Regulation Of Cryptocurrencies in the USA and Worldwide: Two Approaches

Regulation Of Cryptocurrencies In the USA And Worldwide

 

The blockchain technology is spreading across the world economy. But how its main product, a cryptocurrency, is treated in legal terms? Newconomy media asked the expert Alexandra Levin Kramer from the US-based law firm CKR Law LLP, who is also a co-founder and CEO at Womin.io.

Two approaches to the cryptocurrency regulation

There are two extremes into which countries are divided, Alexandra Kramer says. The first approach involves restricting the circulation of digital assets and banning ICO, it is applied in such countries like China or South Korea. On the opposite side, there are several states with a “blockchain friendly” policy, including Malta, Singapore, Gibraltar, and Estonia.

But the majority of countries place themselves between these two camps, with USA, Canada and European Union among them. None of those countries banned crypto, however, they’re trying to keep the balance. That’s why the progress in regulation has been made “very slowly,” the expert notes.

While there are many complaints about it, there is “much happening behind the scenes”. For instance, US financial regulator Securities and Exchange Commission (SEC) has recently established the Finhub initiative, dedicated to the closer work with startups in the field of financial technologies, including blockchain.  

Alexandra Kramer underlined that in Common law countries like the United States, regardless of the industry, the court system plays a major role in the regulation. There are two classes of legal cases: first is lawsuits from investors that conclude how similar cases will be considered in the future, and the bright example is “Tezos case”; another class is “regulators, going after companies for an alleged violation of securities laws.” And state officials don’t necessarily win – some judges refuse to admit that a certain token is a security, Kramer added.

Still, the expert concluded that the regulation of cryptocurrency in the United States is far from being over:

“We need to wait – to see how courts deal with this.”

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Importance of compliance with the law

In the USA, most of the tokens are recognized securities, almost without an exception, Kramer highlights:

“It is only legal advice. But if you are selling a token in order to raise capital to build a platform that doesn’t exist yet, than you’re likely to be considered a security.”

She stresses that the crypto market is damaged by the ongoing “crypto winter”. Still, it played its role, removing speculators and impostors from the stage:

“We are left with the people who are very serious about the technology and arn’t just trying to make a quick buck… So, I think, those who are left recognize that a token, which follows a certain financial model will be considered securities”

Such an attitude towards compliance with the rules is already attracting institutional investors to the market, even those who follow and remained aside before, such as endowment and pension funds.

Horses and unicorns in the realm of tokens

Speaking about the future of cryptocurrencies, Kramer said that the emergence of Security Token Offerings is imminent. An STO market will become possible after there will appear a registered exchange for security tokens, “not just dealing with some broker-dealer.”

Another issue for crypto startups is rigid rules for the registration of securities. Though there can be certain exemptions. In 2015, the new Regulation A was passed, which contains rules providing exemptions from the registration requirements. Several startups involved in cryptocurrency issuance have already applied for the exemption of its securities. This process is still pending, but a positive outcome will impact the industry, US attorney believes:

“In my mind, it is sort of the best exemption from registration to use, because, unlike some other exemptions, that restrict the security from sales to accredited investors, for instance… Regulation A is sort of a mini-IPO. The benefit is that there is no restriction who you can sell the token… And also it is not restricted to resell a token once it is listed, they can be traded.”

Regulation A requires to “put quite a bit of work into creating an offering memorandum” to provide a disclosure that’s required to the SEC, but “as soon as SEC approves the first, that will become a model to use.”   

“Besides a discussion around security tokens and SEC, there is some animal that is not a security, which is sort of a unicorn: they can exist in theory under US law, but they are very rare”, – she added.

Anyway, Wyoming is the only state to create a legal framework for the non-security tokens by far.

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Rigid rules for all crypto companies around the globe

Foreign companies, selling tokens outside the USA, need to follow the United States law, too. Kramer explained that there is a Regulation S, a set of rules that includes rules for how non-US companies need to conduct offers of securities outside the United States:

“Regulation S is complicated for the blockchain industry. It also means you can’t market your offering in the United States. Well, if you have a website that accessible to US IP-addresses, then you will be probably considered marketing to the US.”

The compliance with the US law is preferable even if the token is not sold on the US market. Because the issuer has to investigate deeply its investors’ list to exclude those from the United States. Moreover, after the initial sale, such tokens remain prohibited from buying by US citizens. This becomes an even larger issue as it is hard to control the circulation of digital assets:

“At least there are certain things that our clients are trying to do to prove they’re not trying to evade the law. For example, I advise clients to block US IP-addresses from their website. Also, if you are going to list your token on an exchange, list it on a one that will not admit US persons as buyers,”- Kramer concludes.