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EU Watchdog Looks to ICOs to Formulate Appropriate Regulation

The European Union’s securities watchdog has a new initiative to develop suitable regulations for initial coin offerings (ICOs) and it requires investigating every single ICO.

The European Securities and Markets Authority (ESMA) looks to be following the lead of the US on this front, which has notably tight restrictions on the industry that saw the Securities and Exchange Commision (SEC) shutting down a number of ICOs this year, including that from Dallas-based AriseBank and Centra Tech.

Chair of ESMA Steven Maijoor told the European Parliament’s economic affairs committee that he is interested in finding out how ICOs fit into existing financial regulation, and what the implication will be for the general capital raising sector.

As he says, however, this task has been particularly challenging as each initial token sale can differ in nature, and not all of them fall under the category of a ”financial instrument”. Those that do, fall under the current regulatory framework but those that don’t, raise the question ”what do we do with those ICOs that are outside the regulatory world’,’ as Maijoor puts it.

His colleague Andrea Enria, chair of the European Banking Authority, previously told officials that he thinks the correct path for action is to avoid stifling innovation, proposing that ICOs should be allowed to prevail without any influence from the EU.

However, he now says that the outcome is not as he hoped, predominantly because the warnings that the EU issued to retail investors regarding cryptocurrency assets have not been sufficient to raise awareness. Regulators across Europe have tried to inform potential crypto customers that there is no safety net should their investment not go as they expect, but apparently, this message has been largely lost.

US SEC chairman Jay Clayton thinks that the way to combat this is to regulate the sale of new tokens as securities are, but admits that not all will fall into this category. Bitcoin and Etherum have been decided as not falling into the category of securities.

 

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EU Financial Regulator Carves Out €1.1 Million Fund to Monitor Crypto Assets

Crypto assets and fintech industries are the focus points of an EUR 1.1 million fund set out by the European Union’s financial regulator to monitor these innovations.

Objectives

The 2019 Annual Work Programme document was published by the European Securities and Markets Authority (ESMA) on 27 September 2018. Within it, the ESMA establishes the need for regulatory and supervisory treatment of fintech and cryptocurrencies.

ESMA is an entity within the EU that produces standardized rulebooks for EU financial markets and market supervision. It also works within securities legislation and regulation.

As stated in the key objectives outlined in the paper, the ESMA writes, “Achieve a coordinated approach to the  regulation and supervisory treatment of new or innovative financial activities and provide advice to present to the EU institutions, market participants or consumers.”

Secondly, it adds, “Implement the framework for the use of the product intervention powers provided by the MiFIR [Markets in Financial Instruments Directive]”.

In this, the ESMA wishes to monitor retail investor trends and financial activities and play a “proactive role in market intelligence gathering” where it can provide advice, propose relevant action, as well as “coordinate NCA’s initiatives on market monitoring and facilitating exchanges of best practices”.

European progressions

It was reported by Fortune in early September that the EU is taking its time with regards to regulating the crypto market. At a meeting in Vienna, finance ministers had agreed that regulating the space can wait until the European authorities have completed a “thorough analysis”.

Talks in Vienna appeared buoyantly positive about cryptocurrencies as the European Commission vice president Vladis Dombrovskis declared that “crypto-assets are here to stay” during a press conference.

While being bullish on initial coin offerings (ICOs) as a viable financing method, he also pointed out that numerous risks often affiliated with the issuing of digital tokens and the cryptocurrency markets as a whole.

Despite the skepticism and scrutiny that these branches of blockchain technology often come under, Members of the European Parliament (MEPs) appear to be bullish on blockchain.

A recent meeting in Strasbourg, France, saw MEPs discuss the uses of blockchain technology, with many MEPs pushing for legislation sooner than later to avoid “losing control” of new technologies. Furthermore, East European MEPs were looking to establish themselves as blockchain hubs.

Blockchain discourse in Europe is presently revolving around regulation, innovation, and relations with financial institutions; follow these events and more in the Bitcoin News weekly roundups.

