On January 3, 2009, a developer who went by the name Satoshi Nakamoto produced the Genesis Block: the first block in a new, decentralized, open ledger system in a brand-new technology: blockchain. Nakamoto’s Genesis Block became the moment Bitcoin — and within it, an entirely new mode of thinking regarding money, accounting, and data transfer — was born.
Today, Bitcoin turns 10. And while we all know today that Bitcoin is just one of thousands of tokens, 10 is a good time to reflect on the watershed developments cryptocurrency has seen over the past decade.
While there’s a lot to say about crypto from an investment point of view — specifically re: the Bitcoin Cash hard fork and the “Crypto Winter” — we’ll be skipping over the crypto-fiat aspect for now and looking at the security and regulatory aspects of cryptocurrency in January 2019.
In crypto, security is king
2018 was a record year for hacks. In 2017, $220 million in crypto assets were stolen in hacks and breaches; in 2018, that number rose to an estimated $1.1 billion — a 450% increase in just 12 months.
Most of the 2018 hacks were exchanges, as they are the easiest cryptocurrency-holding institution to hack. Research published in August reveals that all top 19 exchanges worldwide have been hit.
“Increased fraudulent activity and attention of hacker groups to the crypto-industry, additional functions of malicious software related to cryptocurrencies, as well as the significant amounts of already stolen funds signals that the industry is not ready to defend itself and protect its users,” Ruslan Yusufov, the Director of Special Projects at Group-IB, stated in that report.
Hacks are exacerbated by exchanges and wallets not using, at the bare minimum, two-factor authentication as an industry standard. More startling: only 1 in 5 compromised cryptocurrency accounts in 2018 had been secured with passwords longer than 8 characters.
Hacks were also just one aspect of crypto attacks in 2018, as the term “crypto jacking” was born to describe the new phenomenon of miners hacking into various computers and servers to jack electricity for mining operations. At the end of 2018, mining malware incidents were revealed to have risen 4000% since 2017.
Whatever the cause, the increase in hacks has shown an upswing (finally) in concerns over cryptocurrency security, both for the end-user and on the institutional level. Using online search data as an indicator of interest, the terms “cryptocurrency security” and “blockchain security” reached peak popularity in January 2018 and in March 2018, respectively. Interest has begun to taper off , Google trends data indicates — possibly due to the “crypto winter” and widespread skepticism about cryptocurrency’s ability to respond from the crash. However, the popularity of questions regarding securing crypto assets in Quora and on other forums indicate that more and more people are aware of the need for extra security measures for blockchain than ever before.
Moving toward cryptocurrency regulation — slowly
2018 was a landmark year for the global effort to regulate blockchain and cryptocurrencies.
G20 nations concluded in July 2018 that crypto assets do not threaten global financial stability and can, in fact, “deliver significant benefits” to the financial sector. While the G20 did not issue any regulatory statements during that initial meeting, by December, all G20 nations signed a declaration to conform the cryptocurrency market to anti-money-laundering standards set by the Financial Action Task Force (FATF).
“We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF standards and we will consider other responses as needed,” section 25 of the declaration reads.
Indian Prime Minister Narendra Modi read the initiative, calling on the FATF to “formulate a standard definition of fugitive economic offenders,” as well as standardized “identification, extradition and judicial proceedings” for those offenders.
Asia-Pacific: Steps Forward, Steps Back
In terms of regional moves to regulate cryptocurrency, Asia-Pacific arguably remains the most progressive in terms of the reform toward digitized currency, despite also being the region also holding the most countries with an implicit ban on ICOs or cryptocurrency transactions
First, the good. Japan and Australia are the most progressive countries in APAC in terms of normalizing digital currency — as both have introduced regulatory frameworks for application of tax laws and AML and anti-terrorism fund laws on cryptocurrencies by mid-2018. Hong Kong and Singapore have applied AML and anti-terrorism laws to digital currency, but not yet implemented taxation; Russia has implemented limited taxation on cryptocurrency (mining, in particular) — but not AML laws; and New Zealand has introduced regulation limiting ICOs, but not banning them.
The past year was really a watershed year for Japan, which recognized cryptocurrency as legal tender in 2017; 2018 began with the formation of the Japanese Virtual Currency Exchange Association and regulation protocols set in place which require exchanges to receive a license from the Financial Services Agency (FSA) in order to operate.Crypto regulations on the table, as of mid-December 2018, included taking active steps to secure private keys; maintain net assets “equal to or more than the amount equivalent to the currency and repayment funds” at all times, as a backup strategy in the event of a hack; and enact countermeasures to prevent bankruptcy.
