SEC investigates Binance BNB, is cryptocurrency a “currency” or an “asset”?

According to foreign media reports on June 6, the U.S. Securities and Exchange Commission (SEC) is conducting an investigation against Binance, mainly involving Binance Coin (BNB), which was issued by Binance in 2017, and is verifying whether the token should be regarded as A security that should have been registered with the SEC.

The report pointed out that if an investor finances a company or project by purchasing a cryptocurrency with the intention of profiting from it, the cryptocurrency may fall under the SEC’s regulatory purview, based on the 1946 U.S. Supreme Court’s definition of an investment covenant.

In its latest statement, Binance said, “It is inappropriate for us to comment on ongoing dialogues with regulators, and we will continue to meet all requirements set by regulators.”

Although this investigation may take a long time to come to fruition, the US securities regulatory authorities have taken action on token issuance, and the regulatory thinking on cryptocurrencies can be seen. Whether cryptocurrencies belong to “currency” or “securities assets” has once again caused a fever. discussion.

In fact, after the recent UST and LUNA “death spiral” incidents, the heads of financial regulatory authorities in many countries have expressed their preference to define cryptocurrencies as assets rather than currencies since the beginning of this year.

Asset or currency, this is a common dilemma encountered by cryptocurrencies in the world. Different definitions will inevitably lead to completely different directions of regulatory policies.

Asset or currency?

At the World Economic Forum in Davos in late May, International Monetary Fund (IMF) managing director Kristalina Georgieva said, “Crypto products cannot be confused with currencies, and any product without a sovereign guarantee can be an asset, but not a currency.”

 According to Kristalina Georgieva, a prerequisite for so-called money is a stable store of value. Therefore, although Bitcoin is called currency, it is not “money”.

At the World Economic Forum in Davos, the heads of central banks in most countries took a similar stance. Francois Villeroy de Galhau, governor of the French central bank, admitted that he does not call cryptoassets cryptocurrencies: “I always thought of cryptocurrencies as assets, not currencies. They are not reliable money, nor are they reliable means of payment. “

Bank of Thailand Governor Sethaput Suthiwartnarueput said: “If you want to invest in cryptocurrencies, that’s fine, but we don’t want to see it as a payment method because it’s not suitable.”

These views of crypto products as assets rather than currencies are supported by certain data. According to a 2021 Fidelity Digital Assets survey of institutional investors, 56% of European institutional investors and 33% of US institutional investors hold investments in the digital asset class. There have been a lot of improvements on the basis of 45% and 27% in the previous year, while the data in Asia is 71%, which is much higher than that in Europe and the United States.

On July 1, 2021, a new fund law in Germany came into effect, allowing special funds in Germany to invest 20% of their portfolio in crypto assets such as Bitcoin.

Looking at the bull market of encrypted assets since the outbreak of the new crown epidemic, after hitting a historical high of $68,789 in November 2021, Bitcoin is currently hovering around $30,000, and the price has fallen by more than half. The attributes of risk assets are particularly obvious.

Regulators in various countries generally deny the monetary attributes of encrypted products. The main consideration is that most of the encrypted products do not have actual assets for value anchoring, so they are more inclined to regard them as encrypted assets.

In contrast, USDT and other stablecoins backed by US dollar assets have become a special regulatory target, and their regulatory ideas are different from other encrypted assets.

Recently, Federal Reserve Vice Chairman Lael Brainard said in a hearing before the House Finance Committee that the U.S. central bank digital currency (CBDC) may eventually coexist and complement stablecoins and commercial bank currencies.

The UK regulators’ attention to stablecoins appears to be even more advanced. The UK government’s Global Crypto Asset Technology and Investment Hub plan mentions stablecoins as an efficient means of payment.

In recent years, encryption projects have continued to innovate and develop rapidly. However, in the early days, the regulatory policies of various countries have almost stayed the same.

Compared with the complete prohibition of cryptocurrencies in the early years, regulatory ideas have begun to embrace the industry, but the value of cryptocurrencies has not yet been recognized in some countries and regions.

Argentina’s central bank recently said it would prohibit banks from offering customers any digital asset services that are not regulated by the central bank. The heads of central banks in Sri Lanka, Jamaica, Kenya and other countries have made it clear that they do not support cryptocurrency transactions.

Legislative and regulatory ideas are different

Some countries and regions have formed draft legislation to initially clarify the regulatory thinking.

The “death spiral” of UST and LUNA prompted South Korean authorities to speed up the formulation of a basic law on digital assets. It is reported that the Basic Law of Digital Assets will incorporate virtual assets such as cryptocurrencies into the institutional system. This bill is planned to be promulgated in 2023 and implemented in 2024.

However, the road to legislative regulation of cryptocurrencies has not been smooth. Recently, South Korea’s cryptocurrency taxation law, which was scheduled to take effect in early 2022, was announced to be delayed until 2023. According to the above-mentioned taxation law, cryptocurrency transactions with annual gains of more than 2.5 million won (about $2,100) will be subject to 20% capital gains tax and 2% local income tax.

