Matrixport View_Regulation #13

Bitcoin just closed its best March and Q1 in 8 years. Bloomberg predicts the price of Bitcoin can go up to USD 400K. All seems to confirm a continuation of the bull run in the month of April, which traditionally is a good month for cryptocurrency. Newcomer to the scene, the NFTs, have launched many exciting discussions on how blockchain and crypto currencies can play an important role in artistic endeavours and their market. Never a dull moment it is in the crypto currency circle. Regulators are watching these developments closely and various stricter rules and laws have been introduced or about to be introduced soon.

Now let’s have a look at the big regulatory stories in March 2021:

Policies and regulations around the globe:


Japan’s FSA asks cryptocurrency industry group to introduce FATF travel rule

Japan has made another step toward adopting cryptocurrency Anti-Money Laundering regulations developed by the Financial Action Task Force, Cointelegraph Japan reports. The Japanese Financial Services Agency announced Wednesday that it will adopt the FATF’s travel rule — a set of regulations requiring virtual asset service providers to share transaction data for senders and recipients — by April 2022. “It is required to introduce and implement the travel rule regulations in each country,” the FSA noted. The FSA requested the Japanese Virtual Currency Exchange Association, a local self-regulatory crypto organization, to prepare for the implementation of the travel rule: “From the perspective of ensuring the proper and reliable execution of the crypto asset exchange business, we will examine the accurate implementation of the travel rule in terms of technology and operation. We would like the JVCEA to establish a necessary system, so please inform the members of the association.”


Iowa House approves bill to legally recognize blockchain smart contracts

On March 29, the Iowa House of Representatives passed a bill that seeks to legally recognize transactions and registrations made via blockchain smart contracts. The bill — SF541 — gained Senate approval earlier in the month. Under the auspices of the new bill, smart contracts would be given the same legal status as regular contracts, while distributed-ledger technology would be viewed as a reliable electronic store of record. Regarding smart contracts, the bill states: “The bill provides that a contract shall not be denied legal effect or enforceability solely because the contract is a smart contract or contains a smart contract provision.” The bill states that any registration of rights or ownership would not be invalidated by its broadcast on a blockchain network unless the transaction was related specifically to the transfer of the rights in question.

Texas chases after Wyoming with crypto law proposal, but challenges remain

Everything is bigger in Texas, but when it comes to crypto-friendly legislation, this doesn’t seem to be the case… just yet. On March 12, 2021, Texas Representative Tan Parker introduced the Uniform Commercial Code, also known as UCC, amendment bill (House Bill 4474) to better adapt commercial law to blockchain innovation and digital asset regulations. Specifically speaking, the Texas UCC amendment bill aims to recognize virtual currencies under commercial law. Lee Bratcher, president of the Texas Blockchain Council — an organization recently established as a trade association intended to make Texas a leader in national blockchain growth — told Cointelegraph that the Texas Blockchain Council worked closely with Texas legislators to draft this bill, noting that if passed, it would change the business law around the definition of digital currencies and the legal definition of control: “The Texas Blockchain Council has been working with uniform law commission around the language of the UCC amendment bill, along with other stakeholders to make sure they are all comfortable with the language.”

IRS clarifies reporting requirements for crypto bought with fiat

The United States Internal Revenue Service, or IRS, has updated its FAQ section on cryptocurrency to clarify investors who have only purchased crypto assets with fiat currency do not need to report their transactions under the “virtual currency” question. The first page of U.S. citizens’ Individual Income Tax Return form, or Form 1040, asks whether the respondent received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency” during 2020. As such, the form’s wording suggests that individuals who acquired crypto assets through any means would be required to answer yes to the question, regardless of whether the virtual currency was purchased using U.S. dollars, Kenyan shillings, or peanuts. However, question five of the IRS’ updated cryptocurrency FAQ information asks whether an individual who “purchased virtual currency with real currency and had no other virtual transactions during the year” must report said activities in Form 1040. The answer now states: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”


Russia’s money laundering watchdog monitoring crypto to ruble transactions

Russia’s Federal Financial Monitoring Service, or Rosfinmonitoring — the country’s Anti-Money Laundering body — is policing crypto to fiat transactions. The federal executive body responsible for AML oversight made this known while addressing the members of parliament on Tuesday, according to a report by Russian news agency Regnum. In a meeting with members of the State Duma Committee on the Financial Market, Herman Neglyad, deputy chief of Rosfinmonitoring revealed that the AML watchdog was working with commercial banks to police crypto to fiat transactions, stating: “Banks have already begun to pay attention to exchange operations, that is, when they see that an operation has come after the exchange of virtual assets for hard currency, they have already begun to evaluate them and actually inform us about these operations.”

