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In start of 2018, we discussed the market trend of cryptocurrencies – such as Bitcoin, Ethereum, Ripple, etc. – in the dimension of legality, opportunities & risk, fraud incidents as well as the global regulatory actions at that time. After 3 quarters, many global regulators have updated their approaches for cryptocurrency regulation – but not in a coherent direction, unfortunately.

This following article provides you more visibility of the recent cryptocurrency regulations, our insight on the regulatory landscape and how to address the regulations. The article is concluded by stating the importance for proper governance in crypto-business development.

Recent Updates: Impact of Regulatory Actions on Market Capitalization Fluctuations

Fluctuation of Market Capitalization

During 2017, the value of cryptocurrency as well as their market capitalization has surged at a dramatic rate1; the tendendcy in first 3 quarters of 2018 reflects that cryptocurrency’s market value has reached their historical peak in Jan 2018. Fig 12 shows the tendency of market capitalization of cryptocurrency and Fig 23 particularly shows the market value of bitcoin, both illustrating their historical peaks.

Fig 12 Historical Peak of Market Capitalization

Fig 23 Historical Peak of Bitcoin Market Value

One of the major reasons for the significant drop in 2018 is due to the regulator’s response – many of the global regulators have expressed warnings, or even taken actions to restrict crypto-related activities. Here are some of the highlights on the regulator’s action on cryptocurrency in 20184:

China – All ICOs and cryptocurrency exchange platform are prohibited

Since Sep 2017, the People Bank of China (PBoC) announced that ICOs are an illegal activity. All of the digital token financing and trading platforms are defined as illegal and must be stopped immediately. In 2018, PBoC extended its regulation to overseas platforms that offer crypto-exchange services to domestic investors5. Interestingly, PBoC does not block any holding of cryptocurrency by individuals.

US, UK, EU – ICOs are allowed but need to be regulated by existing regulations & laws

In US, ICO rules are deviated across states, but it is allowed at the federal level. SEC emphasizes on whether the digital token has characteristics of “securities”, and if yes, should be governed by SEC ruling on securities investment. All ICOs / crypto-exchange platforms are expected to be registered and / or licensed; they should also apply AML / KYC policies or otherwise exposing themselves into risk of illegal actions.

In UK, Financial Conduct Authority (FCA) is setting up regulatory sandbox to apply suitable degree of regulation to cryptocurrency & ICO. In EU, the approach is similar to US, high consideration on securities token.

HK, SG, JP – ICOs are allowed but impose high awareness on warning on “Securities” token

These Asia jurisdictions, i.e. HK, SG & JP, are imposing high awareness on ICOs, particularly on those “securities” tokens. They issued warning signals to investors concerning about the investment risk on digital tokens having securities characters, and emphasized that those digital tokens are under regulatory scope of current investment governance rules. Singapore even issued a guide on digital token offering to ensure sufficient awareness was delivered.

Gibraltar, Malta, Bermuda – Setup clearly legislation to target the goal of developing as a crypto-hub

Surprisingly, while regulatory of crypto is under debate in many jurisdictions, smaller nations and territories have already set up clear regulation frameworks for it. For example, Gibraltar published “DLT framework” in Jan 2018, followed by Malta, which published three new laws on cryptocurrency in July. They target to provide a safe and healthy environment and target to develop “crypto-hub”6.

Inconsistent Regulator Responses

Due to inconsistent regulator responses, ambiguity and confusion has been generated among investors and even regulators themselves. Products & services may be allowed in one jurisdiction but prohibited in another. What is the best practice to regulate crypto? How to address the regulation? The remainder of the article will target to answer these questions.

Know the Crypto Assets, and Possible Regulations

Crypto-assets classification

Before regulations are addressed, it is better to first identify and classify the categories of cryptocurrency, or crypto assets in a more accurate wording, and their features. We can group and categorize as follow7:

  • Crypto coins (e.g. Bitcoin, XRP, Ether) – Virtual commodity that can be obtained from mining operation, or purchasing / exchanging in digital platform.
  • Asset/security token – virtual tokens that represent an asset, such as a debt claim or equity of the issuer.
  • Utility token – virtual tokens intended to provide access digitally to an application or service.
  • Payment token – virtual tokens used as a means of payment for acquiring goods or services, or as a means of money or value transfer.
  • Top-up derivatives (e.g. CME/CBOE futures) – financial derivatives where the underlying assets are crypto.

It should be noted that ICO is an activity to collect funds and distribute digital tokens, but not an asset.

