Laying down the law: how to keep your cryptocurrency compliant
This is a contributed article by Dr. Wolfgang Richter, Executive Partner at DWF Germany
Blockchain is booming – in the finance, tech, and even in retail and hospitality sectors. But regulation around blockchain has become something of a black cloud hanging over what previously seemed like a land of milk and honey for businesses and entrepreneurs.
Regulation seems complex, and trying to make sense of all the relevant rules across jurisdictions can feel a bit like trying to fit a square peg into a round hole – especially when trying to deal with both global and local regulations at the same time. But it does not have to be this way. Here are a few tips on what you should be aware of, as well as a few pointers on how you can turn these into a positive rather than a negative.
First and foremost: jurisdiction is key. It is important to be clear where you are operating, and that does not just mean being aware of where the token is coming from. Your token needs to be compliant wherever the offering is made. That may mean a few extra rules.
In Europe, for example, any tokens purchased by making payments to an issuer are ‘public offerings’ in each of those countries – which requires legwork on behalf of local regulators in each, unless the token is limited only to previously accredited investors. If the token is a security however, then you can passport the approval of any one European regulator into all other EU countries.
If you are managing third-party funds, there is a risk your token model might be seen as a collective investment trust – with all the regulatory approval and reporting requirements that entails. But your token may well be seen as e-money if it is designed to be exchanged for hard currency – and those pounds, dollars and euros, too, bring prohibitive regulatory consequences.
And that is just Europe – the rest of the world is another kettle of fish. China, Korea, the US and Australia all have different regulatory schemes to follow, and increasingly the response to reams of regulation is to simply ignore other countries like the US and China to avoid the relevant restrictions. So how to spin the regulatory situation to your advantage?
As ever, where there is a challenge, there is an opportunity. Regulation exists for a reason, of course – in the case of blockchain, it has the benefit of keeping unscrupulous operators off the playing field and avoids a race to the bottom in price and standards. That can only be a good thing.
But it also holds a hidden benefit in driving you to look more closely at the token structures available to you. Tokens can represent a range of real-life circumstances or agreements – whether contracts, shares, assets, monetary or non-monetary participation rights, and so on. If you know exactly what you are dealing with, you can pick a token structure which fits your exact needs, but also one which falls into a category of less stringent regulatory requirements. Every structure has its drawbacks, but in many cases these may well be preferable to a much more heavily regulated set-up.
So that means changing the way you implement blockchain token structures into your business. Start by evaluating the real-life situation your token represents, the incentive, as well as the payment approach that is desirable. Do not focus on the token, but the underlying business – only once you know what you want to achieve should you look at exactly which token is going to help you achieve your objectives, whether that is a security, utility, or payment tokens. This may need to be a collaborative effort between business development teams and token experts to work exactly what is needed. But once that is done, you can start to address the – reduced – relevant regulatory, tax, perception and cost burdens.
If you take the first steps of working out exactly where you need to be and what you need, you will be streamlining the rest of the crypto process. That means jumping ahead of both the market and your competitors. So start thinking about what you really want and need from your blockchain, and the rest should fall into place.