The Legal Stance Of Crypto Exchanges - Blockchain App Factory
The concept of a completely decentralized and global currency agnostic to market fluctuations and geopolitical factors seems quite like a utopia. However, it was made possible through the works of Satoshi Nakamoto when Bitcoin was introduced in 2009. It heralded a new realm of currencies that operated on the top of the decentralized and immutable digital ledger called the blockchain.
While cryptocurrencies like e Bitcoin have seen quite a steady increase in acceptance and some unbelievable skyrocketing in its value – hitting almost the $20,000 mark in December 2017 – it has still not been accepted as a mainstream matter of payment. However, it still does provide a lucrative opportunity for making a profit as the fluctuations in prices woo traders.
Exchanges involving cryptocurrencies have been playing the cat and mouse game when it comes to legal recognition. On one side, exchanges that seek to protect the interests of the investors stand to violate one of the most basic philosophies of cryptocurrency – anonymity. At the same time, they cannot afford to just let the exchange be in loose traders’ hands because it might affect their reputation and might result in the exchange being compromised.
The governments and jurisdictions all over the world are well aware of this confusing mix of advantages and disadvantages. This has led to different countries, and different jurisdictions develop where it stands and positions with respect to cryptocurrency exchanges.
In the oncoming paragraphs, let us look at the stance of a few key players when it comes to cryptocurrency exchanges.
The European Union
Being the home to countries like Malta and Lithuania, the European Union has been one of the most welcoming countries towards crypto and blockchain technology as a whole. However, they have maintained an uncompromising stance when it comes to upholding anti-money laundering and combating of financing of terrorism.
The KYC/AML rules apply to wallets and exchanges as well. On 10 January 2020, the European Union’s 5th anti-money laundering directive, commonly referred to as 5AMLD, went into effect, and the directive refers to cryptocurrency as a digital representation of value that is not issued or guaranteed by a central bank or public authority. It also goes on to say that it is not necessarily attached to a legally established currency, and it does not possess the status of currency or money. However, it also gives a small strait of relief, stating that it can be accepted by natural or legal persons as means of exchange and can also be transferred and traded electronically.
All crypto custodians are included in the directive as “obliged entities” meaning that they face the same regulatory requirements as any other financial institution.
All authorized bitcoin exchanges are therefore required to comply with the KYC/AML norms of the European Union. The financial intelligence units like the Federal Financial Supervisory Authority of Germany and the Ministry of Economy and Finance in Italy have been ordered to collect identification and authentication information about the owners of crypto assets. This has raised a ruckus over the anonymity that the crypto space promises. This has even led to the shutting down of some exchanges and some exchanges moving out of the European Union to circumvent the stringent enforcement of regulations to comply with, and the costs associated with them.
It will not be an exaggeration to say that Canada has been quite ahead of the United States when it comes to complying, or rather adopting crypto technology. The Canadian Securities Administrators – the Canadian equivalent of the SEC – has issued proper guidelines to crypto exchanges to help them understand whether or not they are subject to the security laws of Canada. The consultation paper released by the CSA in March 2019 has stated that the exchanges are required to comply with security regulations if they deal with securities or derivatives. However, some exchanges have taken a stance that they were not subject to the security laws of Canada because crypto-assets cannot be derivatives or securities.
To counter this problem, the CSA has stated that a crypto asset will be deemed a security or a derivative unless the exchange makes immediate delivery of the crypto asset to the user. It has also extended its regulation by stating that any exchange that provides the user with just a contractual right or claim to an underlying crypto asset is deemed to qualify that particular as it as a security and an exchange that does so will fall into the View of the security laws of Canada.
This has put both exchanges and traders in a difficult position because users have the practice of storing their crypto assets on the same exchange that they trade and do not transfer their funds to an offsite wallet. This might result in a lot of exchanges in Canada being deemed liable to comply with security laws.
India is probably one of the most unexpected names on this list. However, surprisingly, India, with its traditional outlook on finance, has still managed to be quite friendly towards cryptocurrency exchanges. The Reserve Bank of India, India’s central bank and currency issue and authority banned or regulated financial institutions in the country from transacting with crypto exchanges. This ban came in at a time when 10% of the global bitcoin transactions were attributed to India.
However, the Supreme Court, listening to a challenge by the Internet and Mobile Association of India (IAMAI) has ruled in favor of cryptocurrency exchanges claiming India’s constitutional right provided to its citizens to practice any profession or to carry on any occupation or trade or business.
The decision regarding crypto has still not gone into the legislator area yet. It is quite possible that the government could enact hostile legislation that could overrule the decision of the Supreme Court. However, until then, India will continue to be cryptocurrency exchange friendly!
It’s quite evident that cryptocurrency exchanges will be one of the most preferred methods to make a profit in the crypto space. We believe that most countries will arrive at a fine point between being legally compliant while at the same time, being protective of the identity of the users of an exchange.
Any aspect of legal questionability oscillates back and forth and finally arrives at its point of equilibrium, and crypto exchanges are bound to fall into this category, at least for the time being.