Tag: Regulatory

The regulatory landscape on cryptocurrencies and the blockchain industry is changing, many expect a global crackdown on this industry. The atmosphere is tense, as the United States, China, and Europe seem to be moving to tackle a topic long overdue.

Adam Berker, Senior Legal Counsel at global payment network Mercuryo, conducted a research on some of the most relevant points in terms of regulations, money laundering policies, and more. To have a better grasp of the current regulatory outlook, we asked him for a more detailed look into his research. This is what he told us.

Q: Can you talk more about your background, your work at Mercuryo, and how you got involved with the crypto industry?

A: My first experience with the cryptocurrency industry was in 2019 when I worked at Musaev & Associates law firm. I received a request from a private investor for participation in Telegram Open Networks’ (TON) ICO. Even though telegram did not launch its cryptocurrency, I managed to finish this investment project and really got interested in the crypto industry.

Later, in 2020 I joined Mercuryo as a Legal Counsel and started providing full legal support to the group of companies with entities in the UK, Cyprus, Estonia, and Cayman Islands for conducting its activity all over the world. I also undertake performing AML & KYC/KYB checks and onboarding procedures in financial institutions.

Under my management, Mercuryo expanded its activity to the US, Canada, Latin America and considerably enlarged the number of companies in the corporate structure, obtaining corresponding crypto and payment licenses. Furthermore, I provided legal support in developing partnerships with crypto industry leaders for such products as Cryptocurrency Widget, Acquiring & Crypto-Acquiring, Over-the-Counter deals. Additionally, I provided legal support in securing a $7.5M Series A funding led by Target Global, a major international VC fund with €800M+ under management.

Q: Recently you conducted research on crypto regulation on a global scale, what are some of the key points and takeaways from your investigation? Would you say that regulations are leaning more positively or negatively for cryptocurrencies around the globe?

A: According to my research, we may divide regulatory authorities’ approach to the 3 categories:

• Business-oriented. These jurisdictions prefer to ease the process of incorporation, obtainment of licenses and ongoing operation so that crypto businesses would be more interested in them. One of such jurisdictions is Canada, as the whole process of incorporation and license issuance is made online and very quickly, they require a minimum package of documents and the local Anti-money laundering regulation does not require crypto companies to obtain proofs of address from the end-users.
• Control-oriented. These jurisdictions usually impose very strict requirements for the crypto entities regarding the Know-Your-Customer (KYC) procedure of the clients. For example, if you want to operate from Lichtenstein, you would need to obtain information about the client’s address of residence, the origin of assets and even professional occupation. In Australia, you will only need to identify your customers, but if you do this using electronic tools (as most crypto services do), you would need to obtain two identification documents. Though, it does not matter for the local regulator AUSTRAC that some customers may only have national ID. All these additional requirements negatively affect business metrics, as customers don’t like undergoing long KYC procedures.
• “Gray” jurisdictions. There isn’t any specific crypto regulation, neither AML, nor financial services’ laws formally apply to crypto in these countries. Yet, these states are open for crypto companies and they are definitely working on ways to implement crypto into their legislative systems. For example, Brazil has introduced “auxiliary financial services” as a special type of activity for crypto companies and they will surely go further with it.

In general, regulations are leaning more positively on the cryptocurrency industry as they help businesses understand the local “rules of the game” and protect customers from fraud and scams.

Q: Why do you think it has taken regulators so long to approach cryptocurrencies, and crypto-based companies and services? Do you agree with the statements made by government officials claiming that cryptocurrencies and the crypto space are “highly unregulated”?

A: A few years ago, many governments used to be against any crypto and they tended to ban anything related to this sphere. Now they understand that it is a huge economic sector, and for that reason, they try to take part in it.

Of course, nowadays crypto regulations of many countries are not as developed as the regulation of financial services, for example. Nevertheless, it is definitely not a “highly unregulated” field, since there are such jurisdictions as Estonia and the UK, where local lawmakers developed very advanced and clear rules for crypto companies, including those related to licensing, customer onboarding, ongoing monitoring and reporting.

In general, we may say that most of the countries opt for crypto regulations that would be similar to financial services’ regulations, especially to electronic money institution regulations. For example, in the U.S. you should register your business as a Money Services Business with FinCen on a federal level and then obtain Money Transmitter authorizations in the states where your business is planning to provide services (except for Montana since there is no MT license requirement). In most states, you will be able to provide both money transmission services (in general: cash checks, transmit money, own and operate ATMs, and provide electronic funds transfers) and provide crypto-related services. The main problem with the U.S. is that companies have to obtain MT licences separately in every state. Though, 29 states concluded a Multistate Licensing Agreement for MSBs and companies may file one application that will be reviewed by all the participants of the Agreement. Nevertheless, this system still needs time for development and proper implementation as each state has its own requirements for the money transmitters.

