A Legal and Regulatory Framework for Governance of Cryptoassets

In the inaugural Global Cryptoasset Regulatory Landscape Study, a team of researchers at the Cambridge Centre for Alternative Finance, Judge Business School, have compared and contrasted various regulatory approaches and practices with regards to cryptoassets in a number of jurisdictions and shed light on current regulatory challenges and opportunities. The study, which sets out a theoretical framework to conceptualise cryptoassets and related activities, introduces three interconnected components in the legal and regulatory analysis of cryptoasset activities: (1) the nature and form of cryptoassets, (2) the issuance of cryptoassets, and (3) intermediated activities in the life cycle of cryptoassets. This framework has been applied to 23 jurisdictions to examine the regulatory authorities regulating cryptoassets, their current classification and related activities, as well as regulatory processes and responses.

The report argues that one of the major impediments to the analysis and the formulation of clear policies for the emerging cryptoasset and blockchain industry is the lack of clear and common terminology. There is no standard usage of terminology across regulators and a variety of terms have been used to refer to cryptoassets in official statements, often interchangeably and without a clear definition. It outlines the attempts by the regulators, industry participants and academics to define the boundaries of the term cryptoassets by dividing them into three major views: (a) the ‘broad’ view which considers any digital token issued and transferred via any type of DLT system to be a cryptoasset; (b) the ‘intermediate’ view which limits the scope to both open and permissionless, as well as hybrid, DLT systems; and (c) the ‘narrow’ view which further restricts the scope exclusively to open and permissionless infrastructure. Due to this absence of any clear agreement on the definitional boundaries, regulators face several challenges: first, to understand the nuances of the different terms, second, to identify the terminology most suitable for their regulatory objectives, and finally to define the terminology clearly and ensure it is used consistently in official statements.

In analyzing the regulatory challenges and gaps that stem from the development and implementation of cryptoasset regulation, key activities such as alternative token distribution mechanisms (i.e. airdrop and fork), decentralized exchanges and the creation of cryptoassets through mining or the peer-to-peer transfer of cryptoassets have often been overlooked. Inherent limitations to regulatory principles, unclear classification/terminologies and regulatory arbitrage challenge regulators’ ability to robustly define their regulatory perimeter and implement regulations. In many of the jurisdictions studied, regulators have addressed key risks related to financial integrity and systemic issues as well as investor and consumer protection, but additional risks may warrant further regulatory attention. The study found that regulators may also need to consider how other laws might be applicable (such as tax or property law), apart from securities laws, banking and payment systems laws, and/or AML laws, that have so far received the most regulatory attention in relation to regulating cryptoasset-related activities. It will be crucial, therefore, to fully examine the efficacy and adequacy of existing regulations before developing new and bespoke regulations, and identify cryptoasset activities that do not require (additional) regulation.

The study observes that the most sophisticated regulatory frameworks are often found in smaller countries with a relatively low level of domestic cryptoasset activity and a tendency for more flexible financial regulation. However, the scope of different regulatory authorities can and often does overlap when regulating cryptoasset activities. Empirical evidence reveals that central banks have usually been the first type of regulatory authority to issue official statements (including warnings about cryptoassets), followed by government departments and financial supervisory bodies. Further, the first step towards regulating cryptoassets has typically been to distinguish cryptoassets which are deemed to be ‘securities’ from other types of cryptoassets. Notably, existing regulatory frameworks generally classify cryptoassets into payment, utility, and security tokens, although some jurisdictions consider an additional fourth category of ‘hybrid’ tokens (that shares characteristics of multiple categories). Initial coin offering (ICOs) and cryptoasset exchange activities pose greater concerns in terms of their regulation for regulators and are often regulated under existing securities law, supplemented with guidance from the securities regulators.Our analysis has brought forth a number of recommendations regarding the regulation of cryptoassets. We find that, primarily, traditional assets recorded on a distributed ledger technology infrastructure (ie tokenization) should be distinguished from new and natively digital cryptoassets with unique characteristics, since the fundamentally new characteristic of a natively digital cryptoasset is the incentive role that it may play in a particular network. Further, a legal and regulatory classification of a cryptoasset should be based on an in-depth assessment of several factors (e.g. rights attached, access, economic function of the token), generally conducted on a case-by-case basis. Since a majority of cryptoasset-related activities carried out by intermediaries show strong similarities to existing financial activities found in traditional markets (eg exchange and trading), it is, therefore, possible to regulate them as such.

The report will serve as a useful empirical study to infrom industry stakeholders as well as evidence-based regulation and policymaking.

Apolline Blandin is Research Manager, Cryptocurrency and Blockchain Technology at the Cambridge Centre for Alternative Finance (CCAF), University of Cambridge.

Michel Rauchs is Cryptocurrency and Blockchain Lead at the Cambridge Centre for Alternative Finance (CCAF), University of Cambridge.

Hatim Hussain is Research Assistant at the Cambridge Centre for Alternative Finance (CCAF), University of Cambridge.