 

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EU Commission “Pleased” with Blockchain Enthusiasm from European Parliament

Members of the European Parliament (MEPs) gathered today in Strasbourg, France for plenary meetings are currently debating the use of blockchain technology, with Digital Single Market Commissioner Andrus Ansip saying minutes ago that he was “pleased” to see MEPs on the same page as the EU Commission in its enthusiasm for blockchain potential.

Sandwiched between a session on human rights violations in Chechnya and economic support for remote regions, the debate on blockchain sought to discuss how the EU Commission would provide “legal certainty” for the use of the technology.

Earlier, MEP Dario Tamburrano from Italy urged the European Parliament members to move towards legislation to avoid “losing control” of new technologies, echoing French MEP Christelle Lechavalier’s statement that regulators should give blockchain adequate time to provide evidence and maturity for use across multiple sectors.

Both Italy and France have been making fervent moves towards cryptocurrency especially in recent months. The former last week became the 27th nation to enter the European Blockchain Partnership, which seeks to foster blockchain cooperation between member nations. France this year axed income tax on cryptocurrency and has a pro-crypto finance minister in the shape of Bruno Le Maire, who maintained that blockchain was “a revolution”.

MEPs from Eastern European nations – themselves keen to establish blockchain hubs in the region – were also vocal in the debate, with Lithuanian centre-right MEP Antanas Guoga asking fellow Parliament members to accept that blockchain is “here to stay”. He warned that laggards would have to “live with” not being able to have “much say” over the technology, pointing out that decentralized systems would be highly resistant to external attempts for control.

Romania’s Cristian-Silviu Busoi cautioned the EU against “rushing prematurely” into regulation or face stifled innovation.

Ansip closed the session, saying that blockchain should not be seen as a “panacea” but stressed that it was an opportunity that “cannot be overlooked”. The assembly is expected to vote tomorrow on 2 October on a non-binding motion which will mandate the Commission to conduct an impact study of a “wider update” of blockchain in the EU.

 

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Luxembourg Aims to Provide Legal Certainty for Blockchain

The government of Luxembourg is hoping to pass a bill through their legislature which will enable blockchain technology to be backed by an extra layer of legal security.

Tiny landlocked Luxembourg has an important role in the EU as the seat of the European Court of Justice, the highest judicial authority in the European Community. The bill which is being tabled by the government has been drafted in order to ensure that all blockchain-based transactions have the same level of security and legal stature as of those made without the technology behind them.

The country’s finance minister Pierre Gramegna has suggested that such measures are being introduced as a step to guarantee investor security and confidence in blockchain as a technological tool, suggesting that:

”This was in the best interests of the financial sector, as there have already been transactions done using blockchain, such as distributing parts of investment funds, for example.”

Luxembourg, is continuing to position itself as a blockchain hub in the region; surrounded by France, Germany, and Belgium. It is still in the throws of expanding its development in the sector. In comments made last year by Xavier Bettel, Luxembourg’s Prime Minister and minister of Telecommunication stated:

“The state is fulfilling its role as a kickstarter and a coordinator while leaving technological and commercial choices to the industry”, whilst facilitating projects which create “meaningful projects in cutting-edge technology.”

The new bill which is expected to pass into legislation is primarily aimed at blockchain and will make no reference to cryptocurrency or ICOs, but will focus on the new technology’s target of promoting new financial goods and services. Luxembourg’s financial regulator the CSSF has not particularly warmed to cryptocurrency in the same way as its neighbours, warning earlier this year that as yet the ICO model is as yet unproven.

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Europol: It’s Cash that Funds Terrorism

A 72-page long report recently published by Europol has clarified that it is conventional banking which is the primary source of terrorist funding such as the recent attacks on European cities.

The report explains that such outrages are financed through cash as it is a tried and tested form of funding. Finding an alternative source, such as cryptocurrencies like Bitcoin, which publicly log transactions, is of little interest to terrorist cells operating in Europe, according to the findings.

Europol based in The Hague, the Netherlands, supports the 28 EU Member States in their fight against terrorism, cybercrime and other serious and organized forms of crime. They also work with many non-EU partner states and international organizations.

