2020 was an outstanding year for the crypto economy, with more companies and institutions than ever implementing the technology. Big announcements like PayPal’s decision to allow its users to buy and sell Bitcoin (BTC) understandably have dominated the headlines. However, crucial regulatory developments around the world have largely flown under the radar and are likely to be even more important to crypto in the long run.
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The importance of clear regulatory frameworks cannot be overstated, as inconsistent and inadequate legislation is a major barrier for companies that rely on digital assets and distributed ledger technologies. It is now clear that a number of jurisdictions in the European Union and Southeast Asia are leading the regulatory race and there are clear taxonomies for digital assets – while the United States continues to catch up.
An important Europe-wide development in 2020 was the EU’s proposal for a common legal framework for crypto assets in the 27 member states. The Markets in Crypto Assets Regulation (MiCA) aims to provide legal certainty regarding the definitions of a number of types of digital assets and related services. A pilot regime for DLT market infrastructures is to be introduced shortly.
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A number of European states are even further ahead, and Germany is proving to be one of the most progressive states in the European Union. Since January 2020, the safekeeping of crypto assets as a regulated financial service provider has been integrated into the Bundesbankengesetz, for which a special license from the federal supervisory authority is required. As a result, many financial institutions are at an advanced stage in their digital asset offering roadmap, and more than 40 institutions have expressed an interest in applying for a custodian license.
In August 2020, the German Ministry of Finance published a draft law on electronic securities. This bill enables the issuance of digital bearer bonds on a DLT infrastructure without the requirement of a paper-based certificate and introduces the definition and regulated financial service of a decentralized securities register. The law is expected to be passed in the second quarter of 2021. This is another important step towards a comprehensive digital asset framework in the country.
Switzerland has established itself as a crypto-friendly state and offers clear guidelines for digital assets at an early stage in the technology’s life cycle. In September, Swiss parliamentarians voted for a comprehensive reform of finance and company law relating to DLT technology. These laws, which are expected to come into effect early next year, will further open the doors for the adoption of digital assets in the country as they update the legislation on digital securities trading and segregation of crypto-based assets in the event of bankruptcy and filing a Create a new authorization category for “DLT trading facilities” (crypto exchanges).
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Other European jurisdictions have also put in place strict legal frameworks for regulating digital assets. Liechtenstein has reportedly been the first country in Europe to break new ground to enact an entirely new and comprehensive framework for regulating blockchain, digital ledger technology and tokens. The Act on Tokens and Trustworthy Technology Service Providers, which came into force on January 1, 2020, provides an innovative method of regulating blockchain technologies that, instead of integrating blockchain and digital assets into existing legal frameworks, allows any right or asset according to the token Container model can be packed in a token.
The United States
In contrast to the clear legal framework across Europe, the US, the world’s financial leader, remains a notable lag in providing comprehensive crypto rules. This divergence is already having a noticeable impact on the introduction of digital asset functionality by institutions, accelerating the roadmaps between institutions in countries with a clear licensing system. Tier 1 and Tier 2 banks like Standard Chartered, BBVA and Gazprombank Switzerland have publicly announced all crypto custody offers in the past few months, and it is becoming clear that European banks have the potential to become the world’s leading crypto providers to develop .
This trend does not go unnoticed by US banks, which are currently dominating global markets. As soon as the US regulators align and give their banking sector clear guidelines, the market in the US should also see explosive growth. U.S. regulators took the first steps towards such clarity this year when Congress passed the Crypto-Currency Act of 2020 in March, which provided some legal certainty as to the definition of the types of digital assets and which regulator to monitor would be responsible.
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In terms of digital asset custody, an important step forward was made in July when the Office of Currency Auditor issued a letter authorizing any regulated financial institution to provide cryptocurrency custody services once appropriate risk management processes and controls were in place.
However, other US regulators have remained largely silent and seem content to cede the floor to jurisdictions in Europe and Asia. At the same time, rumors of regulatory measures such as the Treasury Department’s ban on unsecured purses and the introduction of the Stable Act to make stable coins illegal without government approval are creating a more restrictive environment for digital assets.
If this lack of pursuit of constructive regulation and concrete guidance at the federal level persists, it will be interesting to see if individual states take steps to legislate for digital assets at the local level. For example, the move by the San Francisco-based crypto exchange Kraken to move into the regulated space by acquiring a banking license in the state of Wyoming is an interesting precursor of what could come next if federal agencies don’t make quick and regulatory progress.
As the signs become clearer that US regulators are becoming aware of the danger of being left behind in the race for digital asset supremacy, it is becoming clearer that such a battle could be lost for at least this year.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Johannes Kaske is Director of Sales and Business Development at Metaco, where he is responsible for leading the strategy and implementation of Metaco’s sales activities throughout Germany. Before joining Metaco, he worked for the Bavarian State Ministry for Digital Affairs, where he was responsible for the state government’s blockchain strategy and headed the Bavarian Center for Blockchain. Johannes graduated from ESADE Business School in Barcelona with a Master of Science in international management.