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Stock Markets and Cryptocurrencies

With current market capitalization of around USD 377 billion, Bitcoin and other cryptocurrencies cannot be ignored anymore. While institutional investors seem to have caught on to the new trends, regulatory bodies continue to struggle to adopt an appropriate regulatory framework. Although several measures have been taken already, a proper legislative solution is still missing.

Dr. György Boros-Gyömbér, Lawyer, Sárhegyi and Partners Law Firm

1. Classic stock exchanges vs. crypto markets

Traditional stock exchanges are characterized by strict regulation, the need for intermediaries and high transactional fees. These features are not self-serving; most are necessary (or thought to be necessary) for the reliability and security of these markets.
In contrast, cryptocurrency markets are currently not subject to sector-specific rules and are much cheaper to trade on. These traits make crypto markets more desirable, but these are its main disadvantages as well; just think about the bankruptcy of Mt. Gox or the frauds concerning ICOs. To fight these risks, authorities in the European Union as well as the United States have adopted regulation in some form.

2. Regulation in the EU

In the European Union, agencies of the EU and several member states have proposed some kind of crypto-related regulation already, mainly for financial instruments related to cryptocurrencies.
In a statement issued last year, the European Securities and Markets Authority (ESMA) said that in the case of ICOs, the process by which the financial instruments are created or traded is likely to involve some Markets in Financial Instruments Directive (MiFID)-regulated activities. Thus, a company engaged in such activities needs to comply with organizational and transparency requirements as well as conduct of business rules laid down in MiFID. In the same vein, the U.K.’s Financial Conduct Authority stated that crypto futures, CFDs and options can be subject to MiFID regulation and the authorization of FCA too. For CFDs, product intervention measures has been agreed upon by ESMA as well, stating that cryptocurrencies pose major risks for investors.
Another drastic step has been taken by the European Parliament recently. Based on an upgrade to the Anti-money laundering Directive adopted by the EP, virtual currency exchange platforms and custodian wallet providers have to apply customer due diligence controls as well. This could mean that investors can say goodbye to the anonymity, which is one of the main advantages of crypto exchanges.

3.Regulation in the United States

In America, both the federal government and individual states had already dealt with cryptocurrencies in some form.
On the federal level, a uniform regulation has not yet been proposed. However, the Securities and Exchange Commission (SEC) has already made several statements regarding the matter.
In one recent statement, the SEC laid down that a platform trading securities and operating as an exchange must register as a national securities exchange or operate under an exemption.
In another statement, the SEC stressed that those who offer and sell securities in the United States are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.
In the absence of federal regulation, the individual states had been left to introduce regulation. One example is the controversial BitLicense introduced by New York State, which has received some criticism. Under this regulation, anyone engaging in crypto-related business activities, like buying and selling virtual currency or storing them, must obtain a BitLicense.
Most states have not passed any specific regulation thus far, however. To help them, the Uniform Law Commission has proposed a model regulation named the Uniform Regulation of Virtual Currency Businesses Act, which can serve as a guideline for the future.

4. Summary

By now it has become clear that some kind of regulation needs to be applied to crypto markets. Nevertheless, in the absence of a globally harmonized regulation, none of the regulatory responses can fully achieve their goals. Crypto exchanges are global and can operate almost anywhere in the world, which makes regulation especially difficult for national governments. That said, a slight movement toward a more regulated market can be observed.