Also, in line with the findings of the report, in the US last week, a senior member of the Foundation for Defence of Democracies Centre on Sanctions and Illicit Finance spoke out against anti-crypto rhetoric, particularly those aimed at the financing of militant jihad.

A senior member of the center, Yaya Fanusie maintained that despite continual references by governments around the world that cryptocurrency finances terrorist activity, terrorist networks have been mainly unsuccessful in using cryptocurrency to fund their activities. The Europol report agreed, stating:

“…despite the clear potential, none of the attacks carried out on European soil appear to have been funded via cryptocurrencies. The use of cryptocurrencies by terrorist groups has only involved low-level transactions – their main funding still stems from conventional banking and money remittance services.”

It is undeniable that just like cash, cryptocurrencies are on the radar of criminals but the use of Bitcoin in criminal activity has dropped to 35% of the market share from a peak of 80% when the flagship digital currency was its infancy. It is now known that criminals are more likely to use Zcash and Monero across the globe than Bitcoin. The report clarifies that:

“While the criminal abuse of cryptocurrencies remains largely within the realm of cybercrime, some Member States reported that they are increasingly encountering their use by non-cyber [organized crime groups].”

The report concludes that law enforcement information sharing and tighter security measures are the best weapons cybersecurity has against cyber-attacks.

 

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ECB Chief Reiterates Lack of CBDC Justification

European Central Bank (ECB) president Mario Draghi has reconfirmed to the European Parliament that there are no plans to create a central bank digital currency (CBDC).

Draghi cited a lack of any prevailing economic conditions to warrant such as step, going on to suggest that DLTs hadn’t been severely tested as yet and still required “substantial further development before they could be used in a central bank context”.

The fact that discussions around the world about CBDCs is gaining some impetus hasn’t escaped the ECB or EU financial regulators, particularly in the light of Sweden’s Riksbank considering its own e-krona due to dwindling interest in cash and a rise in the use electronic money in that country.

The ECB, at one time scathing in its condemnation digital currency, has recently demonstrated a change of its stance, even suggesting that cryptocurrencies have a place in the future. It recently suggested that the financial body should begin to “…work on exchanges and platforms which provide services at the interface between crypto-assets and the real economy”. The comments were made earlier this year by Bank of France Governor Francois Villeroy de Galhau who also sits on the ECB’s Governing Council.

Bitcoin’s rising popularity currently feeds the debate globally whether the future direction of money is electronic rather than paper. The ECB chief has suggested however that an ECB digital currency would mean that the central bank would set itself against the banking sector in such a scenario and lead to potentially substantial operational costs and risks.

A view held by some experts is that a CBDC could make quantitative easing more effective bypassing the banking sector, also as a substitute for bank deposits, strengthen the transmission of monetary policy changes to the economy. Such views assert that a CBDC need not be nearly as disruptive as the ECB maintain in its criticism of the concept.

 

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European Commission Vice President Believes Crypto Has Place in Future

The vice president of the European Commission has said that “crypto-assets are here to stay” at the second informal Economic and Financial Affairs Council (ECOFIN) press conference.

Progressive

At the ECOFIN press conference in Vienna, vice president Vladis Dombrovskis spoke of the discussion between himself and other ministers, describing it as a “good exchange” with regards to the future of cryptocurrencies and initial coin offerings (ICOs).

In his speech, Dombrovskis said, “We also had a good exchange of views on crypto-assets. We see that crypto-assets are here to stay. Despite the recent turbulence, this market continues to grow.”

He continues, “In particular initial coin offerings, or ICOs, we see they have the potential to emerge as a viable form of alternative financing. Already last year, ICOs helped raise over 6 billion dollars in funding and this year this figure will be substantially bigger.”

These positive remarks are however underpinned by a somewhat cautious attitude; he highlighted risks such as investment protection, market integrity, as well as money laundering among other nefarious activities that regulators, governments and industries are trying to stamp out or protect themselves against.

