Blockchain and Crypto Regulatory Update in Southbank, Melbourne.
We are still very early in the development and adoption of cryptocurrency and blockchain technology. So where are we in terms of the legal framework of cryptocurrencies and blockchain technology? And what are the Australian and Chinese regulators up to?
We had a highly informative and intelligible session on the current blockchain and crypto regulatory framework of Australia and China from our speakers:
Derek Henningsen - Head of Legal and Compliance at Huobi Australia
Andrew Fei - Harvard Attorney & Senior Associate at King & Wood Mallesons
Some key insights from our speakers can be found captured below.
Derek Henningsen, Head of Legal and Compliance at Huobi Australia
Derek Henningsen, Head of Legal and Compliance at Huobi Australia, giving an introduction of blockchain technology and an overview of Australian blockchain and crypto regulatory framework.
Introduction to blockchain technology
Blockchain technology can record financial transactions, store medical records or track the flow of goods, information and payments through a supply chain. If someone is to manipulate the system they would have to change every register.
An interesting use case of blockchain technology: in a Syrian Refugee Camp in Jordan, with the combination of blockchain and biometric technology, refugees who arrive without identification can scan their remittance forms and irises to have funds allocated to them. This enables them to access benefits, resources and to become a part of the community smoothly.
Blockchain technology can provide a frictionless experience for the community.
Regulatory environment
Countries all have a different regulatory framework and approach. The three main regulatory approach are:
Crypto Delaware: have developed a friendly regulatory environment for innovation and some jurisdictions focused on consumer protection (e.g., Malta and Switzerland).
Sovereign Technology Sword: technology and economic competition is a national priority (e.g., China and Russia). Although China's stance for cryptocurrencies is negative, they are very supportive in the development of blockchain technology. Recalling his experience in China, Derek mentions the common excitement of working towards the enterprise level blockchain projects among his colleagues in Beijing.
Consumer Protection Shield: placing existing regulation and laws first. Prefers the traditional frameworks to generate economic prosperity (e.g., the United States and the United Kingdom).
Derek sees Australia as being in between Crypto Delaware and Consumer Protection approach since Australian regulators have demonstrated active involvement in this space. The three main crypto and blockchain regulators recognised in Australia as of now are Australian Securities and Investments Commission (ASIC), Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Tax Office (ATO).
Australian Securities and Investments Commission (ASIC)
ASIC wants to be in the front foot when it comes to consumer protection in this space.
The key consistent issues recognised by ASIC are:
The use of misleading or deceptive statements in sales and marketing materials.
Operating an illegal unregistered managed investment scheme (MIS).
Not holding an Australian financial services licence.
Australian Transaction Reports and Analysis Centre (AUSTRAC)
If a business exchanges fiat for cryptocurrencies (and vice versa), then they are obliged under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 to register with and report to AUSTRAC, and implement a KYC process.
AUSTRAC has a facilitative approach. They gave a 6-month window for exchanges to become fully compliant (3rd of April 2018–2nd of October 3018) if they haven't already.
They're currently building out their database and expanding their interaction in this space.
Australian Tax Office (ATO)
Cryptocurrencies are not money but CGT assets.
You can conduct Self Managed Super Fund (SMSF) with cryptocurrencies under certain requirements.
Tax depends on what you're doing and how much you've purchased. The broad approach of the ATO is if you've bought under $10,000, then it can be treated as a personal use asset and not subject to taxation.
Securities Tokens
Securities Tokens is akin to equity ownership. Over the last six months, there has been a movement from ICOs to STOs.
The key difference between ICO and STO is that with an ICO you're buying something out of the blue. Projects write up a white paper with an innovative idea and the community puts in money to help fund the project. The truth is, a majority of these projects have failed. Securities Tokens represent an electronically wrapped stake or share in a private interest. This can be extended to various assets like sports teams, real estate, cars, art, IP etc.
Key advantages of securities tokens include:
Quick settlement and cost reduction. With the use of blockchain technology and smart contracts, settlements can be done almost instantly.
Fractional ownership. Securities tokens allow you to divide underlying assets into smaller units.
Traditionally illiquid investments are made liquid.
At this moment, no exchanges in Australia holds an AFS Licence.
Convergence
A quick overview of where the big institutional players are moving and what might the future be heading:
Chartered Financial Analyst (CFA) organisation has created two crypto and blockchain courses.
Fidelity - launching an institutional custody solution.
Hedge funds - some of the largest hedge funds in the world are actively building out crypto trading desks.
CME - bitcoin futures
Gordon/JPM - facilitating derivatives trading for clients.
Yale University - is venturing into the blockchain space by investing and helping Paradigm raise $400 million.
Andrew Fei, Harvard attorney Senior Associate at King & Wood Mallesons
Andrew Fei, Harvard Attorney and Senior Associate at King & Wood Mallesons, speaking on the blockchain and crypto regulatory landscape in China.
China Crypto Asset and Blockchain Regulation
For a period of time, RMB and bitcoin accounted for about 98% of transactions in the world which gives a good reason for the Chinese regulators in regulating this space especially in terms of capital flow and foreign exchange.
Over the past 5 years, if you ask someone "which country has the largest fintech companies in the world?", you probably won't hear any of them being Chinese companies. However, if you look at Fintech 100's report, you'll see that the top three would be Chinese.
