Blockchain Blog

International News - Blockchain & The Law: 01/05/18 Update

By Marina Fyrigou-Koulouri, Joy Xiao, and Alexandra Levin Kramer

The blockchain industry had no vacation over the last two weeks ending January 05, 2018, during which a number of global legal news items have been reported as follows:

China

On January 3, 2018, as reported on www.renmin.com.cn, DFTN,[1] China’s first online cryptocurrency digital trading platform supported by the Chinese government, was officially launched in Chengdu, Sichuan Province.. DFTN is funded by the China Academy of Financial Innovation Blockchain Business Council and is operated by Zhongcai Digital Trading (Beijing) Financial service limited company and is the first platform since China’s ban[2] on TS[3] which permits deposits and withdrawals in RMB cash.

Additionally, Sinochem Group successfully closed the first Chinese blockchain trial transaction on international crude oil trading between China and the Middle East[4]. Based on the analysis, the fundamental technology of this deal (blockchain smart contracts and digital bills of lading) can greatly improve the efficiency of international crude oil trading and achieve a cost savings of at least 20% - 30% by reducing trading transaction costs. In the future, it is expected that applying blockchain technology in the crude oil trading industry in China will improve the transparency of crude oil trading transactions and risk management in the oil trading industry.[5]

China is considered to have the highest number of miners in the world, as it currently produces approximately 75% of the world’s bitcoin supply.[6] However, a memo dated January 2, 2018, from China’s internet finance regulator, the “Leading Group of Internet Financial Risks Remediation” (the “Group”) was leaked indicating that in addition to having banned token sales, China is planning to clamp down on Chinese miners too. The memo insists that “bitcoin miners should make an ‘orderly exit’ from China because they have consumed ‘huge amounts of resources and stoked speculation of ‘virtual currencies.’”[7] Although the Group and the People’s Bank of China cannot directly regulate miners, they have the ability to ask local authorities to do so by changing policies on electric power and land usage, tax, and environmental issues.[8]

Europe

On January 3, 2018, Ewald Nowotny, Governor of the Central Bank of the Republic of Austria and member of the European Central Bank’s governing council, claimed that cryptocurrencies need to be regulated and taxed and he also highlighted their potential use in money laundering.

According to Nowotny, “everyone involved should reveal their identity,” like in any other financial transaction. Moreover, he stated “[i]t can't be allowed that we've just decided to stop printing 500-euro notes to fight money laundering, that we've slapped strict rules on every tiny savings club, and then have to watch people blithely laundering money around the globe with bitcoin."[9] Additionally, he supported the implementation of a value-added tax on bitcoin “since it’s not a currency,” in his opinion.

Malaysia

On January 2, 2018, Malaysia’s Finance Minister, II Datuk Seri Johari Abdul Ghani, stated that the country “will not impose a blanket ban on cryptocurrencies, including bitcoin.”[10] According to Johari, the Malaysian government is aware of the need to achieve a “balance between public interest and integrity of the financial system” as it does not want to inhibit any innovation that could be “beneficial to the public.”[11] Nevertheless, there is also a need to develop suitable regulation in order to ensure protection from relevant risks. In fact, even though the country’s central bank, Bank Negara Malaysia, does not yet regulate digital currencies, it has the authority to monitor digital currency exchanges and ensure that they comply with “customer due diligence” and requirements to “report suspicious transactions”. Finally, Johari concluded that it is “imperative for the authorities to have a thorough understanding of digital currencies before embarking on any policy actions.”[12]

Gibraltar

On January 1, 2018, the Gibraltar Financial Services Commission (the “GFSC”) introduced the Digital Ledger Technology (“DLT”) Regulatory Framework,[13] which updated the jurisdiction’s financial services regulations, by and made it the first jurisdiction to officially introduce a new DLT regulatory framework. 

Nicky Gomez, head of GFSC’s Risk and Innovation Department, said: “We are really excited to finally welcome applications from DLT providers. We expect to be very busy in the coming months…[and] [w]e are looking forward to working on some interesting and innovative ideas with applicants.”[14]

Under the new rules, starting on January 1, 2018 “any firm carrying out by way of business, in or from within Gibraltar, the use of …DLT) for storing or transmitting value belonging to others (DLT activities)” will be required to receive authorization to be a DLT provider by the GFSC[15] 

Additionally, the new rules list nine basic principles, which a DLT provider must adhere to, namely to:

  1. “conduct its business with honesty and integrity;”
  2. “pay due regard to the interests and needs of each and all its customer and…communicate with its customers in a way which is fair, clear and not misleading,” including practices ensuring the protection of consumers’ interests and employing “ethical advertising and marketing standards,” as well as an “initial and per-transaction disclosure of risks [and] terms and conditions;”
  3. “maintain adequate financial and non-financial resources;” 
  4. “manage and control its business effectively;”
  5. ensure “the protection of client assets and money when it is responsible for them;”
  6. employ “effective corporate governance arrangements;”  
  7. “ensure that all systems and security access protocols are maintained to appropriate high standards;” 
  8. take actions “to prevent, detect and disclose financial crime risks such as anti-money laundering and countering terrorist financing (AML/CFT);” and
  9. “be resilient and must develop contingency plans for the orderly and solvent wind down of its business,” which include disaster recovery and crisis management plans. 