Dombrovskis asserted that there is a “need to continue monitoring developments in this area”, calling upon international partners such as the Financial Stability Board or G20 to cooperate.

Describing the challenges imposed by digital currencies, he cited a common issue that has plagued the progress of legislation and regulation which is the classification and categorization of digital assets. This would determine “whether and how to apply existing EU financial rules to these new assets or if we need new EU rules”.

Crypto-competence

Australia has been tackling this issue head on, while developing a means to tax cryptocurrencies. Several steps were been taken to define digital assets in a taxable context as accurately as possible.

The US has been wrestling the issue in a similar manner. The Supreme Court of the United States ruled on 21 June that Bitcoin could be used as a currency; this came as a result of a hearing that debated whether stock options can be taxed the same way that cash earnings are.

Earlier in June, the US Securities and Exchange Commission (SEC) declared that Bitcoin and Ethereum would not be regulated as securities; the subject digital assets being classified as securities in the states has been an ongoing matter for some time.

At the tail end of the speech, the vice president said that there is an ongoing effort between ECOFIN and the European Supervisory Authorities that he called “regulatory mapping of crypto assets”. Member states are in support of the mapping effort and Dombrovskis is expecting the assessment to be concluded this year.

The European Parliament recently held an all-party meeting that examined proposals for ICO rules. No formal statements have emerged from this discussion as of yet, but the speech given by Dombrovskis appears to echo the progressions made across departments of the EU.

 

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South Korean Financial Regulator Calls for “International Discipline System” for Crypto and ICOs

The governor of the South Korean Financial Supervisory Service (FSS) has made calls for an “international discipline system” for cryptocurrencies and initial coin offerings (ICOs).

International Discussion

The 20th annual Integrated Financial Supervisors Conference (IFSC) was held from September 6th to 7th in Seoul. In attendance were officials and regulators from fourteen other countries including Japan, Canada, Australia, Singapore, the United Kingdom, and Germany.

They had gathered to discuss global regulatory issues. The South Korean FSS governor, Yoon Suk-heun brought to light that new financial services such as cryptocurrencies and fintech display potential risks for consumers. He urged for a global regulatory system to be put in place.

During the opening ceremony of the IFSC event, Yoon said: “For new risks involving cryptocurrencies, we must calm overheated speculation and crack down on illegal activities.”

In addition to this, according to the Korea Times, Yoon added, “The authorities are in a difficult situation to minimize the side effects while encouraging financial innovation… The aim is to calm overheated speculation and prevent illegal activities against new risks associated with virtual currency or initial coin offerings (ICOs)… We need to create an international discipline system, which can only generate regulatory gains between countries.”

Leading by Example

Yoon echoed the blockchain savvy crypto-positive sentiments that are commonly espoused by South Korean enthusiasts. He went on to elaborate on the present countermeasures in place for emerging or disruptive financial services, such as cryptocurrencies and ICOs.

He explained that the current system includes a “supervision method for effective internal control and compliance of financial companies, the direction of financial consumer protection system and financial inclusion policy, [and the] effective anti-money laundering system and how to operate it.”

The governor has hopes that information sharing and international cooperation will be bolstered, believing that “internal control of financial companies is a way to safely manage customers assets and maintain sound management.”

Yoon added, “Korea has faithfully implemented international supervision standards such as reporting doubtful transactions, confiscation of criminal proceeds related to the prevention of money laundering, and expanding the exchange of information between countries.”

Across the Globe

The European Union Parliament has been hot on the heels of creating a unified set of regulations for ICOs and cryptocurrencies with some members of the discussion acknowledging that the market is seeking legitimization and that these regulations need to be made with a sense of urgency.

Other nations are successfully implementing their own regulatory guidelines. Most recently, Uzbekistan legalized cryptocurrencies. In the Philippines, cryptocurrency exchange and ICO regulations are in the process of being finalized.

Other nations including South Korea are still fine-tuning the regulatory side of the industry, Canada has postponed their release of regulations until 2020, and China is presently struggling to manage legal cases related to cryptocurrency due to unclear regulations.