By the way, one of the main, but not quite obvious, problems nowadays is an inconsistency between regulations in different countries, which is a serious obstacle for businesses as most of the crypto companies conduct their activity in the international arena. The best solution for this is a unifying agreement between countries. For example, the European Union may implement some kind of passporting system which is now used for financial institutions. This system enables companies that are authorised in any EU or EEA state to conduct their activity freely in any other state with minimal additional authorisation.

Q: Many believe that a U.S. crackdown on the industry will have a negative global impact on the entire crypto industry. According to your research, are there any safe havens for companies that want to operate without hostilities? Can the U.S. really have a global reach when it comes to cryptocurrencies?

A: The U.S. already impacts the whole industry with their regulations since even foreign crypto-companies that want to provide services to the U.S. citizens need to comply with their laws. For that reason, most of the crypto projects try to avoid any relations with the U.S. For example, we may often see the U.S. in the list of banned countries in many ICOs. However, most of the regulated jurisdictions allow entities to provide services to foreigners under local laws.

In my opinion, the most favourable jurisdictions are Canada, as I have said before, and Lithuania since they don’t have strict KYC requirements, companies may have foreign directors and the process of incorporation and license obtainment is rather simple in comparison to other jurisdictions. Additionally, I should underline that in Canada crypto companies obtain Money Services Business registration which also gives them the possibility to carry out currency exchange services, money transfer services, issue or redemption of traveler’s checks, money orders or bank charges, check cashing and ATM operation. Moreover, Canadian regulator FINTRAC regularly issues detailed guidelines which can be very useful for such companies.

Also, many crypto companies incorporate their legal entities in so-called “gray areas” (unregulated jurisdictions) like the Seychelle Islands. This also could be an option since they are not obliged to comply with common crypto rules like in other countries. Nevertheless, problems may arise later when these countries finally approve local laws which may not be as favourable as in other jurisdictions.

Q: Often, we see regulators, government officials, and politicians asking for a crackdown on the industry, especially in the U.S. Is this the most efficient approach? How can users, consumers, and the countries themselves benefit from clear regulations and fair policies?

A: Of course, no one will benefit from the crackdown as new industries need assistance from governments for future development. If lawmakers impose too many restrictions, companies just will not start their businesses there. Nevertheless, clear and fair policies give companies an understanding of the local rules, certain consequences for their violation and ways to protect themselves. Additionally, these regulations protect customers from fraudsters since every diligent market player is licensed by the correspondent authority and every customer may file a complaint in case of unlawful acts. On the other hand, regulations help governments control fiat money flows, fight money laundering, and, of course, collect taxes.

Q: Coinbase, Ripple, and others major companies with revenues directly linked to the crypto industry have been lobbying in Washington and other centers of political power around the globe. Do you think this is something that more companies should embrace openly? How can a crypto company or crypto service provider approach regulators if they already have a negative bias?

A: It is clear that the whole industry gains an advantage if such major companies achieve success in lobbying their own interests. In this case, bigger companies create precedents and regulatory authorities will follow these precedents in future cases regarding other companies.

My general advice for companies that already have a negative bias is that they should always be in contact with authorities and be ready to provide detailed responses to official requests. Still, it always depends on the specific case, country of incorporation, whether there were any serious violations of applicable regulation or not.

Q: Recently, Uniswap Labs and other DeFi interfaces limited the users’ access to specific tokens. Speculations point out a possible intervention by regulators in the U.S. towards these companies. Many criticized the decision and questioned the decentralized nature of the protocol. How can this relation between DeFi companies, regulators, and users work out in the long term? Do you envision a future where users must use backdoors to interact with any DeFi product?

A: Since governments try to control the crypto sphere more and more, it is obvious that DeFi companies also will be regulated, even though they do not involve fiat transactions in their business scheme.

As there is no escape from the regulation, crypto companies should not ignore this process. On the contrary, it is better for them to build a constructive dialogue with authorities so that the latter could understand all the needs of the industry.

For example, today it is clear that governments fight against anonymity in crypto and this may also affect projects like Uniswap since they do not require users to undergo any KYC procedures. In this case, using backdoors to interact with DeFi products or any other crypto products may be a possible option for users that do not want to disclose their identity.