Cryptocurrency has become a perplexing challenge for financial market regulators worldwide. Its unique characteristics defy traditional classification, and the collapse of FTX in 2022 highlighted the urgent need for more sophisticated regulations. According to David Sacco, a finance practitioner from the Pompea College of Business at the University of New Haven, national governments are compelled to establish regulatory oversight over cryptocurrencies as a means to manage their economies through currency control.
However, regulating a decentralized asset that appeals to investors precisely because it operates beyond governmental influence presents a formidable dilemma. This article delves into the diverse approaches undertaken by major countries in shaping their regulatory frameworks for cryptocurrency, contributing to the existing ambiguity surrounding its regulation.
The evolution of cryptocurrency from a speculative investment to an emerging asset class has prompted governments worldwide to explore various strategies to regulate this burgeoning market. This article provides a brief overview of the current global crypto regulations in several key jurisdictions.
The Markets in Crypto-Assets Regulation (MiCA) stands as the pioneering cross-jurisdictional regulatory and supervisory framework for crypto-assets. Initially introduced in 2020 as a response to a global stablecoin initiative, MiCA has recently gained approval from the Economic and Financial Affairs Council of the European Union. This significant development, following a vote on May 16, 2023, aligns with the European Commission’s objective of establishing a regulatory framework that facilitates the adoption of distributed ledger technology (DLT) and crypto-assets within the financial services sector.
MiCA aims to achieve legal clarity, safeguard consumer and investor interests, maintain market integrity, ensure financial stability, promote innovation, and address the challenges posed by fragmented national frameworks. MiCA encompasses a broad range of business activities related to crypto-assets in the EU, affecting most firms operating in this space. Non-EU crypto-asset firms engaging in activities for EU customers must also comply with MiCA’s requirements, although certain exemptions exist for non-EU domiciled firms under specific conditions, known as ‘reverse solicitation.’
Key clarifications provided by MiCA include the differentiation between tokens defined as ‘financial instruments’ and those classified as ‘crypto-assets.’ The former will be subject to existing financial services rules such as MiFIR/MiFID II, while the latter will adhere to the bespoke pan-EU regime established by MiCA. The regulation also introduces rules concerning regulated crypto-asset services, encompassing authorization, and ongoing supervision obligations for crypto-asset issuers (CAIs) and crypto-asset service providers (CASPs). MiCA’s scope encompasses various crypto-asset categories, including asset-referenced tokens (ART), electronic money tokens (EMT), and other crypto-assets, such as utility tokens.
The European Securities and Markets Authority (ESMA) will issue guidelines within 18 months of MiCA’s enforcement to determine the criteria and conditions for designating digital assets as either in-scope or out-of-scope.
The services governed by MiCA largely mirror the regulations outlined in MiFID, imposing licensing requirements on crypto-asset service providers (CASPs). These services include custody and administration of crypto-assets on behalf of third parties, operation of trading platforms for crypto-assets, exchange services involving crypto-assets for funds or other crypto-assets, execution of orders for crypto-assets, placement of crypto-assets, provision of transfer services, reception and transmission of orders, advice on crypto-assets, and portfolio management incorporating crypto-assets.
Notably, MiCA does not explicitly address whether lending activities involving crypto-assets are regulated. This may be subject to national-level regulations, or lending activities could fall within the scope of MiCA’s authorization requirements when performed by lenders engaging in other regulated activities. The lending of financial instruments, if a digital asset is categorized as such, is governed by the existing body of EU financial services legislation and regulations.
UNITED ARAB EMIRATES
The Virtual Assets Regulatory Authority (VARA) has introduced the Full Market Product Regulations to govern Virtual Asset Service Providers (VASPs) operating in Dubai, excluding the Dubai International Financial Centre (DIFC). These regulations signify Dubai’s commitment to developing its virtual economy and establishing a transparent regulatory framework for virtual assets while also prioritizing consumer protection. The UAE’s Virtual Assets (VA) sector remains dynamic in 2023, with recent crypto-related bankruptcies underscoring the need for continuous development and updates in VA legislation.
Cabinet Resolution No. 111 of 2022, which regulates Virtual Assets and Related Service Providers, came into effect at the beginning of 2023. According to this legislation, all companies operating or intending to operate in the VA sector in Dubai must obtain a license from VARA.
Subsequently, on February 7, 2023, VARA issued the highly anticipated Full Market Product Regulations (FMP Regulations) in accordance with Dubai Law No. 4 on Regulating Virtual Assets (VA Law) in the Emirate of Dubai. These regulations complement the Marketing Regulations issued by VARA in August 2022 and represent the latest stride in Dubai’s ambition to become a leading global hub for virtual assets. The FMP Regulations aim to foster Dubai’s digital economy, raise awareness of the UAE’s crypto landscape, and attract VA investments. Under the VA Law, VARA’s objectives include protecting investors and dealers in VAs through the development of additional regulations, rules, and standards to supervise VASPs in Dubai.