Themes in Chinese Fintech Regulation
Sometimes the Chinese regulatory framework can be complicated when you look at the economic and financial layers. * To make it simpler, the Chinese regulatory framework can be identified into four themes:
Technology-based economic transformation: an economic reform. It's commonly perceived that China's economy is moving into a new normal (i.e., saying goodbye to double digits GDP which was largely driven by cheap exports) and transitioning into a more sustainable and innovative approach backed by technology. The Chinese government is setting up reforms and wishes for China to be the next technological powerhouse.
Encouraging innovation and entrepreneurship: true innovation doesn't necessarily happen in "big boardrooms at big firms" or "large corporate levels", but perhaps in the garage by college dropouts or a group of mates brainstorming a great idea. The Chinese government recognises this so they encourage entrepreneurship among the younger generation.
Preventing systemic financial risks: there is always some sort of risk in every financial system. The Chinese government is more concerned about "systemic financial risks" - a certain amount of risk that is so significant that it can create an event like the global financial crisis. They don't want this to happen because they want to maintain a social and economic stability.
Maintaining social stability: the current situation is that the Chinese government has a lot of control in the economy. Thus, the Chinese government holds a majority of accountability for their people. So if their citizens are to buy crypto from ICOs and they lose their money, then they may blame the Chinese government. Therefore, the Chinese government wants to maintain social stability by preventing systemic financial risk.
Bitcoin and other Crypto Assets
People's Bank of China (PBOC) is the central bank in China. PBOC is a key regulator in China and cares deeply for China's financial and social stability.
Bitcoin and other crypto assets are recognised as a 'virtual commodity' or 'private financial asset'. It doesn't have the same status as money or a legal tender. Towards the end of 2013, the PBOC came out with a statement to warn people about the volatility of cryptocurrency. They don't want their citizens to be too involved in the transaction of cryptocurrencies (i.e., accepting cryptocurrencies or facilitating the exchange). They've continued to do that even during the increasing price of the cryptocurrencies over the past years.
Initial Coin Offerings
The basic position in China is that crypto is banned and they're not supportive of ICOs. In 2017, the joint regulatory announcement stated that ICOs are constituted as unauthorised and illegal fundraising. There isn't enough information for investors when it comes to ICOs thus they're not able to make an informed decision and most of the time they're in a very vulnerable position. The Chinese regulators have recounted that most of these ICOs are scams and they don't want the general public to be involved in that.
China's jurisdiction is large and complicated, therefore it can be difficult to create a nuanced guidance to define ICOs. Thus, an outright ban is the most feasible step.
PBOC releases a yearly Financial Stability Report which had a special section regarding the risks related to crypto assets. The key recommendations from the financial regulators are that they'll take a substance over form approach to target ICOs and to ensure that ICOs aren't disguising themselves.
It may seem like China is very negative in this space but that is not necessarily the case. They are very positive and supportive towards the development of blockchain technology. This can be reiterated with the example of having the top fintech companies in the world.
Central Bank Digital Currency
PBOC is exploring issuing its own digital currency. We need to remember the distinction between the cryptocurrencies and the official cryptocurrency (digital legal tender) which is supported sovereign credit. A lot of the central banks in the world is looking into forming their own cryptocurrencies as well and PBOC is one of the first regulators to announce moves in this space.
The key advantages in this idea are: lower issuing and circulating costs (don't have to reprint money), convenience and transparency (easier to monitor the flow of money), reduce unlawful acts, oversight of money supply, financial inclusiveness, and RMB internationalisation.
Since China has a population of 1.4 billion people and has a very large economy, the government cares very much about financial and social stability. Therefore, they won't be hasty in terms of rolling out the digital currency. It's going to be a gradual and evolving process. To change from one currency to another is a very big move, thus there is no space for marginal error. Andrew believes that it's an interesting space to watch.
Blockchain
The state council has described blockchain technology as a key frontier technology and the MIIT has published two blockchain related whitepapers.
As of March 2018, there are 456 Chinese companies that have 'blockchain' as their primary business. This means that the majority of the Chinese citizens are excited by the applications and use cases of the technology.
PBOC released a working paper to explain "What blockchain can and cannot do?". PBOC doesn't want to create a bubble in this space, therefore they want to make the limitations of the blockchain technology clear.
CAC's proposed blockchain regulation
The Cyber Administration of China (CAC) (Chinese internet regulator) is involved in this space because blockchain technology and the delivery of it is linked to it the internet and big data. The internet is going to be the main medium for how blockchain technology is going to be delivered.
What triggered this involvement was an incident earlier this year where a group of Chinese individuals who engaged in the transactions based on the blockchain to disseminate information. From this, the government realised that they need some regulation in this space.
What the future holds
Blockchain services will have to be officially registered and have to consistently quote their registration number. This is how the regulators will be able to monitor these companies in the future.
With this type of regime, they would also require an annual security review and other assessments, i.e., every time there's an upgrade or improvement to their system, it has to undergo a review and more assessments, which may result in a slow down in innovation with the constant review and reports.
The general blockchain environment in China is very encouraging.
Over 40 people in attendance to hear the update on the blockchain and crypto regulations in Australia and China. Enjoying drinks and pizzas.
Both Australia and China's regulators in the blockchain and cryptocurrency space have different approaches and actions taken place. One thing that both have in common is that they want to protect consumers and minimise risks in frauds and scams. As the space matures with time, so will the regulation.
For the audio/video of the whole session:
Part one:
Part two:
