Tonight I came across a very interesting article on a subreddit about the possible implications of crypto regulations for NEO and crypto-trading venues. Because I think it's important and because the author seems competent to me, I wanted to share this with you:

There is a lot of talk about new crypto regulations, following the recent statements from the Public Bank of China (hereafter: PBOC). I decided to write this small article, so that people better understand the challenges the PBOC, NEO and crypto-trading venues might be facing.
I work as a lawyer in the Investment Management branch in the Netherlands, where I help clients (banks, assets managers, investment funds) to implement (European) legislation. Although regulation from the PBOC will be (of course) different than European Legislation, I believe they will in principle be the same. I would like to stress out that these are my personal views, which I worked out in my own time. They therefore do not represent in any way the views of the company I work for.

The Applicability of a law to a company

There are currently no licensing requirements for NEO or crypto-trading venues. It is however very probable that the PBOC would introduce this kind of licensing. There are two ways in which a country’s laws can apply to a company. When a company is registered in a country which requires licensing for a particular type of business, the license requirements will apply to this company. Another way in which a country’s laws can apply to a business is through the initiative test. When a company actively offers its services in another country, the license requirements in this country will apply to the company.
It is important to understand that it is impossible to avoid regulatory requirements by sending a satellite into space. The business that a company conducts determines whether a license is required, not the whereabouts of the hardware used in providing the service. The whereabouts of the hardware may perhaps only cause privacy issues. For example: the storage of privacy sensitive data outside the EU for example is not considered to provide an adequate level of protection.

What kind of requirements would apply to NEO and crypto-trading venues?

There are five kinds of regulatory requirements which could apply to NEO and/or crypto-trading venues that I find noteworthy.

1. Anti-Money Laundering:

Rules which are generally labelled as “Anti-Money Laundering” (AML) are in place to stop money laundering, terrorism financing and organized crime. AML applies to credit institutions, financial institutions and a list of natural or legal persons (among which: accountants and providers of gambling services). NEO and Crypto-trading venues currently do not fall under this definition. However, investing in NEO could be a very useful instrument to launder money, or finance terrorism. Would the list be updated to include companies like NEO and crypto-trading venues, they would have to verify the customers before entering into the business relationship, identify the ultimate beneficial owner of the customer and verify the ownership and control structure of the group to which a customer belongs. NEO and the crypto-trading venues would also have to monitor their transactions and recognize and report any unusual transactions.

2. Sanction laws:

Sanctions are an instrument of a diplomatic or economic nature which seek to bring about a change in activities or policies such as violations of international law or human rights, or policies that do not respect the rule of law or democratic principles. Sanctions laws require companies to screen their administration to make sure there are no natural or legal persons or entities that are named in the sanctions regulations amongst their clients. In short: these laws prevent NEO and crypto-traders to conduct business with ISIS, North Korea, etc. The Sanction laws are in principle already applicable to NEO and trading venues, but are not actively enforced. The crypto regulation initiative would probably change this.

3. Investor protection:

Investor protection rules are rules that encourage honest advertising of financial products, and to prevent fraud to make sure that investors do not lose money. NEO or crypto-trading venues are currently not required to provide investor protection, since NEO’s and GAS do not fall under any definition of financial instruments or client funds. Any new crypto regulation probably will contain a lot of investor protection rules. These rules will make crypto-trading venues distinguish between consumers and professional clients and require them to clearly inform consumers on the risks involved with buying NEO’s. NEO would be required to draft a prospectus, in which they should place all information that could be of use for investors to form a responsible judgement on the financial situation and the prospects of NEO. The rules will also enforce crypto-trading venues to segregate client assets from their own, so that client assets are protected in case of bankruptcy.

4. Market Abuse:

Market abuse is defined by the European Commission as: circumstances where financial investors have been unreasonably disadvantaged, directly or indirectly, by others who:

• have used information which is not publicly available (insider dealing)
• have distorted the price-setting mechanism of financial instruments
• have disseminated false or misleading information

All three cases can apply to cryptocurrencies. Insider dealing could occur if a close friend of anyone in the NEO team hears of information that would significantly impact the price of NEO. Price-setting mechanisms are the practices of “whales” everybody talks about. Dissemination of false and misleading information is the “fake news” we have been seeing so much of.
I think it’s clear that any crypto regulatory initiative would include market abuse rules which apply to NEO and crypto-trading venues. Neo would be required to keep a list of persons with access to insider information. Crypto-trading venues would be required to report all transactions to its National Competent Authority (NCA). NCA’s would then be able to screen the transactions to actively search for market abuse practices.

5. Tax:

The applicability of tax laws to the money invested in the ICO is very interesting. I am not a tax lawyer, so don’t pin me down on this one, but I think the money received in the ICO would be regarded as a donation. In an IPO (Initial Public Offering) of shares, anyone participating would receive actual shares of a company. In the case of NEO we do not receive shares. NEO also didn’t issue bonds, which constitute a debt. The participators of the ICO (unfortunately not me) received voting rights on the consensus network. I don’t believe the tax authorities would allow NEO not to pay any tax over money picked up in the ICO. NEO and crypto-trading venues would also have to keep all accounting and financial data, so that the tax authorities can investigate potential tax evasion of NEO’s clients. Within the European Union this data retention period is between 6 and 10 years.

Conclusions

I think regulation is good for the crypto branch and I am very happy as a NEO investor that management has stated multiple times that it will comply with regulation. There will however be significant implications for NEO and crypto-trading venues.

Both NEO and crypto-trading venues: would have to investigate the identity of every (ultimate beneficiary) holder of NEO and store this information. They would have to store all accounting and financial data. They would also have to report suspicious transactions and make sure none of its clients are on sanctions lists.

NEO: would have to keep insider lists so that inside information does not end up on the streets. NEO would also have to provide more and clearer information on the company and the underlying worth of NEO’s and GAS. NEO would probably also have to pay more taxes over the money received in the ICO.

Crypto-trading venues: would have to report all transactions to its NCA. They would have to segregate client assets from its own assets and would have to inform (consumer) clients of the risks involved in trading.

Since everyone posts their public address with an article, I will also. If anyone has spare NEOs or GAS, I won’t refuse any. My girlfriend doesn’t allow me to buy any more ;)
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