(1) The Regulatory Framework
The FMP Regulations establish a comprehensive regulatory framework governing VAs and all related activities for VASPs operating in Dubai, excluding those in the DIFC.
The FMP Regulations consist of two categories: the Mandatory Rulebooks and the Activity-Specific Rulebooks.
Virtual Assets and Related Activities Regulations 2023 (VARA Regulations)
Compliance & Risk Management Rulebook
Technology & Information Rulebook
Market Conduct Rulebook
Advisory Services Rulebook
Broker-Dealer Services Rulebook
Custody Services Rulebook
Exchange Services Rulebook
Lending & Borrowing Services Rulebook
Payments & Remittances Services Rulebook
Management & Investment Services Rulebook
All VASPs must comply with the Mandatory Rulebooks as well as the relevant Activity-Specific Rulebooks based on their licensed activities. Additionally, VASPs are required to adhere to all federal anti-money laundering and counter-terrorism financing laws.
(2) Licensing Requirements
The FMP Regulations also outline the licensing requirements for VASPs. To engage in specific VA activities in Dubai (excluding the DIFC), VASPs must first obtain a license from VARA. The activities include Advisory Services, Broker-Dealer Services, Custody Services, Exchange Services, Lending and Borrowing Services, Payments and Remittances Services, and VA Management and Investment Services.
Conducting any of the listed activities as a business without authorization and a regulatory license or exempt status approval from VARA is prohibited. VARA will determine whether an activity is conducted as a business or not.
The licensing process for VASPs involves four stages: obtaining a provisional permit, a preparatory license, an operating license, and an FMP license. VARA set a deadline of April 30, 2023, for companies and VASPs to submit initial disclosure questionnaires and confirm their intention to undertake regulated activities in the UAE. VASPs operating in Dubai must obtain SCA (Securities and Commodities Authority) approval before commencing full market operations. BitOasis became the first VASP to receive an MVP Operational License from VARA, allowing them to offer VA broker-dealer services in Dubai.
Under the FMP Regulations, VARA has the discretion to revoke VASPs’ licenses for reasons such as material violations of laws, regulations, rules, directives, or insolvency. The success of VASPs in obtaining full licenses depends on their ability to demonstrate compliance with the FMP Regulations.
These regulations from VARA reflect the UAE Government’s acknowledgment of the importance of consumer protection and the establishment of a transparent regulatory framework for VAs. It is expected that more regulations will follow for both onshore Dubai and other free zones in the UAE. VASPs conducting VA-related business in the UAE should seek legal advice to ensure compliance with applicable regulations due to the complexity of VA regulations.
BRITISH VIRGIN ISLANDS
The Virtual Assets Service Providers Act, 2022 (VASP Act) took effect on February 1, 2023, in the British Virgin Islands (BVI). This legislation regulates virtual asset service providers (VASPs) and mandates their registration with the BVI Financial Services Commission (FSC). To supplement the VASP Act, the FSC has released the VASP Registration Guidance and the Virtual Assets Service Providers Guide to the Prevention of Money Laundering, Terrorist Financing, and Proliferation Financing. Additionally, the Anti-money Laundering (Amendment) Regulations, 2022, and the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2022 have brought VASPs within the scope of the BVI’s anti-money laundering and counter-terrorism financing regime for transactions involving virtual assets valued at $1,000 or more.
According to the VASP Act, a VASP is defined as a provider of virtual asset services who conducts one or more activities on behalf of another person as a business. These activities include exchanging virtual assets for fiat currencies, exchanging virtual assets between various forms, transferring virtual assets between addresses or accounts, safekeeping or administering virtual assets, participating in financial services related to the offer or sale of virtual assets, and other specified activities or operations determined by the VASP Act or regulations.
All entities intending to provide virtual asset services within the BVI must register with the FSC. New entities must complete the registration process before commencing VASP activities. Existing VASPs had until July 31, 2023, to submit their registration applications or cease VASP-related activities. Failure to register by this deadline will result in the FSC treating the VASPs as conducting unauthorized business, subject to enforcement measures.
The FSC will review registration applications, issue certificates of registration, and impose appropriate conditions on approved applicants. The registration process aims to provide initial feedback within six weeks of the FSC’s receipt of a complete application and concludes within six months from the initial submission date. To apply for registration, VASPs must provide detailed information about directors, officers, shareholders, auditors, and representatives, along with a business plan, risk assessment, business continuity plan, compliance manual, internal safeguards and data protection systems, client asset handling and custodian relationship protocols, and declarations of accuracy.