Despite this, not every APAC country has jumped on board. According to a Library of Congress report on cryptocurrency regulation worldwide, bans on ICOs have been enacted in China, Macau, and Pakistan; bans on all activity regarding cryptocurrency remain in Pakistan, Nepal, and Vietnam; and bans on cryptocurrency transactions (although not on holding crypto) remain in Bangladesh, Thailand, and China.
Just last week, a South Korean court ruled that cryptocurrency exchanges could not be held accountable under its Electronic Financial Transactions Act, stating that “virtual currencies cannot be used to buy goods and it is difficult to guarantee their exchange for cash because their value is very volatile. [Cryptocurrencies] are mainly used for speculative means […].”
APAC, overall, has engaged the most with the idea of normalizing and/or regulating cryptocurrencies — and engagement is the biggest step toward progress.
Europe, Middle East, Africa (EMEA) — A Regional Divide
EMEA can be divided squarely between Europe — where many countries have moved toward taxation of crypto assets — and Africa/Middle East, where progress is limited.
Since 2015, EU countries cannot apply Value Added Tax (VAT) to crypto assets — although further taxation applies in 12 European countries. And additional 8 countries apply AML and anti-terrorism laws to crypto assets; just two countries — Denmark and Switzerland — apply both.
Several EU countries hold limits on cryptocurrency activities; The Netherlands, which has introduced regulation re: ICOs; Lithuania, which bars financial transactions within its borders from conducting cryptocurrency transactions; and Spain, Belarus, and Luxembourg, which do not recognize cryptocurrency as legal tender, but have remained active in further conversation about the regulation of digital currencies. The Isle of Man accepts cryptocurrency as legal tender alongside its national currency — only one out of two major countries worldwide to do so (the other being Mexico). In the Middle East and Africa, the cryptocurrency train is moving more slowly. Nine countries have placed explicit or implicit bans on cryptocurrency activity. Israel and South Africa have applied taxation laws.
In March 2018, the European Commission issued a FinTech Action plan to tackle the opportunities presented by new technologies such as blockchain and artificial intelligence (AI); the plan includes the establishment of the EU Blockchain Observatory and Forum, which announced its members shortly before the New Year. The EUBOF is expected to meet in January 2019.
Other highlights include regulation for exchanges in Gibraltar, passed in January 2018 and wide-ranging cryptocurrency and exchange regulations taking effect in Malta in November 2018.
North, Central, South America (NCSA):
The Americas saw a lot of movement in terms of clarifying cryptocurrency regulation in early 2018.
In January, Bermuda issued a warning against investing in ICOs, but did not explicitly ban them — citing (the somewhat circular logic of) them remaining “unregulated because there are no requirements with which they are required to comply at this time.” Trinidad and Tobago, Ecuador, Honduras, similarly, warned that month in official statements that cryptocurrencies are not officially considered legal tender and — while not illegal — could not be protected by anti-money-laundering and other monetary protection laws.
Several weeks later, three countries — Canada, Venezuela, and Mexico — took positive steps toward cryptocurrency regulation. Canada’s Ontario Securities Commission had approved the country’s first blockchain fund — Blockchain Technologies ETF. Venezuela took steps to introduce its own virtual currency — the petro — sparking a legal battle over the legality of the move between the National Assembly and the Venezuelan government.
Mexico, meanwhile, introduced a broad range of regulatory powers over cryptocurrency — including standardizing which crypto assets could be used by financial authorities in the country (not by specific coin, but by characteristics of present and future coins), authorizing institutions to use digital assets, and requiring financial companies to inform clients of the risks involved, among others. Mexico is one of two countries which accepts cryptocurrency as legal tender, and its implementation of these regulations will be a litmus test for cryptocurrency integration into the traditional financial sector.
In the United States, tax applications for cryptocurrency are dependent on whether tokens are defined as securities. In June 2018, Bitcoin and Ether were declared not to be securities — and are managed by the Commodity Futures Trading Commission (CFTC); the remainder of tokens are under the Securities and Exchange Commission (SEC). Last month, two bipartisan bills were introduced — the Virtual Currency Consumer Protection Act and the Virtual Currency Market and Regulatory Competitiveness Act — directing the CFTC to regulate price manipulation and analyze crypto laws in other countries to allow the US to become a competitive player in the crypto asset market.
Overall, the final countries to drag their feet with the cryptocurrency train are Bolivia, which has banned all cryptocurrency activity, and Colombia, which has banned cryptocurrency transactions. Argentina, at this time, has applied tax law to cryptocurrency, but not anti-money-laundering laws.
What’s ahead for 2019? No one knows for sure. But whether you’re investing in Bitcoins or Ethereum; altcoins or security tokens; pushing for a bull market or a bear market, the evidence is clear that only secure solutions will stand the tests of time and regulation.
(Correction: We originally listed Lithuania as a country with a full ban on cryptocurrency transactions. Thank you to NonceD’Nonce for alerting us to the error.)