Putin issues orders to combat ‘illegal cross-border transfers’ of digital assets”

Russian President Vladimir Putin has stressed the importance of developing additional measures to fight against illegal cross-border transactions of digital financial assets. Speaking at a board meeting of the General Prosecutor’s office Wednesday, Putin stated that “criminal elements have been increasingly deploying digital financial assets,” which needs special attention from the government. “There is one more point — quite new, but essential: we should take additional measures to suppress illegal cross-border movement of digital financial assets,” Putin said. The President ordered local enforcement as well as the Federal Service for Financial Monitoring, or Rosfinmonitoring, to give all their attention to this issue.


Indian crypto exchange execs intensify lobbing efforts to prevent ban

Nischal Shetty, CEO of Indian crypto exchange WazirX, and other stakeholders in the industry are reportedly working toward convincing the government to adopt more nuanced cryptocurrency regulations. According to a report by The Economic Times, the country’s Blockchain and Crypto Council has drafted a presentation note highlighting recommendations for cryptocurrency regulations in India. The regulatory framework proposed by the council — which is an arm of the Internet and Mobile Association of India, or IAMAI — reportedly contains measures to address issues like money laundering and threats to rupee monetary sovereignty in the country. For Shetty, the proactive approach adopted by crypto stakeholders in the country has become necessary given the negative stance taken by government authorities toward cryptocurrencies. Thus, the council plans to present its recommendations to government agencies like the Ministry of Electronics and Information Technology and the Department of Economic Affairs.

India’s government orders companies to disclose crypto holdings

While the legal status of cryptocurrencies remains undecided in India, companies in the country involved in virtual assets must now report their activities as part of their financial statements.The new rule follows amendments made by the country’s Ministry of Corporate Affairs to Schedule III of the 2013 Companies Act. According to the document published on Wednesday, Indian firms both public and private that have invested or traded in crypto during the financial year must disclose their profits or losses. Other crypto-related disclosures include the amount of cryptocurrency held by the company as of the reporting date as well as additional advance deposits made by customers for the purpose of cryptocurrency investment or trading. The amendments to the Companies Act of 2013 will come into effect at the start of April.


Germany’s financial regulator issues retail crypto investment warning

Germany’s Federal Financial Supervisory Authority, or BaFin, has warned investors about the risks involved in cryptocurrency investments. In a consumer protection alert issued on its website on Friday, the regulator offered a cautionary tale about crypto involvement on the part of retail investors. As part of its statement, BaFin echoed similar admonitions espoused by several European regulators including the European Securities and Markets Authority and the European Banking Authority. According to BaFin, retail investors need to be aware of the risks of incurring 100% losses from their crypto investments. While European Union lawmakers are still working toward creating an EU-wide set of laws for digital currencies, German regulators already have some legal framework for digital assets in the country. Crypto custody providers, exchanges and other businesses can only operate in Germany under license from BaFin. As previously reported by Cointelegraph, the country legalized digital securities back in December 2020.


Irish crypto firms will impose Anti Money Laundering ID checks from April

Irish lawmakers will impose an anti money laundering regime on crypto for the first time in April. The Central Bank of Ireland has extended the nation’s anti-money laundering, or AML, and countering the financing of terrorism, or CTF, guidelines to apply to Bitcoin and crypto assets from April. Starting next month, Ireland’s crypto asset service providers must comply with AML rules and other regulations for the first time. The new rules are a result of the inclusion of the latest European Union AML Directive into Irish law. Companies that operate with crypto assets, and any firms providing services to them, will be required to complete due diligence checks on their clients and account for the origin and destination of funds. Ireland’s firms will have to convince the central bank they are maintaining AML and CFT policies to the same standards required of mainstream financial service providers. Cryptocurrency has historically existed outside of specific Irish laws, allowing traders to speculate on digital assets anonymously.

South Korea

South Korea faces strict crypto regulation and fears of centralization

From real-name account trading to investigating individuals using cryptocurrencies to evade taxes, government officials in South Korea are enacting stricter regulations to oversee the cryptocurrency industry in the country. These measures often require digital currency businesses to provide detailed customer data and transaction information to the relevant authorities. With these stringent measures often comes an increase in the cost of compliance for exchanges and other crypto service providers. Privacy concerns are another issue amid the swath of information being provided to government agencies. However, this strict regulatory climate has done little to dampen the enthusiasm for cryptocurrencies in South Korea. Crypto trading in the country continues to gain more traction, with exchange investors in line for significant price gains in shares amid the current upsurge in digital currency activity in the country.

Experts say new South Korean crypto rules will create a monopolized market

South Korea is heading into a new period for its crypto industry, with stringent new rules coming into effect on Thursday that will require all cryptocurrency businesses to comply with new crypto reporting regulations and registration rules. As an article from the Korea Herald outlines, industry experts fear that the impact of the new measures — specifically, the incoming Specific Financial Transactions Act — will have damaging consequences for most domestic cryptocurrency firms. The act requires all virtual asset operators to seek official registration, for which they must show evidence that they are operating using real-name accounts at South Korean banks. While this is intended to prevent financial crimes such as money laundering, the vast majority of smaller-scale crypto firms have reportedly thus far been unable to forge partnerships with local financial institutions. Koo Tae-eon, a layer specializing in tech firms, told the Herald: “Since the promulgation of the law a year ago until now, so many crypto exchanges have tried to abide by the new law by getting real-name accounts from the local banks, but it didn‘t work. Even those that are equipped with an information security management system and have CEOs with no criminal records were not able to forge a partnership with banks.”

