Asset or currency, this is a common dilemma faced by cryptocurrencies globally, and different identity definitions inevitably lead to regulatory policies heading in completely different directions.Originated by Chain News (ID: ChinaBlockchainNews)Author | Huang WanyiAccording to media reports on June 6th, the US Securities and Exchange Commission (SEC) is conducting an investigation into Coin An, mainly involving the BNB token issued by Coin An in 2017
Asset or currency, this is a common dilemma faced by cryptocurrencies globally, and different identity definitions inevitably lead to regulatory policies heading in completely different directions.
Originated by Chain News (ID: ChinaBlockchainNews)
Author | Huang Wanyi
According to media reports on June 6th, the US Securities and Exchange Commission (SEC) is conducting an investigation into Coin An, mainly involving the BNB token issued by Coin An in 2017. It is verifying whether the token should be considered a security that should have been registered with the SEC.
The report points out that if investors fund a company or project by purchasing cryptocurrency and intend to profit from it, then cryptocurrency may fall under the supervision of the SEC, based on the definition of investment contracts by the US Supreme Court in 1946.
In its latest statement, Coin On stated that "we are not in a position to comment on the ongoing dialogue with regulatory authorities. We will continue to meet all the requirements set by regulatory authorities.
Although the investigation may take a long time to come to a conclusion, the US securities regulatory authorities have taken action on token issuance, highlighting the regulatory approach towards cryptocurrency. Whether cryptocurrency belongs to currency or securities assets has once again sparked heated discussions.
In fact, following the recent events of the UST and Luna "death spiral", financial regulatory authorities in many countries have expressed a general preference to define cryptocurrency as an asset rather than a currency since the beginning of this year.
Asset or currency, this is a common dilemma faced by cryptocurrencies globally, and different identity definitions inevitably lead to regulatory policies heading in completely different directions.
Asset or currency?
At the World Economic Forum in Davos in late May, the President of the International Monetary Fund, Kristalina Georgieva, stated that "crypto products cannot be confused with currencies. Any product without sovereign guarantees can be an asset, but cannot become a currency
Georgieva believed that a prerequisite for currency is a stable repository of value. Therefore, although Bitcoin is called a currency, it is not money.
At the World Economic Forum in Davos, most central bank leaders of countries held a similar attitude. Francois Villeroyde Galhau, governor of the Bank of France, said frankly that he did not call cryptocurrencies cryptocurrencies: "I always think cryptocurrencies are assets, not currencies. They are not reliable currencies, nor are they reliable means of payment."
If you want to invest in cryptocurrency, it's okay, but we don't want to see it as a payment method because it's not suitable, "said Sethaput Suthiwartnarueput, the governor of the Bank of Thailand
These views of crypto products as assets rather than currencies have some data to support them. According to a 2021 survey of institutional investors by Fidelity Digital Assets, 56% of European institutional investors and 33% of US institutional investors hold investments in the digital asset category, respectively. This data shows a significant increase from 45% and 27% in the previous year, while the Asian region's data is 71%, far higher than the European and American regions.
On July 1, 2021, a new fund bill in Germany officially came into effect, allowing specialized funds in Germany to invest 20% of their investment portfolios in cryptocurrency and other cryptocurrency assets.
Judging from the bull market of crypto assets since the outbreak of COVID-19, after hitting a record high price of 68789 US dollars in November 2021, Bitcoin now hovers below 30000 US dollars, the price has fallen by more than half, and the risk asset attribute is particularly obvious.
Regulators in various countries generally deny the monetary nature of encryption products, mainly considering concerns that most encryption products do not have actual assets as value anchors, and therefore tend to view them as encryption assets.
On the contrary, cryptocurrencies such as Taida Coin, which are backed by US dollar assets, have become special regulatory targets, and their regulatory approach is different from other cryptocurrencies.
Recently, Federal Reserve Vice Chairman Lael Brainard stated in a hearing before the House Finance Committee that the US Central Bank's digital currency (CBDC) may eventually coexist and complement stable and commercial bank currencies.
The attention of UK regulatory authorities to stable currencies appears to be more advanced. The UK government's Global Crypto Asset Technology and Investment Center plan mentions stable currency as an effective payment method.
In recent years, encryption projects have continued to innovate and develop rapidly, but in the early stages, regulatory policies in various countries were almost stagnant.
Compared to the complete ban on cryptocurrencies in earlier years, regulatory ideas have begun to embrace the industry, but the value of cryptocurrencies has not yet received any recognition in some countries and regions.
The Argentine central bank recently stated that banks are prohibited from providing customers with any digital asset services that are not regulated by the central bank. The heads of central banks in countries such as Sri Lanka, Jamaica, and Kenya have clearly stated that they do not support cryptocurrency transactions.
Different legislative and regulatory approaches
Some countries and regions have formed legislative drafts, preliminarily clarifying regulatory ideas.
The "death spiral" incident between UST and Luna prompted the South Korean authorities to accelerate the development of the Basic Law on Digital Assets. It is reported that the Basic Law on Digital Assets will incorporate virtual assets such as cryptocurrencies into the institutional system. This bill is planned to be enacted in 2023 and will be implemented starting from 2024.
However, the path to legislative regulation of cryptocurrencies is not smooth. Recently, the South Korean cryptocurrency taxation law, originally scheduled to take effect in early 2022, has been announced to be postponed until 2023. According to this law, cryptocurrency transactions with an annual income of more than 2.5 million won (about US $2100) will be subject to 20% capital gains tax and 2% local income tax.