Possible Crypto Regulation

With clear categorization for every crypto asset, it is straightforward to identify the type of risks that are exposed and the corresponding = regulatory rules. More specifically, regulators / crypto business firms should consider to apply the following risk management framework / policies according to the characteristics of each crypto asset:

  • Money Laundering / Terrorist Risk
  • Fraud / Illegal Transaction
  • Tax Evasion
  • Investment Risk (for security token / top-up derivatives)
  • IT Security Risk
  • Liquidity Risk
  • Advertising Risk (e.g. misleading customers that it is not investment for asset / security token)
  • Operating Risk (e.g. Electric power consumption for “mining” bitcoin)

Obviously, based on specific business models and features of the crypto assets, the weighting magnitude across all the above risks varied. For example, a crypto coin’s exchange platform would emphasize more on the money laundering / terrorist risk, transaction risk, liquidity risk, etc.; in contrast, a crypto investment firm trading on security token would focus more on the investment risk, advertising risk, etc. Other risks, such as IT Security risk, should be heavily considered for all business models and crypto assets.

How to Address Crypto Regulation

Crypto-business firm self-regulation

As regulatory focus is varied across business models and crypto assets, and with thousands of crypto assets – i.e. more than 1000 crypto coins, and quite impossible to count the digital tokens – it is very challenging to setup a common regulatory framework through a top-to-bottom approach. Therefore, we recommend a bottom-to-top approach, by starting on the baselines at the firm level. That is, every crypto-business firm should set up a regulatory framework with their own business model and products, which the standard should be at least equivalent to their home country’s regulators. For example, while regulators may not impose traditional CDD procedures on every new client on-boarding for crypto-business, implementing CDD as an internal standard would be a good practice for achieving prudent standards and risk control.

Below are some examples of possible baselines that can be setup by crypto-business firm:

  • AML screening/ customer due diligence (CDD) on client on-boarding
  • On-going monitoring on customer profile & trade activities
  • Transaction monitoring & fraud detection
  • Real name registration
  • Licensing on particular trade execution
  • Cybersecurity
  • Suitability test for product assessment
  • Advertising restriction / prohibition

With no double, common baselines will be identified across firms, or even industries. After every crypto-business firm tightens their own internal control policy based on the above baselines, it can follow the bottom-to-top approach. Those common baselines act as the ground of a common framework which leverages supervision as well as flexibility.

In practice, the common baselines can be identified by the industry professional associations or self-regulatory body.

Regulator – Setup Regulatory Sandbox

Regulators should utilize the regulatory sandbox concept to facilitate for the development of crypto-regulation, like what FCA is doing in UK. While studies show that tough regulations could potentially cause the departure of crypto business firms in Asia8, regulatory sandbox are able to provide a relatively flexible landscape for crypto innovation to develop their business, and suitable for transition period before the crypto-regulation mechanism is stabilized.

Conclusion: Crypto-Regulation is Essential & Unavoidable

Cryptocurrency is certainly a breakthrough innovation in the digital generation, as it demonstrates that an asset can be virtual / digital and easy to transmit globally via internet. ICO is also an innovative idea to act as crowdfunding for digital start-ups and platforms. Should an innovation be regulated before maturing? Our response is “Definitely YES”, as this innovation is associated with billions of $USD. Regulation is essential and unavoidable. With the suitable and transparent regulations, entrepreneurs and investors can clearly know what is allowed and what is prohibited under the jurisdiction law, and therefore make suitable business judgement / investment decision for cryptocurrency. Also, regulation is essential to address consumer protection and AML.

Setting up appropriate and proportional regulations can fully unlock the potential of cryptocurrency.   As cryptocurrency is still under development and continuously disrupting the entire financial market, Sia Partners will surely stay attuned to the market development, impacts and trends.


1Source:http://en.finance.sia-partners.com/20180109/cryptocurrency-regulation-legality-trends-analysis .

2 Source: https://coinmarketcap.com/

3 Source: https://www.coindesk.com/price/

4 Source: https://www.bitcoinmarketjournal.com/ico-regulations/


6Source:https://www.cnbc.com/2018/08/09/cryptocurrencies--regulating-the-new--economy.html?__source=sharebar%7Ctwitter&par=sharebar .

7Source:https://medium.com/startup-grind/understanding-the-difference-between-coins-utility-tokens-and-tokenized-securities-a6522655fb91  .

8Source:https://financialtribune.com/articles/world-economy/85873/cryptocurrency-exchanges-fleeing-asia-over-tough-regulations  .

About Sia Partners

Founded in 1999, Sia Partners is an independent global management consulting firm and pioneer of Consulting 4.0 with over 1,100 consultants and an annual turnover of USD 200 million. The Group has 20 offices in 15 countries. Through unparalleled industry expertise, Sia Partners delivers superior value and tangible results for its clients. True to its innovative approach, Sia Partners explores the possibilities offered by Artificial Intelligence, invests in data science and develops consulting bots. Sia Partners is a global partnership wholly owned by its executives.

Copyright © 2018SiaPartners.Any use of this material without specific permission of Sia Partners is strictly prohibited.

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