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Crypto to Come Under Microscope at Vienna EU Talks

The EU is ready for its next round of talks with the 28 member states ready to discuss digital assets and whether further legislation is needed.

The next round is scheduled to be held in the Austrian capital Vienna on 7 September and is said to include certain issues surrounding cryptocurrencies such as money laundering, tax evasion and terrorist financing, all subjects which have been of concern to EU legislators over recent years.

It’s thought that the focus on money laundering, tax evasion and terrorist financing planned for Vienna has been motivated in part by concerns that EU laws don’t provide enough protection to investors, particularly in light of Asian moves to tighten regulation following hacking incidents this year. Also, the fact that unregulated exchanges fall outside of global financial regulations has caused some extra concern.

It should be acknowledged that while these concerns continue to dominate EU discussions, it has been noted by the both the European Commission and the International Monetary Fund (IMF) that both digital currencies and blockchain technology can bring great benefits to capital markets and commerce in general.

Regulators in Europe are also keen on harnessing the new technologies unleashed by digital currencies, according to the updated document. Initial coin offerings “have established an effective and efficient way to raise capital”, it said, adding that this development could also help integrate capital markets in the bloc.

French finance minister Bruno Le Maire recently described cryptocurrency as a “revolution”. Income tax on crypto has been axed by the French government and former French finance minister Christine Lagarde, now IMF head, described future international digital currency regulation as “inevitable”.

Lagarde said that not only could Bitcoin enable fast and inexpensive transactions but that the underlying technology behind cryptocurrencies, blockchain, could make financial markets safer.

Other states have made positive comments with the German federal government stating that cryptocurrencies don’t pose any threat to financial stability and the UK’s Financial Conduct Authority (FCA) announcing the launch of a collaborative entity, the Global Financial Innovation Network (GFIN).

An EU document obtained by Bloomberg says that ICOs “have established an effective and efficient way to raise capital”. The document reportedly also states that ICOs could help integrate capital markets in the EU.

 

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What Lies Ahead for Blockchain and Cryptocurrencies, Post-Brexit?

A Britain-based CEO has suggested that post-Brexit, cryptocurrencies will benefit the UK as they have key advantages over fiat currencies.

Danial Daychopan of Crypto company Plutus, suggests that due to the pound and euro’s interdependence and the fact that they are both based on other currencies,  allows decentralized cryptocurrencies to offer a “variable and stable alternative” for both consumers and businesses in the post-Brexit UK.

The current lack of direction in Brexit negotiations has led some people to believe that a period of instability is a possibility as both Europe and the UK race towards next year’s deadline. Daychopan sees instability and lack of trust in governments and the global financial system as key to the success of digital currencies. He claims:

“…in economies that aren’t stable, we’re already seeing digital economies developing and thriving. We’re approaching a period of instability and people need to understand that cryptocurrencies are going to be a force for good, not just tokens to be speculated upon.”

In terms of where cryptocurrencies sit once Britain’s departure from the EU becomes a reality, it is still unclear how Brexit will affect the future of blockchain and cryptocurrencies in both zones. The EU including the UK, with the exception of only 6 states, has signed up to the EU Blockchain Partnership which will promote the future exchange of expertise in order to launch EU wide blockchain-based applications across the single digital market.

The EU has called for cryptocurrency regulation at both European and G20 level and would clearly like to regulate the industry from Brussels, a further possible complication for the UK. As current members of the “EU Blockchain Observatory Forum” the UK has already benefited from membership with the EU’s fintech market, now valued at $6 billion.

Kay Swinburne, Member of the European Parliament (MEP), argues that bodies such as the EU Blockchain Observatory Forum are not essential to the UK advancing its fintech impact after Brexit. The UK, with its new crypto haven Gibraltar, having advanced significantly down the cryptocurrency and blockchain route, may be well placed to withstand significant damage to its fintech markets on withdrawal.

As the UK prepares to leave the EU it is also reportedly planning to create its own crypto regulations before 2019. The EU has already passed its own blockchain resolution for a post-Brexit Europe in order to remain a global fintech hub.

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