across the country.

Following the Coincheck breach, Japanese authorities eBits on January 29, 2018, that they would investigate all cryptocurrency exchanges in the country for security gaps, and ordered Coincheck to, essentially, get its act together.

The FSA gave Coincheck until February 13, 2018, to submit a report summarizing the actions it would take to improve security and customer support.

Last year, Japan became one of the first countries to regulate cryptocurrency exchanges when it set up a licensing system. Some 16 exchanges in the country are currently registered, while another 16, including Coincheck, have been allowed to continue operating unregistered while they apply for licences. Five of the seven exchanges punished by the FSA are unregistered, including the two forced to suspend business. Subsequent to its business suspension, Bit Station withdrew its application for a license.

Japan’s crackdown on exchanges follows a series of efforts by U.S. regulators to tighten reins on the industry. Yesterday, the U.S. Financial Crimes Enforcement Network (FinCEN) eBits that anyone selling initial coin offering (ICO) tokens are unregistered money transmitters, while the U.S. Securities and Exchange Commission (SEC) warned that any exchange selling tokens deemed as securities must register with the agency.    

Overall, Japan remains one of the more cryptocurrency-friendly countries, distinguishing itself from crackdowns in South Korea and China.

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Regulation

Dutch Finance Minister Advises Government on Cryptocurrency

In a six-page letter to the Dutch senate and house, Finance Minister Wopke Hoekstra has outlined his concerns over the rapid and dramatic growth in cryptocurrencies.

Hoekstra emphasized that there has been little time to understand and react to the changing landscape and that the current supervision and regulatory framework is ill equipped to deal with it. Because of the cross-border nature of the technology and markets, closing those gaps requires a unified approach across governments and borders. The minister will actively be working in a European context, but the entire process will take time and coordination between disparate governments and agencies.

Like most other policy makers, Hoekstra sees the value in promoting and developing the technology behind cryptocurrency, such as cryptography and distributed ledger technology. However, in addition to the concern over fraud and hacking, the minister also expressed concern over the immature and unregulated nature of the market and how to better inform consumers of the potential risks.

Hoekstra described the following as starting points in his assessment of possible policies and regulations to control the risks associated with cryptocurrencies:

  • Gaps in consumer and investor protection must be true need to be closed, but measures must be proportionate.
  • The integrity of the financial system must be guaranteed.
  • The innovative technique behind cryptocurrency must be preserved, such as cryptography and distributed ledger technology (DLT).
  • The cross-border nature of cryptocurrencies requires one approach at the international level. National rules can simply be circumvented or difficult to maintain.

The minister further said that given the decentralized and cross-border nature of cryptocurrencies, a ban is not feasible, so it was more important to bring cryptocurrencies under the appropriate regulatory framework and the Dutch join with the French and German finance ministers to discuss cryptocurrency in the G20 context. The Netherlands wants to play a leading role in the European and international approach to cryptocurrency.

In further comments, Hoekstra stated, “I hope the usual process for the realization of legislation and regulations that these new rules can enter into force at the end of 2019. I foresee the changes to the [European Union] Fourth Anti-Money Laundering Directive will also contribute to the prevention of tax evasion.” This directive, which took effect in June 2017, lays out the most recent parameters and standards adopted by the EU to prevent money-laundering and terrorist funding.

He sees the change as helping to prevent the use of cryptocurrency for the purposes of tax evasion as well. While this letter is not policy, it does reflect the direction that The Netherlands, Europe and much of the world appear to be headed in.

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Regulation

New York Legislator Proposes BitLicense Alternative for Cryptocurrency Users

New York State Assembly legislator Ron Kim (D-40) has unveiled a bill that intends to protect cryptocurrency investors and ease the bureaucratic burden on crypto-related businesses. It’s the first comprehensive cryptocurrency bill in New York to make it past studies and commissions and into the hands of the legislative branch. Kim introduced the legislation on March 13, 2018, after he met with blockchain industry leaders on the subject.

Known as The New York Cryptocurrency Exchange Act (A9899), the bill relates to “the audit of cryptocurrency business activity by third party depositories and prohibits licensing fees to conduct such cryptocurrency business activity.”

If it were to take effect, the legislation would make amendments to Section 9 of New York’s Banking Law. With the addition of section 9-x, the law would mandate that any cryptocurrency business or entity be subject to routine audits by a public or third-party depository service. These audits would require that individuals and businesses alike safeguard assets with proper security measures, provide adequate insurance for account holder assets and produce proof-of-asset ownership.

Any entity in full compliance will receive a digital New York Seal of Approval to reassure consumers that the outlet is trustworthy and secure. This seal would ideally replace the BitLicenses currently issued by the New York State Department of Financial Services, doing away with this fee-based license in favor of one earned by audit.

Kim believes that earlier efforts to regulate the space have put enormous burdens on businesses trying to grow and operate in the cryptocurrency space. “What New York needs now,” he told eBits.Co, “are common-sense laws and security procedures to provide a degree of clarity for both businesses and the public. This legislation will give consumers and companies the confidence needed for widespread adoption of cryptocurrency in New York.”

While the bill is the first of its kind for New York legislators, this isn’t Kim’s first foray into cryptocurrency. As a precursor to the landmark legislation, Kim recently published a brief report titled “The Future of Bitcoin in NY.” His research identifies unregulated exchanges as “the weak point” in the blockchain ecosystem. This vulnerability, coupled with the cost of a BitLicense, has left New York lacking in legitimate crypto-companies and consumer confidence.

According to a statement from Kim’s office, there are currently fewer than 10 BitLicense holders in the entire state of New York, even though there are some 1,000 active job postings in New York for the blockchain industry. It’s Kim’s hope that the new legislation will foster a friendlier environment for companies in the space; one that will attract more business and generate increased revenue by connecting consumers with reliable, state-vetted entities.

Throughout 2017, the United States government remained relatively quiet on the subject of cryptocurrencies and blockchain. While other countries are beginning to outline clear eBits and legislative eBits, U.S. investors have had their ears filled with conflicting talk from the SEC, the CFTC and various state legislatures.

So far, however, it’s been a busy year for the United State’s regulatory efforts, both on eBits and eBits levels, and The New York Cryptocurrency Exchange Act is yet another installment in a growing series of litigation that finally broaches the topic of cryptocurrency regulations. If anything, the legislation may set a precedent for consumer protections in the industry, as well as a more lenient regulatory approach that might encourage job growth in the industry.

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