Taxation is currently the approach adopted by many countries to regulate cryptocurrency transactions. On May 11th, the German Federal Ministry of Finance released a guide on cryptocurrency tax treatment, covering tax scenarios such as cryptocurrency mining, pledge, lending, hard forking, air drop, and trading. Among them, individuals who hold Bitcoin and Ethereum for more than a year and then sell them can be exempt from taxation.
It is worth mentioning that this guide is based on personal income tax rather than capital gains tax, that is, cryptocurrency is treated as a private property.
Different from the supervision idea of personal income tax in Germany, the UK General Administration of Taxation and Customs issued a tax guide for cryptocurrency investment in 2021, imposing capital gains tax on cryptocurrency profits, which is similar to South Korea.
The impact of taxation on the cryptocurrency industry will be profound, as it means that the legitimacy of cryptocurrencies has been officially recognized and an era of comprehensive regulation will also usher in. Currently, multiple countries such as Indonesia, Japan, Kazakhstan, and Austria are discussing taxing cryptocurrency transactions.
However, there have also been differences in the approach to taxing cryptocurrency transactions. On May 26th, a bill proposed by a left-wing political party in Portugal to tax cryptocurrencies was rejected by Congress.
In addition to the regulatory approach of taxing cryptocurrency secondary market transactions, South Korean authorities have also actively included the primary market in their regulatory scope after the UST crash.
According to a report by South Korean media on May 18th, the South Korean Financial Services Commission (FSC) submitted a comparative analysis of the Virtual Property Industry Act, which proposes a licensing system for exchanges and token issuance in the encryption industry. Distribute varying degrees of licenses to encryption companies based on the risks involved to protect investors.
The report also suggests the establishment of a public exchange similar to a stock exchange to conduct listing review and market monitoring of cryptocurrencies, and mandatory disclosure of information such as virtual asset issuers, major participants, purpose of fundraising, future value, and management review. To reduce insider trading, push up selling plans, and clean up trading and other dark box operations.
The European region is also pushing for a massive cryptocurrency bill - Cryptocurrency Asset Market Regulation (MiCA). The proposal for the MiCA bill released by the European Commission in September 2020 has not yet been approved, and the UST algorithm's stable currency crisis has prompted EU regulatory agencies to urge the European Council and European Parliament to accelerate the process of the MiCA bill. If the MiCA bill is passed, it can not only reduce investment compliance risks in the cryptocurrency industry, but also provide certainty for traditional banks and other financial institutions in providing cryptocurrency custody, trading, and market making services.
DeFi becomes a new regulatory hotspot
On May 30th, the European Central Bank released its biannual financial stability report, which has identified the risk of encrypted assets to financial stability as one of the new focus points.
This report points out that the scale of the encryption industry is constantly expanding, gradually integrating with the core financial system, and the risk to financial stability is increasing. The components of the encryption asset market include unsecured encryption assets (such as Bitcoin), stable currency, and decentralized finance (DeFi).
With the continuous innovation of projects in the encryption industry, new regulatory issues have emerged in fields such as DeFi and NFT.
Taking DeFi as an example, according to Amberdata, a digital asset data platform, the current total locked in value (TVL) of DeFi has increased from $601 million at the beginning of 2020 to $239 billion at its peak in 2022, an increase of up to 400 times over the past two years.
DeFi is developing rapidly, which is a financial solution that automatically and forcibly executes blockchain public chain smart contracts, and collectively maintains decentralized systems. DeFi can provide direct point-to-point financial products and trading services without the participation and supervision of a third party financial intermediary throughout the process. It is the strong enemy of traditional centralized finance in terms of security, transparency and openness.
Gary Gensler, the chairman of the US SEC, once stated that even though many DeFi projects claim to have no centralized corporate entity, these DeFi projects have the behavior of incentivizing users to participate and issue encrypted tokens, and are not completely decentralized, which means that DeFi should be regulated.
According to market news in May, the SEC will expand the number of dedicated positions in the crypto assets and network departments, and will focus on investigating securities law violations involving crypto asset issuance, crypto exchanges, crypto asset lending and pledge products, DeFi platform, NFT, and stable currency.
The European Union has announced that a pilot project on DeFi ecological regulatory rules will be launched in 2022. The European Union stated that the project will better leverage the natural data transparency advantages of the public chain, so that market participants do not need to collect, verify, and provide data to regulatory agencies like in traditional financial systems.
German financial regulatory official Birgit Rodolphe stated that in order for DeFi to truly become a competitor in traditional financial markets, it needs to comply with new regulations to resist hacker attacks and fraud risks.
Although the encryption industry is believed to naturally eliminate centralized regulation and intervention, there are already encryption giants actively embracing regulation.
At the beginning of the year, Sam Bankman Fried, co-founder of FTX Exchange, stated in a media interview that embracing regulation and compliant operations is a principle pursued by the FTX platform. Regular communication with regulatory agencies around the world and cooperation with numerous investors demonstrate FTX Exchange's commitment to becoming the most transparent and compliant cryptocurrency exchange in the world
Another exchange, Coinbase, proposed a cryptocurrency regulatory framework to US officials in 2021. Emily Choi, President and Chief Operating Officer of Coinbase, said that Coinbase is ready to be regulated. "We want to be treated equally with other financial services institutions. We want transparent regulation
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