The father of modern economics, Adam Smith, once said:
"There is no art which one government sooner learns of another than that of draining money from the pockets of the people."
Smith was trying to persuade his readers of his economic philosophy: that governments should not intervene in market activity, and free trade should be encouraged(1). Cryptocurrency is the only solution to date that facilitates global transactions free from intervention from intermediaries like governments or banks (2).
The G7 Working Group on Stablecoins believe that a global stablecoin could be the way forward. However, the working group advised that no global stablecoin project should begin until there is legal certainty and sound governance(3).
Paradoxically however, independent attempts to regulate stablecoins or other cryptoassets bear the risk of generating more legal uncertainty if the end goal for a global stablecoin is a global regulatory framework.
Take the positions of the UK and Germany for example. The UK regulates each classification of cryptoassets independently, according to its class(4). Germany, on the other hand, defines all cryptoassets as “units of account” and regulates all cryptoassets under Germany’s Banking Act, no matter its type(5). In this example, although both countries have made attempts to set clear regulatory boundaries, doing so independently from one another inadvertently create two approaches to crypto regulation that are fundamentally different. Such dissimilarities are commonplace among other jurisdictions as well(6).
Even basic terminologies vary between jurisdictions. Cryptoassets used as a digital means of exchange like Bitcoin are referred to as “exchange tokens” in the UK, “currency tokens” in Israel, “payment tokens” in Germany, “payment-type crypto-assets” by the European Securities and Markets Authority (ESMA) and “cryptoassets” in Abu Dhabi(7).
Looking to the future, this presents significant problems for future regulators. Contradicting regulations may dissuade countries from assenting to international conventions. Assenting jurisdictions may do so in name only(8). Non-conforming regulations may cement themselves as regional judicial precedent and legal uncertainty is magnified in cross-border transactions.
One could make the case, however, that it is not uncommon to adopt and implement international legal frameworks, say, from a convention. However, one must bear in mind the compounding nature of these issues, the notorious unreliability of conventions with regard to implementation, and the strict need for a reliable set of rules to govern what could be, for the first time in history, a true global currency.
A global view is therefore necessary when drafting local regulation. Legislators must take into serious consideration regulations designed by other jurisdictions. Ones that have invested more time and resources into developing their legislative frameworks. In this regard, it may be worth considering which jurisdiction is the most developed with regard to crypto regulation.
The US
In the US, individual states each have different attitudes toward cryptocurrency regulation(9). Wyoming, for example, is known for its crypto-friendly policies, while New York is known for its onerous and restrictive crypto laws. At the federal level, even the US Securities and Exchange Commission (SEC) regulates independently from the Financial Crimes Enforcement Network (FinCEN) and the US Federal Reserve Board, each having issued their own independent guidelines(10).
The UK
The UK’s latest approach to the regulation of e-money tokens is described in her consultation paper entitled “UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence”(11). In it, the UK confirms that e-money tokens are regulated by the Electronic Money Regulations 2011(12). The UK government also expressed its support of stablecoin for cross-border payments and proposed to introduce a regulatory regime for stablecoin transactions(13). The UK is continuing to receive responses to the consultation paper.
The EU
The European Union (“EU”) appears to be furthest ahead in the development of a regulatory framework. The EU has been building on its comprehensive Markets in Crypto-assets (MiCA) proposal since September 2020. The MiCA regulations specifically govern e-money tokens, stablecoins and utility tokens(14). Financial instruments which include security tokens are expressly excluded from MiCA and are subject to applicable security instruments like the Markets in Financial Instruments Directive(15). Under MiCA, a handful of tokens would be further classified into a group of “significant” tokens, a list of tokens determined by the European Banking Authority (“EBA”). These “significant” tokens are subject to more stringent regulation(16).
In addition to being the most ahead with regard to regulation, the EU is also uniquely suited to lead the path toward a global regulatory framework for three reasons.
(1) It has considerable influence in global political and economic spheres(17).
(2) The EU which consists of 27 member states is no stranger to drafting legislation, directives, conventions, and treaties which bind multiple jurisdictions(18).
(3) The EU’s official and existing approach to drafting takes into consideration multilingual and multicultural users, and focuses on simple and precise language(19). The same approach should be taken for a global regulatory framework. This alone makes the EU one of the most qualified bodies to produce one.