Entities seeking to provide virtual asset custody services or operate virtual asset exchanges must provide additional information demonstrating their ability to safeguard client assets and mitigate risks associated with money laundering and terrorist financing. Entities involved in virtual asset services in the BVI need to familiarize themselves with the VASP Act, seek professional advice, and comply with registration requirements to ensure legal compliance within the jurisdiction.
In Panama, the regulation of virtual asset services was addressed through the passing of Bill 697 of 2021 by the Panamanian National Assembly in October 2022. However, the Government, citing concerns of inconvenience and enforceability, sent the bill to the Supreme Court of Justice in January for review. The Government’s objections to the bill centered around the need for “adaptation” to align with existing norms governing the financial system and the Panamanian monetary system.
Consequently, a decision from the Supreme Court of Justice will determine whether the bill should be adopted as is or returned to the National Assembly for further amendments. It is important to note that the process of obtaining a Supreme Court ruling can be time-consuming, possibly taking several months or even one to two years. If the bill is ultimately adopted, subsequent steps will need to be taken to implement the regulator’s regulations, guidelines, and licensing scheme, which will also require additional time.
Regarding the current legislation applicable to virtual assets in Panama, investment businesses are regulated under Decree Law 1 of 1999 and its subsequent amendments. Additionally, Title II of Law 67 of 2011, modified by Law No. 12 of April 3, 2012, and Law No. 56 of October 2, 2012, governs the securities market in the Republic of Panama and the Superintendence of the Securities Market.
SAINT VINCENT AND THE GRENADINES
In Saint Vincent and the Grenadines, the Virtual Asset Business Act, of 2022 defines virtual assets as digital representations of value that can be digitally traded or transferred for payment or investment purposes, excluding digital representations of fiat currency or securities. Virtual asset business refers to engaging in activities such as exchanging virtual assets for fiat currency, exchanging between different virtual assets, transferring virtual assets, safekeeping or administering virtual assets, and participating in financial services related to the issuance or sale of virtual assets.
To offer or operate a virtual asset business in Saint Vincent and the Grenadines, registration under the Act is mandatory. A person must not engage in virtual asset business without being registered. Requirements for registration include making a statutory deposit of one hundred thousand dollars or an amount equivalent to twenty-five percent of the registrant’s financial obligations to clients, whichever is greater. The deposit can be in cash, government securities, or another approved form. The deposit will be retained by the Authority for a specified period after the registrant ceases virtual asset business operations.
Registrants must submit quarterly reports to the Authority, including the number and value of accounts held by the registrant. Additionally, registrants are obligated to maintain adequate accounting records, prepare financial statements following generally accepted accounting principles, and keep copies of these records and statements at their place of business in Saint Vincent and the Grenadines. Registrants are required to implement and maintain policies for virtual asset businesses that comply with data protection legislation. These policies aim to ensure the legitimate collection, storage, use, and disclosure of clients’ personal information, protect against unauthorized access, and maintain confidentiality. Furthermore, registrants must safeguard their operations and personal information from cyber threats. Each year, registrants must appoint an auditor who is a qualified accountant to perform audits and other necessary duties, as determined by the Authority.
The Digital Assets and Registered Exchanges Act, 2020 (DARE Act) was implemented in The Bahamas on December 14, 2020, to regulate the issuance, sale, and trade of digital assets within or from the country. This legislation established a legal definition for digital assets and created a regulatory framework for digital asset businesses and activities permitted in The Bahamas. The primary objectives of the DARE Act were to protect investors and consumers, align with international standards to combat money laundering, terrorism financing, and weapons proliferation, and manage risks associated with digital assets. The Act aimed to provide a comprehensive yet adaptable regulatory framework that promotes innovation and the development of the digital asset industry in The Bahamas.
The legislation adopted an activities-based approach to registration and a risk-based approach to supervision, ensuring appropriate oversight to maintain market integrity and protect investors in the evolving digital asset landscape. An essential aspect of developing the legislation was ensuring The Bahamas’ compliance with international commitments in combating money laundering, terrorism financing, and proliferation financing (AML/CFT/CPF). The DARE Act incorporated robust AML/CFT/CPF provisions based on guidance from international standards bodies like the Financial Action Task Force (FATF). In March 2022, the DARE Act was further enhanced with the introduction of the DARE (AML/CFT/CPF) Rules.
Under the Act, digital assets are defined as digital representations of value distributed through a distributed ledger technology (DLT) platform, including contractual tokens with embedded value or contractual rights of use. The digital asset business includes various activities such as operating digital token exchanges, providing services related to digital token exchanges, utilizing digital assets as payment service providers, offering financial services related to digital asset issuances, and other activities as prescribed by regulations. Initial token offerings refer to public offerings of digital tokens in exchange for fiat currency or other digital assets.
The Act applies to individuals involved in the formation, promotion, maintenance, organization, sale, or redemption of initial token offerings and legal entities incorporated, registered, or established in The Bahamas engaged in digital asset business activities, regardless of the physical location of operations.
