Cryptocurrency Regulation

Blockchain Jurisdictions & Legislations | Blockchain Summit Malta

Jonathan Galea 04 Jan 2019

VIDEO TRANSCRIPTION: BATTLE OF JURISDICTIONS   Introduction:    Battle of the Jurisdictions. Malta, Switzerland, Estonia and South Korea go head to head in this animated battle between jurisdictions.    Jonathan Galea for Malta, Blockchain Advisory Karin Lorez for Switzerland, MME Dmitry Chirkin for Estonia, Humaniq Seungmin Jasmine Jung for South Korea, Jipyong Moderated by Gregory Klumov, Stasis   Moderator (Stasis):     Good morning, everybody. Thank you, Mr. Prime Minister. Now, this is quite a packed event, right? And besides Malta probably needs better conference centers, better hotels. I’m sure you’re all impressed how this island develops. I have here on the panel several experts who can share valuable opinions on different jurisdictions on how blockchain legislation will be adopted throughout the world.    So, may I start with Jasmine. Jasmine, South Korea recently banned ICOs. So now there is like a full stop on these activities. Do you think it’s gonna be lifted sometime soon?   Jasmine (Jipyong):    Well, South Korea was actually one of the first countries to embrace the blockchain and cryptocurrencies. Many of you may have heard of the term “kimchi premium” which alluded to the price of cryptocurrencies in Korea being higher than in other countries. This actually, however, made the government scared because they were afraid that the investors would be scammed or would lose on their savings. So what did the government do? They started banning everything. And one of the things they banned was ICO activities, especially security tokens being issued in Korea. This was promulgated in September last year and it has been going on for a while.   The problems the politicians found out is that it didn’t really stop Korean companies from doing ICOs work. What happened is that, Korean companies started to go overseas to do ICOs, making a lot of money for Singaporean law firms, consulting agencies. And the Korean government realized that if they continued with this ban, Korea would be at the back end of the blockchain technology. So they are revisiting ICOs and cryptocurrencies, in general. The rumor, which is quite official, is that there will new regulations that will be coming out in November, and hopefully, although I can’t predict with certainty, hopefully, they will provide some clarity on the direction of ICOs and cryptocurrencies in Korea.    Moderator (Stasis):    Okay, that’s clearly important to avoid regulated arbitrage because once some jurisdictions indorse business friendly legal framework and others just deny or prohibit doing business, so entrepreneurs will immediately go to the particular country which is a more favorable jurisdiction, exploiting this arbitrage.    Dmitry, what is happening in Estonia. It was one of the first countries that endorsed crypto-friendly legislations, but still not much businesses managed to open bank accounts there or created companies. Can you cast some light on that jurisdiction?   Dmitry (Humaniq):    Well, technically yes. Estonia was one of the first jurisdictions to welcome DLT technology, and blockchain and crypto. And I’m quite not sure whether not so many companies are established in Estonia, based on the PWC recent newsletter, more than 31 successful ICO only in the second half of this year […] Estonia.   I’m the international transaction lawyer, and only thing I cared when I drive my clients to go to particular jurisdictions is the tax efficiency. So Estonia has zero VAT and zero corporate income tax, which is brilliant. While we are running out to make our token, not the security token, we go to utility token, which has tax implications. So with Estonia, zero tax implications.    Estonia has a relevantly low-cost to set up a company and the company maintenance. The key feature to open the bank account is to have the substance in the particular jurisdiction where your office is. And in Estonia, the price for the real substance, real office, is very low. And now lots of developers and now the IT companies move their offices to Estonia due to the fact that personal income tax are also low. So I think based on the tax regime, it’s quite good.    Also, we have the licenses in Estonia for trading, for exchanges. And the price is also quite low, but those licenses are granted by the European Union country, that’s why they can be passported to other European jurisdictions.   Moderator (Stasis):    Okay, Karen. You’re from Switzerland, right? So Switzerland was also at the forefront of these initial footsteps, right, and they tried out to approach digital assets classifying them into several tokens, which I think is really the right way to do it. You have to figure out that utility tokens do not require high regulation and security token of which they regulate as usual security tokens. So we need to classify somehow. But since Switzerland made these comments, it put quite a halt on multiple activities that, you know, appeared in the country. So what is currently happening, and when will Swiss companies be able to open bank accounts for the ICO funds they raised.    