Egypt

On January 1, 2018, Shawki Allam, Egypt’s Grand Mufti, stated that “[b]itcoin is forbidden in Islamic Sharia.”[16] After a meeting with economic experts regarding bitcoin and its consequences on the economy, Grand Mufti Allam concluded that trading of such cryptocurrencies is very risky due to their “extreme volatility and fluctuations” and they cannot be considered a “safe investment” as their value is only based on speculations. Additionally, Grand Mufti Allam believes that cryptocurrencies “undermine the legal system” by enabling tax evasion, money laundering, terrorism financing and other criminal or fraudulent activities. Accordingly, he opines, cryptocurrencies trading is forbidden under Islamic law as it is a significantly risky activity and it also “leads to more corruption because it is a decentralized and anonymous system and difficult to trace who gave how much to whom.”[17]

The statement was issued as an interpretation of Islamic law in the form of a fatwa. Although the fatwa does not have a legally binding character, it is treated as a “high-level legal opinion.”[18]

Russia

Russian President Vladimir Putin is considering issuing a national cryptocurrency, the “cryptorouble,” with the goal of helping Russia face challenges resulting from, and possibly evade, economic sanctions that the country has been facing. As Sergei Glazev, an economic adviser to Putin, states “[t]his instrument suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions.”[19] Additionally, he believes that the “cryptorouble” will be “restricted in a certain way” making it possible for the Kremlin to monitor and track its moves.

Previously, the Central Bank of Russia has made several negative statements about cryptocurrencies including stating in its annual Financial Stability Report in November 2017 that there is a bubble in the market, investors may incur substantial losses and it would attempt to block the sale of bitcoin in Russia on non-Russian websites. Similarly, Russia’s Deputy Finance Minister, Alexey Moiseev, said in September 2017 that all cryptocurrency payments would be banned in the future by the national government.[20]

India

On December 29, 2017, the Indian Ministry of Finance issued a statement warning people against the risks of investing in virtual currencies claiming that they are “like Ponzi schemes.”[21] The notice states that there is no “intrinsic value” in virtual currencies nor are they backed by any kind of assets or by government fiat. In fact, “[t]he price of Bitcoin and other [virtual currencies]…is entirely a matter of mere speculation resulting in spurt and volatility in their prices. There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes…[and] [c]onsumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes.”[22] Additionally, the notice clarifies once again that virtual currencies do not constitute legal tender and they “do not have any regulatory permission or protection” in India.  

South Korea

On December 28, 2017, the South Korean government announced its intent to prohibit the use of anonymous virtual accounts in cryptocurrency transactions. Hong Nam-ki, Minister of the Office for Government Policy Coordination, who made this statement after meeting with vice ministers from related ministries, said that the government “can't let this abnormal situation of speculation go on any longer.”[23]

According to Hong, going forward “only real-name bank accounts and matching accounts at virtual currency exchanges can be used for deposits and withdrawals” whereas “the issuance of new virtual accounts to cryptocurrency exchanges will be banned.”[24] Additionally, he stated that the government will impose stricter requirements and toughen related criminal punishment to prevent money-laundering and crimes related to virtual currency activity. 

This announcement was issued just after warnings were made by Choe Heung-Sik, Governor of the country’s Financial Supervisory Service, about bitcoin, saying that “[he] bet[s] the bubble in bitcoin will burst later.”[25]

Israel

On December 25, 2017, Shmuel Hauser, Chairman of the Israel Securities Authority (the “ISA”), discussed a proposal soon to be presented to the ISA seeking to ban bitcoin and other cryptocurrencies trading on the Tel Aviv Stock Exchange Hauser specifically said, “[i]f we have a company that their main business is digital currencies we would not allow it. If already listed, its trading will be suspended.”[26] If the proposal is accepted, a public hearing will follow before exchanges need to comply with the relevant rules.

Additionally, just a day earlier, on December 24, 2017, a source from the Bank of Israel reported that it is considering the launch of a digital currency “as a means of creating a faster payments system as well as reducing the amount of cash in the economy.”[27] The Bank of Israel refused to make any official statements, while the source indicated that such a digital currency “would be centralized, safe and abide by money laundering rules.”

Please contact Alexandra Levin Kramer, the Chair of CKR Law’s Blockchain Technology & Digital Currency practice group if you have any questions. She can be reached at akramer@ckrlaw.com or +1 (212) 259-7300.

 



[11] Id.

[12] Id.

[15] Supra note 12.

[17] Id.

[22] Id.

[24] Id.