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Special Series: Institutional Investment in the Bitcoin Market

Part 4: From dark to light: the story of Bitcoin and regulators

It was not until Bitcoin experienced its first bull-run in 2013 that digital asset regulation became a hot topic. In that year, 30 jurisdictions released initial statements primarily consisting of warnings to consumers and investors over the risks associated with the nascent technology. 

Since then, the rapid growth of digital assets has led many countries to design regulatory frameworks that aim to protect investors and encourage long-term economic stability and innovation. 

While regulation of digital assets is inevitable, global implementation may take some time and there is currently an opportunity for firms and funds to be early adopters. 

Many countries are in various stages of rolling out regulations to first register with their national financial regulators, and then secondly, receive an official license to operate. 

Below is an overview of some of the regulatory frameworks around the world.

The Financial Action Task Force (FATF) is a global regulatory body that issues guidelines on AML/CFT created by the G7 in 1989 to combat money laundering. In June 2019, the FATF became one of the first organizations to comprehensively address digital asset regulation on a global scale, when it issued its “Travel Rule” guidance. This FATF Travel Rule requires Virtual Asset Service Providers (VASPs) to share specific user information related to transactions that exceed USD1,000 in value, creating a standard communications framework for the industry. 

Hong Kong has one of the most forward thinking and comprehensive regulatory frameworks related to digital assets, creating a sandbox for regulation in 2018 and continuing to update policies and guidance on the trading technology with a view to full regulatory oversight by the end of 2022. Digital asset firms that wish to operate in Hong Kong or sell products and services to Hong Kong residents must comply with regulations related to asset and customer protection that are equivalent in stringency to regulations governing traditional financial services. OSL was the first firm to receive Types 1 (brokerage) and 7 (automated trading system) licenses for regulated activities related to digital assets from the Securities and Futures Commission (SFC), after the company opted into the SFC’s virtual asset regime and successfully underwent the SFC’s rigorous vetting requirements.

In Mainland China, authorities have taken a different approach to digital assets, with a stronger view on mining and trading that has caused some businesses to shift focus away from the China market. Despite this, digital assets have been buoyed by ongoing discussions around central bank digital currency implementation that is viewed by many as a game changer in the sector – and an area in which China is a global leader. 

Singapore, known for its high standards in areas such as risk management and audit controls, as well as AML and CTF, announced progressive digital asset regulations under the Monetary Authority of Singapore’s (MAS) Payment Services Act (PSA), which so far has granted two digital asset to licenses (both in August), the first to Australian-based Independent Reserve and the second to DBS Vickers brokerage. More than 170 firms have applied for licensing in Singapore, including OSL.

Japan was one of the first countries to introduce regulation for digital assets in 2016-2017, requiring digital asset platforms to register with the authorities. Japan’s gradual regulatory iterations and its growing cooperation with digital asset exchanges has allowed the country to take its place at the forefront of how AML/CFT regulations are implemented.

In Europe, the recent Digital Finance Package and Markets in Crypto-Asset (MiCA) are set to create an overarching digital framework to regulate all digital assets before 2024. In the UK, the Financial Conduct Authority (FCA) has approved a handful of firms under its crypto regime, which mostly focuses on determining whether companies are compliant with AML rules. OSL has a JV with Standard Chartered’s SC Ventures in the UK and Europe and the JV has applied for relevant licenses in the market.

In the United States, certain digital companies, including Coinbase, are required to register as a money service business (MSB) with Financial Crimes Enforcement Network (FinCEN), and then further apply for licensing on state-level as a money transmitter. Coinbase is also listed on the NASDAQ and must comply with the exchange’s reporting rules, with rumors swirling about other exchanges to follow with public listings of their own. 

Some Digital asset exchanges have registered as a bank with oversight from the New York Department of Financial Services, which means they are subject to the provisions of the US Bank Secrecy Act, the US Patriot Act and the General Regulations of the Banking Board. Several top government officials, including President Joe Biden, SEC Chairman Gary Gensler, and US Senator Elizabeth Warren, among other senators, have spoken out in favor of digital asset regulation and taxation. The US congress has debated and agreed an amendment to the bipartisan infrastructure package which includes guidelines for taxing digital assets. 

In Brazil, rules regarding taxation of digital assets have been established by the national tax bureau. A normative from 2019 determines that digital asset transactions must be properly reported every month to the authorities by Brazilian exchanges, individuals or legal entities. Additionally, Brazilian fund managers have been exploring the current regulation of the country’s Securities and Futures Commission (CVM) to offer regulated ETFs and funds for investors. 

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Worldwide adoption of digital assets will continue to catalyze growth in the sector and increasing regulatory clarity will drive greater participation by major financial institutions. OSL is poised to scale exponentially in these circumstances.