Crypto-asset trading is a fast-growing part of the financial sector. Some countries have wholeheartedly embraced crypto-assets; others have been reticent to permit widespread adoption. Generally, countries have interpreted existing laws and regulations to apply to crypto-assets or adopted new laws or regulations to specifically address crypto-assets – or embarked on some combination of the two. Due to their use of blockchain and other distributed ledger technology, crypto-assets are, in most cases, inherently cross-border and cross-jurisdictional. Thus, most issuers of crypto-assets and operators of trading platforms must address multiple legal and regulatory frameworks when attempting to enter the market.
While this chapter will explore the regulation of crypto-assets and trading platforms in the European Union, the United States, Hong Kong, Singapore, Thailand, and Japan, it is important to note that there are, generally speaking, two types of crypto asset trading platforms: centralised and decentralised. Centralised crypto-asset trading platforms usually act as custodian for the crypto-assets and are responsible for legal and regulatory compliance (in this way, traditional exchanges provide a relatively straightforward analogue). Decentralised trading platforms are different. Instead of taking custody of a user’s cryptoassets, and facilitating and executing trades itself, a decentralised trading platform may simply provide the trade-matching technology, with users retaining control/custody of their cryptoassets and automatically transferring crypto-assets between wallets pursuant to triggered smart contracts. Centralised trading platforms have been targets of hacks (both informational and monetary) because, as the name suggests, they act as central repositories of funds (i.e., crypto-assets and/or fiat currency) and information (e.g., personal information provided by users to satisfy know-your-customer requirements). Decentralised trading platforms, on the other hand, are not an attractive target for hackers since they hold no funds and limited, if any, personal information. Due to this hands-off approach, whether and to what extent certain legal and regulatory regimes may be applicable to such platforms is often unclear: in many cases, if the decentralised trading platform does not hold or transfer funds, then it may not be captured by existing regulatory regimes. Hence, as the market for decentralised trading platforms continues to grow and evolve, regulators continue to grapple with the increasingly complex questions of whether and how these platforms should be regulated.
Originally published in Global Legal Insights - Fintech 2020.
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