South Korea deepens probe on tax evasion via cryptocurrencies

The National Tax Service of South Korea is increasing its efforts to combat tax evasion and is now focusing on the use of cryptocurrencies for such illicit activities. According to the Korea Herald, the tax agency has identified more than 2,400 tax evaders who used cryptocurrencies to hide assets worth over 36.6 billion won ($32 million) from the government. The NTS said it targeted individuals with more than 10 million won ($8,800) in tax defaults while also recovering cash, bonds and other hidden assets. Indeed, the agency reportedly plans to conduct a deeper probe of some of the individuals caught in the tax evasion scheme. As part of its investigations, the NTS liaised with crypto exchanges in the country to obtain detailed customer trading reports. Given the tightly regulated crypto space in South Korea, digital currency trading is only possible via real-name accounts tied to banks and other financial institutions. Indeed, exchanges in the country may soon begin to face stiff penalties for noncompliance with customer identification laws. Major platforms like Bithumb are already upscaling their Anti-Money Laundering protocols.


UK crypto firms must now submit yearly financial crimes reports

The United Kingdom’s Financial Conduct Authority has included cryptoasset businesses under the financial crimes reporting umbrella eight months after initially announcing plans to do so. The FCA made this known via a policy statement issued on its website on Wednesday. This move comes as the country’s financial regulator has increased the number of firms required to submit annual financial crime report known as “REP-CRIM” from 2,500 to about 7,000. According to the policy statement, the FCA declared that compliance with REP-CRIM reporting was a necessary tool to enable regulators to combat money laundering activities. In its 2020/2021 business plan, the FCA stated: “We will strengthen our rules to prevent money laundering, as well as working with domestic and international stakeholders to support a joined-up approach to cryptoassets.”

UK authorities to focus on stablecoin regulations to prevent monopolies

John Glen, the United Kingdom’s financial services minister, has said that stablecoins will be the main focus of the government’s crypto regulatory activity. Glen made delivered his comments while addressing a conference organized by City & Financial Global on Tuesday, Reuters reported. For Glen, the U.K.’s decision to prioritize stablecoins over regulating the broader financial market is due to fears of monopolies emerging in the market based on the limited number of participants offering fiat-pegged cryptocurrency payment services. “There is the potential for some firms to swiftly achieve dominance and crowd out other players, due to their ability to scale and plug into existing online services,” Glen remarked.

Updates and news on the most important players/topics in the industry:

SEC’s ‘Crypto Mom’ warns selling fractionalized NFTs could break the law

Speaking at Draper Goren Holm’s Security Token Summit on March 25, SEC commissioner Hester Peirce, also known as “Crypto Mom” warned the issuers of fractionalized non-fungible tokens and NFT index baskets that they could inadvertently be distributing investment products. While Peirce stated that “the whole concept of an NFT is supposed to be non-fungible” — meaning that “in general, it’s less likely to be a security” — she noted that “people are being very creative in the type of NFTs they are putting out there.” Peirce urged NFT issuers to be cautious if they decide to “sell fractional interests” in NFTs or NFT baskets, stating: “You better be careful that you’re not creating something that’s an investment product — that is a security.” With NFTs fetching increasingly exorbitant prices, fractionalized interests in these assets enable smaller investors to still be able to gain exposure to a small share of a high-priced NFT. Earlier this month, Cointelegraph reported on two emerging teams offering novel solutions for fractionalizing non-fungible tokens.

US-based crypto users likely still have to pay taxes on NFTs, says CNBC

Tax season is almost upon crypto users based in the United States, and even if they plan on keeping their assets digital, nonfungible token — or NFT — buyers might not get off scot-free. According to a CNBC report today, people who use the profits from their crypto holdings to purchase NFTs will likely still have to pay capital gains tax up to 20% when filing their U.S. taxes. “Collectors who are buying NFTs with their cryptocurrency gains could face large tax bills this year for deals that most probably thought were tax free,” said CNBC’s Robert Frank. “The IRS considers crypto a capital asset, not a currency, and if you exchange crypto for any other asset, you immediately recognize a capital gain or loss.” Frank claimed that “Most platforms that sell NFTs are not reporting to the IRS” despite many of the popular auction houses having offices or locations in the United States. For example, the Winklevoss twins’ NFT marketplace Nifty Gateway is based in San Francisco, but buyers can come from all over the world. Anyone who purchases an NFT from the platform — whether a digital sports collectible or a piece of high-end artwork — is subject to declaring the assets based on the laws in their country of residence.



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