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Asset Tokenisation, Infrastructure Development and Far More Regulation

by Kate Goldfinch (science editor, TFT)

2018 was the year of ICOs in the news and a cryptocurrency crash following the sell-off of the most cryptocurrencies from January 2018. After an unprecedented boom 2 years earlier, bitcoin market capitalisation fell below $100 billion from 2017. Perhaps even worse than the falling prices is the uncertainty over where crypto’s headed next. Kate Goldfinch, science editor at The Fintech Times asked experts Julia Shtabska, Head of Blockchain Practice, Nikita Novikov, Associate and Oleksandr Synytsia, Junior Associate at Juscutum Law Firm about what they see as the next big trends in blockchain and the crypto industry and what to expect regulatory wise in 2019.

What awaits the cryptocurrency market in 2019?

Development of cryptocurrency related financial instruments, establishment of highly liquid platforms through institutional exchanges, tokenisation of securities, corporate rights, and enterprise operations are some of the activities from a list of innovations that we expect from the cryptocurrency market in the upcoming year. Here is a roundup of 2018 and expectations in the market for virtual assets in 2019

Global Trend on Money Laundering and Terrorism Financing prevention

Definition of “virtual currency” had been introduced by the fifth EU Anti-Money Laundering Directive (AMLD). Now, a cryptocurrency-oriented business that falls into the category of obliged entities under the AMLD 5 has to conduct customer due diligence measures and report relevant EU state authorities about suspicious transactions.

New regulation covers two types of cryptocurrency business:

  • providers engaged in exchange services between virtual currencies and fiat currencies;
  • custodian wallet providers (cryptocurrency wallets that provide services to safeguard private cryptographic keys on behalf of its customers).

Most of the companies whose business is subject to AML directive regulation have already implemented comprehensive AML policies, as well as control instruments over the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) procedure.

In the Directive, the motive for such regulation was described as follows: Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship.”

Also, in October 2018 Financial Action Task Force (FATF) amended one of its main documents The FATF Recommendations on its international standards on combating money laundering and the financing of terrorism & proliferation. The FATF recommendations contain definitions of terms such as “virtual asset” and “providers of services in the field of virtual assets”, as well as measures that countries should apply to providers of services in the field of virtual assets to counter money laundering and terrorist financing. According to the FATF recommendations, persons or entities engaged in the exchange, transfer, safekeeping, and offering of virtual assets shall be the subject of strict monitoring and AML compliance control.

A global trend on the introduction of registration rules for cryptocurrency exchanges and wallets

2018 was the year of regulation. Most innovative legislation was established in Malta and Gibraltar. Also, Estonia remains one of the friendliest jurisdictions for distributed ledger technology (DLT).

Malta. The Parliament of Malta has adopted three new legislative acts, designed to attract blockchain-related companies from all over the world.

Gibraltar. In 2018, a new regulatory DLT framework came into force. According to this, Gibraltar companies that provide services using blockchain technology are required to obtain the appropriate license from the Financial Services Commission (GFSC).

It is important to mention that the regulation adopted in 2018 is already being implemented on cryptocurrency exchanges, where GBX and Huobi have already received an official license from the state regulator.

Estonia. Over 2018, the Estonian government has issued more than 900 licenses related to virtual assets activities.  Thus, the Estonian Ministry of Finance intends to amend the AML legislation to tighten the compliance for crypto exchanges and custody wallets. In 2019, we will see how the financial supervision authority will monitor the crypto business registered in Estonia.

A new reality for DEX:  In the US, DEX (decentralised exchanges) is equated to ordinary exchanges.

By the end of 2018, SEC using the EtherDelata case had debunked all the myths about the inapplicability of US legislation requirements on a securities trading to DEX.

A platform that offers trading in digital asset securities and operates as an “exchange” (as defined by the federal securities laws) must register with the Commission as a national securities exchange or be exempt from registration.

SEC emphasises that no matter how the platform classifies itself and what technologies or algorithms are used, it should be recognised as an exchange under US laws.

Now crypto-anarchists will not be able to escape from the regulations under the “DEX” banner.

Service Providers for STO and Exchange for ST (security tokens)

Last year many platforms providing a wide range of solutions for STO were created. Securities trading is a strictly regulated activity making it necessary for platforms not only to comply with strict KYC / AML procedures, but also to obtain the relevant licenses / authorisations from the local regulator.

Throughout 2018, many traditional institutional stock exchanges turned their attention to security tokens trading. SIX Swiss Exchange, Malta Stock Exchange, Gibraltar Stock Exchange (GSX), London Stock Exchange and Australian Securities Exchange announced their plans for security tokens trading infrastructure development.

An interesting alternative to traditional stock exchanges on the security tokens market could be ATS (Alternative trading systems) platforms in the USA or the MTF (Multilateral trading facility) in the EU. Such famous STO platforms as Templum and tZero are ATS platforms authorised by the SEC.

Cryptocurrency

Financial instruments and cryptocurrencies

The trends set in 2017 and 2018 continue. Cryptocurrencies are increasingly pouring into the global financial system, and respectively, many traditional financial instruments are entering the cryptocurrency market (like futures contracts or options).

Futures. In 2017, the world observed the launch of bitcoin futures on the US CBOE exchange. This year, the largest US stock exchanges NASDAQ and the NYSE are planning to start trading bitcoin futures subject to the approval of such actions by the Commodity Futures Trading Commission (CFTC).

ETF. In 2018, the entire crypto community expected to launch Bitcoin-ETF. To launch such product, US exchanges need to obtain approval from the SEC. Throughout 2018, different platforms unsuccessfully tried to receive a favorable decision from SEC. Most likely, the launch of Bitcoin-ETF will happen during 2019.

ETP. While in the US the SEC is still considering applications for the launch of ETF, the analog of the American Bitcoin-ETF – Amun Crypto ETP appeared in late November on the SIX Swiss Exchange.

Swaps. In December 2018, OKEx, cryptocurrency exchange located to Malta and launched its new product – Bitcoin Perpetual Swap.

Forecasts for the cryptocurrency market in 2019

In terms of strategy, global regulatory approaches will follow three directions:

  1. Decreasing the barriers which are facing DLT investors (Malta, Gibraltar, Switzerland);
  2. Adopting and enforcing new regulatory provisions to secure governmental influence (China, Russia);
  3. Observance of sustainable practices and laws to maintain financial stability and protect consumer rights (USA, UK).

Also, in the light of last year’s trends, the following trends could be anticipated in 2019:

  • Strengthening of AML / KYC compliance requirements for all cryptocurrency market participants;
  • STO infrastructure and its licensing requirements development;
  • Development of hubs and sandboxes under the control of local regulatory bodies in different jurisdictions;
  • Introduction of risk analysis guides and policies by banking associations or regulators for crypto-related business bank account opening (like SBA in 2018);
  • Development of new financial instruments for crypto;
  • Development of global principles of cryptocurrency regulation by international and regional organisations;
  • Establishment of highly liquid virtual assets trading platforms through traditional institutional exchanges; and
  • Tokenisation of securities, corporate rights, and business operations.

 

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