Karen (MME):   Yeah, good question. I mean, what happened to Switzerland? In February this year, the regulator FINMA issued ICO guidelines, and as you said, they made a classification of tokens. So there are payment tokens, utility tokens, and asset tokens. And since then, you haven’t heard of anything. But that’s only from an outside perspective, to be honest, because when you’re inside, a lot is really happening. So these ICO guidelines, or the ball was actually rolling since then, since they published the ICO guidelines. Because there was a lot of legal certainty from them. People knew what kind of token they are actually issuing, or what kind of token they want to issue. They have some guidelines.    And also banks, which is a very important part. The banks felt more comfortable because finally the regulator gave some guidelines and also statements. So it’s also about the statements and not only given guidelines. And since then, the Swiss Bankers Association also gave out some guidelines. It’s a self-regulatory organization on how to onboard let’s say “crypto-millionaires” or “crypto-companies”. Also this is a very important milestone. The banks feel now more and more comfortable to actually onboard crypto companies and also ICO companies. That’s what we see as lawyers, as law firms, as MME, that a lot of banks are actually approaching us and asking for advice in this field.    Moderator (Stasis):    Okay. Jonathan, you’re shaping your career particularly about cryptocurrencies regulation and […] actually, right? And […] has been the big subject, the big topic. Do you think it’s possible to continue winning this war against regulators that […] currencies in the sense, digital cash that is traceable and it is better than cash in the sense that with cash it’s impossible to trace big amounts, but with digital currencies, there is always a blockchain that is out there and everybody can go out and see how the transactions went through.    Jonathan (Blockchain Advisory):    Incidentally, in 2014 when I started writing my doctorate of law thesis on the subject of bitcoin and its effect on money laundering laws, naturally I had no resources to refer to back then. But when I was studying technology and the way it worked, particularly of course in relation to Bitcoin, I could say that effectively the regulators could potentially have something on their hands which is much, much more efficient and better at tracking and tracing financial transactions.    In fact, in my conclusion to my thesis, I stated that although blockchain technology in relation to Bitcoin particularly, utilizes a method where you know the transactions but not necessarily know the persons behind the transactions, it is far easier to deal with than in the current system where you know the persons but you don’t know the transactions. Because effectively, in order to find out who the persons are behind the transactions, then all you need to do is collect information about them and associate them with a particular work address. And I wonder how long it will take to collect information around the world to realize that they have actually Pandora’s box right in front of them.    So essentially, I believe that blockchain technology will […] itself to the fight against money laundering, but I think the worst enemy of money laundering is the current regulation itself. When I was studying for my thesis, I came across the words “international cooperation” multiple times. International cooperation here work with other jurisdictions to help the fight against money laundering, and so on and so forth.    First of all, where’s the international cooperation decades after we started talking about regulating money laundering. Secondly, how come in 2018, we’re still requesting certain documents such as proof of address in a world which is largely becoming nomadic. We’re all digital nomads, so why are we still trying a square peg fit into a round hole? So I think, rather than trying to see whether technology is a threat at this stage, I guess we should see whether regulation is really a threat, and try of course to understand once and for all that regulation always, always has to follow technology no matter what.    Moderator (Stasis):    Okay, well Maltese example basically already proven that this crypto-friendly, business friendly legal framework is influencing local economy, that the GDP ratio is probably the lowest in Europe and the GDP growth rate is highest in Europe. So what do you think the last part of the puzzle is to bring institutional investors really more involved in this space? Because it is crucial to understand that asset class can only live for a considerable period of time when institutional masters get interested in it. And there are multiple investment products being opened, created, allocated to the asset class to really classify it as a true member of liquid alternatives.    So could you please just, starting from Jasmine, tell your opinion, what do we lack to get more institutional guys involved in digital assets.    