Just about every financial regulator has had their say about cryptocurrency and a recommended regulatory approach. While some have drawn a line in the sand, others continue to evaluate before crafting bright-line rules. Understandably, it has taken some time for policymakers to get up to speed on blockchain and digital assets as they did not exist when most rules, be they for securities or not, were enacted. Today, it is clear there are three types of digital assets plus some subcategories and hybrids. We have virtual (or digital) currencies, security tokens (debt/equity etc.), and utility coins. Each of these crypto assets requires a certain element of nuance when it comes to regulatory compliance.
Several weeks back, the Dutch Authority for the Financial Markets (AFM) and De Nederlandsche Bank (DNB) published their spin on compliance and what should be done for investors in digital assets. Both the AFM and DNB have issued the prerequisite warnings in the past pertaining to crypto scams and the high degree of risk associated with initial coin offerings. Both agencies note that Bitcoin and Ether are not subject to financial supervision but financial products and services based on cryptos are.
Research was conducted to gain better insight into the emerging digital asset sector. Throughout 2018, the AFM and DNB surveyed both investors and crypto/blockchain based platforms.
The DNB and AFM requested two changes be made by the Dutch Minister of Finance:
- Introduce a licensing regime for fiat-crypto exchange platforms and crypto wallet providers, to ensure effective implementation of the revised European anti-money laundering directive. Cryptos are susceptible to financial crime due to the anonymous, cross-border nature of crypto transactions. The fourth European anti-money laundering directive has been revised for this reason, with the standards in the revised directive now also applying to platforms that enable the exchange of cryptos to fiat money and vice versa, as well as to crypto wallet providers. The AFM and DNB recommend a licensing regime under the Anti- Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financieren van terrorisme – Wwft) because this enables applicants to be assessed, and if necessary rejected, before they enter the market. Such a licensing regime requires clear communication about the scope of Wwft supervision for crypto service providers, as the Wwft is not concerned with protecting consumers or setting prudential standards. This must prevent misguided expectations of supervision on the part of consumers and service providers.
- Amend the European regulatory framework to enable blockchain-based development of SME funding, and reconcile the national and the European regulatory definitions of security. We recommend advocating for the amendment of the European regulatory framework to enable the offering and trading of cryptos that are comparable to shares or bonds. For example, this necessitates more proportionate rules for small-scale trading, and requirements that do not unnecessarily hamper the infrastructural benefits of blockchain technology in the settlement and custody of cryptos. The scope of European legislation applicable to corporate funding should shift towards a substance-over-form approach, to ensure that new funding models are covered by the applicable rules. At the national level, we advise to amend the unnecessarily restrictive definition of security to reflect the broader definition used in European legislation. This will allow the AFM to include certain cryptos within the scope of its supervisory perimeter. Amending the definition is also desirable in anticipation of potential European consensus on the qualification of certain cryptos as security under present legislation.
“Although the markets have seen a sharp decline in terms of volume and price, they are still evolving rapidly. It cannot be ruled out, therefore, that the popularity of cryptos may surge again.”
It is interesting to note the relatively supportive tone of the Dutch regulators. Given much needed regulatory oversight, the two regulators appear to support the concept of empowering SME funding using blockchain technology. For crypto advocates, this message should be viewed as an encouraging policy statement. The difficulty, or missing variable, is a pan-European or international regulatory approach to creating a harmonized, level playing field, for both issuers and investors to possibly benefit from blockchain technology.
See the Dutch report below.
utch Authority for the Financial Markets (AFM) and De Nederlandsche Bank (DNB) Crypto Report tcm47-381603