Taxation is the current idea of ​​many countries to incorporate cryptocurrency transactions into regulation. On May 11, the German Federal Ministry of Finance issued a guide to the tax treatment of cryptocurrencies, covering tax scenarios such as cryptocurrency mining, staking, lending, hard forks, airdrops, and transactions, among which individuals hold bitcoin and ether. Coins can be sold tax-free after one year.

It is worth mentioning that this guide is based on personal income tax rather than capital gains tax, i.e. cryptocurrencies are treated as a kind of private property.

Different from the regulatory thinking of personal income tax in Germany, HMRC issued a guideline on the taxation of cryptocurrency investments in 2021, levying capital gains tax on cryptocurrency profits, a practice similar to that of South Korea.

The impact of the taxation on the cryptocurrency industry will be far-reaching, as it means that the legality of cryptocurrencies is officially recognized, and it will also usher in an era of comprehensive regulation. Currently, Indonesia, Japan, Kazakhstan, Austria and other countries are discussing taxation of cryptocurrency transactions.

However, the idea of ​​taxing cryptocurrency transactions has also diverged. On May 26, a bill proposed by Portugal’s left-wing political party to tax cryptocurrencies was rejected by Congress.

In addition to the regulatory idea of ​​taxing cryptocurrency secondary market transactions, South Korean authorities have also actively brought the primary market into the scope of supervision after the UST crash.

According to South Korean media reports, the Financial Services Commission (FSC) of South Korea has submitted a “Comparative Analysis of the Virtual Property Industry Act” report, which proposes a licensing system for exchanges and token issuance in the crypto industry. Crypto businesses are licensed to varying degrees depending on the risks involved to protect investors.

The report also recommends the establishment of a public exchange, similar to a stock exchange, to conduct listing review and market monitoring of cryptocurrencies, with mandatory disclosure of information such as virtual asset issuers, major players, use of raised funds, future value and management review. In order to reduce black-box operations such as insider trading, pumping up selling plans, and transaction brushing.

The European region is also moving forward with a massive cryptocurrency bill, the Market Regulation of Crypto Assets (MiCA). The proposal for the MiCA Act released by the European Commission in September 2020 has not yet been approved. The UST algorithmic stablecoin crisis has also prompted EU regulators to urge the European Council and the European Parliament to speed up the process of the MiCA Act. If the MiCA Act is passed, on the one hand, it will reduce investment compliance risks in the crypto industry, and on the other hand, it will also give traditional banks and other financial institutions certainty in providing crypto custody, trading, and market making services.

DeFi becomes a new hot spot for regulation

On May 30, the European Central Bank released its semi-annual financial stability report, which has taken the risks of encrypted assets to financial stability as one of the new focuses.

The report points out that the crypto industry is growing in size and integrating with the core financial system, and risks to financial stability are increasing, and that the components of the crypto asset market include unsecured crypto assets (such as Bitcoin), stablecoins and decentralization. Finance (DeFi).

With the continuous innovation of projects in the encryption industry, new regulatory issues in DeFi, NFT and other fields have emerged one after another.

Taking DeFi as an example, according to the statistics of digital asset data platform Amberdata, the current DeFi total value locked (TVL) has increased from $601 million in early 2020 to $239 billion at its peak in 2022, an increase of 400 times in two years.

DeFi is gaining momentum, a financial solution that is automatically and enforced through blockchain smart contracts, collectively maintained by a decentralized system. DeFi can provide direct peer-to-peer financial products and trading services without the participation and supervision of third-party financial intermediaries. It is a strong enemy of traditional centralized finance in terms of security, transparency and openness.

Gary Gensler, chairman of the US SEC, once said that even though many DeFi projects claim to have no centralized corporate entities, these DeFi projects have the behavior of incentivizing users to participate and issue encrypted tokens, and are not completely decentralized, which means that DeFi should be subject to Supervision.

According to market news in May, the SEC will expand the personnel of the Crypto Assets and Network Division and will focus on investigating securities law violations involving crypto asset issuance, cryptocurrency exchanges, crypto asset lending and staking products, DeFi platforms, NFTs, and stablecoins Behavior.

The European Union has announced that it will launch a pilot project on DeFi ecological regulatory rules in 2022. The EU says the project will make better use of the natural data transparency advantages of public blockchains so that market participants do not need to collect, verify and provide data to regulators as they do in traditional financial systems.

Birgit Rodolphe, an official at the German financial regulator, said that for DeFi to truly become a competitor to traditional financial markets, it needs to comply with new regulations to resist the risk of hacking and fraud.

Although the cryptocurrency industry is considered to be free from centralized regulation and intervention, there are already cryptocurrency giants actively embracing regulation.

At the beginning of the year, Sam Bankman-Fried (SBF), the co-founder of the FTX exchange, said in an interview with the media that embracing supervision and compliant operation are the principles pursued by the FTX platform: “Regular communication with regulatory agencies around the world and cooperation with many investors are all important It’s a testament to FTX Exchange’s commitment to being the most transparent and compliant cryptocurrency exchange in the world.”

Another exchange, Coinbase, has proposed a cryptocurrency regulatory framework to U.S. officials in 2021. Coinbase chief operating officer Emilie Choi said that Coinbase is ready for regulation. “We want to be treated the same as other financial services institutions. We want transparent regulation.”