Jasmine (Jipyong):   One phenomenon that we’re seeing in this space is actually not decentralization but a concentration of all the different functions in the cryptocurrency space, all being combined into one company or one institution. I’m sure many of you have heard of the “pump and dump” phenomenon which is often being conducted in cryptocurrency exchanges. You’ll also see cryptocurrency exchanges performing many functions even some going to OTC transactions and really, this is one of the reasons why institutional investors are actually afraid of going into the space because they don’t see the comprised measures that used to be in place with traditional financial institutions. And with those comprised measures comes professionalism or expertise, and that’s what I think is necessary to be built and also to be regulated in order for financial institutions to gain more trust and maybe a little more comfort in coming into the space.   Moderator (Stasis):    Dmitry.    Dmitry (Humaniq):   Well, I think the lack of something seamless between crypto and fiats really prevents institutional investors –   That’s what we do, actually.    Actually, yes, we all do this. For instance, I think the security token offering is something that institutional investors are waiting for. We’re assisting certain companies and combined 22 national deposits already, agencies, in order to make kind of a “Euroclear” on the blockchain. We also help our clients to set up the association which will be like “Expert trading agency”. Institutional investors need, let’s say, the shift of responsibility and if there will be the association or something that can bear the risk of fraud or something on your crypto counterpart, being for example a bank, that would be perfect solution. So I think the security […] the depositary, and shift of responsibility.     Moderator (Stasis):    Okay, thanks. Karen.    Karen (MME):   Well, I don’t want to talk about institutional investors. I just want to explain in Switzerland how the whole landscape shifted from start-ups and small companies to banks and big managers and even stock exchanges that are interested in engaged in blockchain technology, in cryptoassets and so on.    So there we see a real shift from small companies to institutional investors, financial institution actually, that are interested in building on solid blockchain technology as a basis. As you might have heard the Swiss Stock Exchange published that they will build a Swiss Digital Exchange, so all on blockchain technology, which is quite revolutionary I would say. And FINMA, the regulator, is now talking with the Swiss Stock Exchange how to best set it up.    So there we see that in the beginning, it was more like small start-ups that wanted to engage in blockchain and cryptoassets, and now it’s really being shifted to big banks, even big banks, and the Swiss Stock Exchange that is moving into this direction.    Moderator (Stasis):    Okay, Jonathan.    Jonathan (Blockchain Advisory):   I think what investors and users alike need, first and foremost, is time. Time to understand this technology, and time to allow the technology to […] as well.   I mean blockchain technology, as we know it, is only 10 years old. The internet took around 30 years in order to become mainstream. However, apart from that, I think we have to shift away from this whole utility concept versus securities and so on and so forth. I mentioned in the past. Just because something has utility doesn’t mean you’re going to use it. I mean, I might have a big axe over here but it doesn’t mean I’m going to use it. It has utility but not for my own particular needs.    So what we really need in order to attract investors is to start providing value. If we take a look at blockchain technology right now, I think it’s only you so far, as in terms of large-scale use, has been issued cryptocurrencies. I haven’t seen anything yet taking Gulf in a spectacular fashion. If you take a look at Ethereum, the biggest so far is Crypto Kitties, which of course says it all. So what we need is to start creating value to of course entice mainstream users and investors to start believing in this technology, and how it can help shape their lives in a better way.   Moderator (Stasis):    I would also like to add that education is very important. So we need to help people climb the learning curve of what this particular digital asset is, because even with the internet as you said, it took really really some time for people to figure out how it can change their lives for better, how information is being moved, right?    So regardless of what’s happening on the cryptocurrency markets right now and prices are falling, as you see, there is a significant investment going on in the industry. People allocating capital, hiring talent, countries are starting to compete for this exciting marketplace. So in whole, this will influence significantly and bring more development to the industry for the years to come.    I think it’s really important to keep a close track on what happens next. Of course, there will still be regulated arbitrage between jurisdictions, but hopefully, European Union will figure it out and adopt some kind of policy on the top level on how to address these digital assets. And conferences like these is very important because people can come and learn about this new and exciting technology.    With that, we are out of time, I would like you to thank our panelists, please?    (claps)   And yeah, very nice conference. There is a big conference center out there to meet the companies who operate in the space and learn from them. Thank you, guys. 

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