The SCB is responsible for regulating and supervising digital asset issuance, digital asset businesses, and related activities in The Bahamas. The SCB possesses broad investigative and regulatory oversight powers over registrants under the Act, including conducting on and off-site investigations and requesting information. The commission maintains a register of digital asset businesses and initial token offerings and develops investor protection standards for the digital asset industry.
Any legal entity intending to conduct digital asset business in or from The Bahamas must register under the provisions of the Act. The registration application should be submitted in the prescribed form, indicating the type of digital asset business to be carried out, and accompanied by the required documents and fees. Entities already registered under the Securities Industry Act, 2011 (SIA), licensed as investment fund administrators under the Investment Funds Act, 2020, or licensed as financial or corporate service providers under the Financial Corporate Service Providers Act, 2020, can apply to register a digital asset business as an additional activity under the Act.
Entities seeking to offer services as a digital token exchange must first register as a digital asset business before applying for registration to establish and operate a digital token exchange. The application should follow the prescribed form and include the necessary documents and fees.
Issuers planning to offer digital tokens through initial token offerings in or from The Bahamas must be deemed fit and proper and apply for registration no later than 45 days before the start of the offer period, which cannot exceed six months. The application must be in the prescribed form and accompanied by a written legal opinion on token classification, an offering memorandum, and a filing fee. The offering memorandum should contain specified information and be accessible on the issuer’s website throughout the offer period and for at least 15 days after its conclusion. Ongoing disclosure requirements are imposed on the issuer in connection with the offering.
Issuers must identify the class or classes of tokens available for subscription and attach a written legal opinion regarding the token classification to the offering memorandum. If the Commission determines that a token is a security, the issuer must withdraw the registration application and proceed to register the token under the provisions of the SIA.
Non-compliance with the provisions of the Act constitutes an offense subject to regulatory and administrative sanctions. On summary conviction, individuals may face fines of up to $500,000 and/or imprisonment for up to 5 years.
In April 2022, in response to lessons learned during the “crypto winter” of 2022, the Commission began a review of the DARE Act to address any legislative gaps, ambiguities, and procedural concerns. As part of this process, the new Digital Assets and Registered Exchanges Bill 2023 (DARE Bill) is being drafted by the international law firm Hogan Lovells. The Commission will collaborate with them in the consultation process to ensure the amendments align with international standards and best practices, maintaining an up-to-date and proactive legislative regime in The Bahamas.
Malta’s Virtual Financial Assets Act (VFA Act) was introduced to regulate Virtual Financial Assets (VFAs) and Initial Virtual Financial Asset Offerings (IVFAOs) while addressing ancillary matters related to the field. Cryptocurrencies fall under the definition of VFAs, and the Act encompasses comprehensive rules that protect consumers and promote industry growth. It sets stringent requirements for cryptocurrency issuers and service providers, including brokerages, portfolio managers, custodian and nominee service providers, eWallet providers, investment advisors, and cryptocurrency exchanges.
According to the VFA Act, VFAs are digital mediums of exchange, units of account, or stores of value that are not classified as electronic money, financial instruments, or virtual tokens. Virtual tokens, also known as utility tokens, have no utility, value, or application outside the DLT platform on which they were issued and can only be redeemed for funds directly by the issuer.
The legislation clearly outlines the license requirements and conditions for individuals and entities issuing VFAs or providing specified VFA-related activities. It establishes a regulatory framework for IVFAOs and VFAs, covering matters ancillary to these offerings. The Act governs the types of VFAs that can be issued through an IVFAO and their admission to trading on Distributed Ledger Technology (DLT) exchanges, with a registered whitepaper submitted to the Malta Financial Services Authority (MFSA). The whitepaper must contain specific information, guidelines on fund usage, and due diligence requirements for the individuals behind the fundraising entity. Businesses are liable to pay damages if investors suffer losses due to false statements in the whitepaper.
The VFA Act defines IVFAOs, commonly known as Initial Coin Offerings (ICOs), as a means of raising funds through the issuance of VFAs in exchange for funds. The Act also covers the requirements for whitepapers issued before ICOs and regulates the manner in which advertisements for IVFAOs and VFAs should be conducted. Issuers of ICOs are required to appoint a VFA agent approved by the MFSA, who will be responsible for reporting and monitoring obligations.
License requirements apply to any person providing VFA services in or from Malta. The Act specifies the services covered, including order reception and transmission, execution of orders, portfolio management, custodian or nominee services, investment advice, VFA exchange operation, and transfer of VFAs. Entities offering VFAs or classified as VFA service providers must apply for a license from the MFSA through a registered VFA agent.
The VFA Act establishes a regulatory environment that brings legal certainty and clarity to Malta’s local and international crypto community.