Summing up
Cryptocurrency is growing at a near unfathomable pace. On 31 December 2019, at the start of the COVID-19 pandemic, the total market capitalisation of altcoins (cryptocurrency other than Bitcoin) was 61 billion USD. A year later, on 31 December 2020, this figure tripled to 224 Billion USD. Five months later, in May 2021, this figure grew seven-fold to 1.6 trillion USD(20). These exponential figures show the continuing and expanding efforts of cryptographers who are trying to come up with creative solutions to make cryptocurrency a viable solution to unrestricted international trade. The likelihood of a blockchain-enabled global currency existing in the medium to long term, therefore, is high. Regulators should respond accordingly by adopting a global view when drafting.
Dr Anne Smith’s study on early constitutional borrowing and the effect it had on international human rights is a great example of how a global legislative approach can influence future international regulation(21). Her paper discusses the bills of rights of Canada, South Africa and Northern Ireland, and how legislative borrowing between them helped acclimatise their laws to international agreements, and potentially headed off international disagreements by setting transnational standards. In my view, it is crucial that cryptocurrency lawmakers exercise foresight by taking an international approach to drafting regulation, more so than any other area of law today.
Reference
(1) Richard E Gift and Joseph Krislov, ‘Are There Classics in Economics?’ (1991) 22 The Journal of Economic Education 27, 28-30
(2) HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021)
(3) G7 Working Group on Stablecoins, ‘Investigating the Impact of Global Stablecoins’ (2019) ii
(4) HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021) para 1.12 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 30 June 2021
(5) Apolline Blandin and others, ‘Global Cryptoasset Regulatory Landscape Study’ (2019) 86 https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2019-04-ccaf-global-cryptoasset-regulatory-landscape-study.pdf accessed 1 July 2021; Ronny Rose and Clemens Zacher, ‘Cryptoassets: A UK and European Perspective on the Regulation of Cryptoassets’ (2020) 21 https://www.esma.europa.eu/document/advice-initial-coin-offerings-and-crypto-assetsaccessed 1 July 2021
(6) Osborne Clarke, ‘The Treatment of E-Money and Virtual Currencies across Jurisdictions’ (2018) https://www.osborneclarke.com/wp-content/uploads/2018/06/The-treatment-of-e-Money-and-virtual-currencies-across-jurisdictions.pdf accessed 1 July 2021
(7) Apolline Blandin and others, ‘Global Cryptoasset Regulatory Landscape Study’ (2019) 38 https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2019-04-ccaf-global-cryptoasset-regulatory-landscape-study.pdf accessed 1 July 2021; European Securities and Markets Authority, ‘Initial Coin Offerings and Crypto-Assets’ (2019) 81 https://www.esma.europa.eu/document/advice-initial-coin-offerings-and-crypto-assets accessed 28 June 2021
(8) Olga Avdeyeva, ‘When Do States Comply with International Treaties?’ (2007) 51 International Studies Quarterly 877, 882
(9) Joe Dewey, ‘Blockchain and Cryptocurrency Regulation 2021: USA’ (Global Legal Insights, 2021) https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa accessed 22 July 2021
(10) Susannah Hammond and Todd Ehret, ‘Compendium – Cryptocurrency Regulations by Country’ (2021)
(11) HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and Call for Evidence’ (2021) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 31 June 2021;
(12) ibid para 1.12
(13) Ibid paras 3.6 – 3.9
(14) European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-Assets, and Amending Directive (EU) 2019/1937’ (2020) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0593
(15) (2014/65/EU) (“MiFID”II)
(16) Klaudius Heda and others, ‘European Commission Introduces Draft Regulation for Markets in Crypto Assets (MiCA)’ (2020) https://www.debevoise.com/-/media/files/insights/publications/2020/11/20201103-european-commission-introduces-draft.pdf accessed 17 July 2021
(17) Laura Silver, Moira Fagan and Nicholas Kent, ‘Majorities in the European Union Have Favorable Views of the Bloc’ (2020) https://www.pewresearch.org/global/2020/11/17/majorities-in-the-european-union-have-favorable-views-of-the-bloc/ accessed 17 July 2021
(18) European Union, ‘EU Law’ (2021) https://europa.eu/european-union/law_en accessed 17 July 2021
(19) European Union, ‘Joint Practical Guide of the European Parliament, the Council and the Commission for Persons Involved in the Drafting of European Union Legislation’ (2015) para 1.1 - 1.2 https://eur-lex.europa.eu/content/techleg/KB0213228ENN.pdf accessed 20 July 2021
(20) CoinMarketCap, ‘Total Cryptocurrency Market Capitalization (Excluding Bitcoin)’ (2021) https://coinmarketcap.com/charts/ accessed 26 June 2021
(21) Anne Smith, ‘Internationalisation and Constitutional Borrowing in Drafting Bills of Rights’ (2011) 60 International and Comparative Law Quarterly 867, 890 - 891
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