The SEC’s ‘crypto token framework’ provided some more concrete guidelines on how the staff at the U.S. government regulatory agency view ICO’s and digital tokens in the cryptocurrency space. Within their framework, the SEC appears to suggest that they observe most current tokens and ICO’s in the cryptocurrency market as securities and securities offerings.
However, their analysis has been met by some stiff criticism from some corners including the Libertarian think tank, Competitive Enterprise Institute, who detailed in a report the overly ambitious and the regulatory-heavy perspective of the SEC would hinder innovation and entrepreneurship. In a similar breath, U.S. lawmakers reintroduced the Token Taxonomy Act, which seeks to preclude cryptocurrencies from being classified as securities in the U.S.
While these developments are pertinent to the global regulatory landscape, they do not define it. Other countries and regions have begun instituting their own frameworks for cryptocurrencies that are critical to take into account. The U.S. government may have significant global reach, but viewing cryptocurrency regulations through a more global prism can provide some better context on the state of cryptocurrency classification in the broader financial sector.
In particular, evaluating a crypto-friendly haven like Malta in comparison to a fragmented set of global guidelines can reveal some valuable insights into the future landscape of international regulations.
Malta’s Crypto-Friendly Regulatory Approach
Dubbed ‘blockchain island,’ Malta quickly emerged as one of the hotbeds for cryptocurrency-focused companies and entrepreneurs due to their favorable outlook of blockchain and cryptocurrency tech.
The Malta Financial Services Agency (MFSA) recently approved the first 14 crypto asset agents in a report published on April 2nd. According to the report:
“VFA agents will be assisting issuers and service providers under the Virtual Financial Services Act, and will be making applications to the MFSA on their behalf.”
The Virtual Financial Services Act (VFSA) officially became law last July and solidified Malta as one of the first global jurisdictions to provide a definitive set of statutes on digital assets. Additionally, the MFSA published a rulebook for Virtual Financial Assets (VFA), which is designed to address rules for VFA agents, issuers, and service providers. However, the initial release of the rulebook was met with resistance by some enterprises in the digital asset sector who cited an over-cautious approach as problematic.
Where Malta primarily differs from the SEC in its stance on ICOs and other digital assets is in regards to classifying them as securities. The SEC’s crypto framework reveals that under the Howey Test, in the format that they apply it, most digital assets and ICOs fall under securities law.
Conversely, in Malta, digital assets — specifically ICOs — are not classified as securities if they are utility tokens. However, issuing institutions such as exchanges (IEOs) or enterprises are required to appoint a VFA agent and need to register with the MFSA. In particular, issuing institutions are also required to file their whitepaper in their application with MFSA that details specific aspects of the sale such as advertisement strategy and marketing.
Utility tokens, which the SEC leans towards classifying securities, are not securities in Malta but are subject to explicit restrictions such as only being redeemable for funds on the platform directly by the issuer of the asset — according to the VFAA document.
The more definitive sets of regulations in Malta is much more reassuring than the current iteration in the U.S., which consists of a legally non-binding set of guidelines issued by the SEC staff in no official capacity. The Malta VFAA includes many safeguards for investors as well, but they are clearcut, and as long as issuers follow the VFA agent directives and stay within the law, they do not have to worry about an arbitrary pursuit of their token offering as security where retroactive fines can be implemented.
Malta is also taking other steps towards better investor protections such as the MFSA partnering with blockchain analysis company CipherTrace for improved crypto business compliance.
A Fragmented Set of Global Guidelines
Malta’s approval of the initial VFA agents will kickstart the incorporation of more licensed companies and exchanges under the umbrella of the regulatory framework. It is still in its early stages but should start unfolding faster throughout 2019.
Surveying other crypto guidelines around the world reveals a more fragmented and incomplete nexus of government stances. Nations like Bermuda have made headway similar to – albeit behind – Malta, and major countries like the U.S. are still grappling with how to approach regulations appropriately. The European Union, as a whole, has also not taken a pronounced stance on legal provisions for crypto firms and assets, but individual states in the EU are moving forward with some early regulatory advances regardless.
For example, the French government is passing crypto asset legislation while Germany has begun consultation on its strategy for blockchain tech. Smaller nations like Luxembourg have already adopted early-stage regulations for the sector as well.
In regards to ICOs, Malta seems the optimal route for exchanges and issuers as the new framework and a flood of service providers, service providers, and other crypto firms rush into the small Mediterranean island nation.
The global landscape for digital assets is likely to continue to be highly fragmented. While the EU may eventually pass a wide-ranging set of regulations on crypto that incorporates standardized guidelines for member states, that seems unlikely to occur for several years, if at all. The U.S. position will be the most marked considering the dominance of the crypto industry in the country but seems unlikely to decouple itself from the SEC’s position that ICO’s and utility tokens are securities.
The reality is that a standardized framework across major regions of the world for crypto assets seems doubtful at best. The notion of the cypherpunk roots of cryptocurrencies and a novel class of assets simply causes too much friction with many modes of international government, particularly in centralized, oppressive regions.
There will undoubtedly be governments who can adequately reconcile governance models with censorship-resistant assets and fundraising models, but many countries will simply not have the initiative to do so. A diverse set of disparate laws appear poised to materialize around the globe as governments begin to take further notice of cryptocurrencies and either choose to adopt them or push them away.