Detailed Analysis of the New Cryptocurrency Regulatory Rules and Their Impact in Various Countries in 2020

This article was published on December 30, 2020, on the Wanxiang Blockchain WeChat public account.
2020 was a year of continuous progress for the blockchain industry, with breakthroughs not only in technology and applications but also in the regulatory policies of various countries regarding crypto assets. Among all crypto assets, stablecoins have price stability and unique advantages in peer-to-peer payments, micropayments, and programmable smart contracts, which have a greater impact on financial stability. Although they will not replace sovereign currencies, the rapid development of stablecoins will attract more attention from regulators. This article reviews and organizes the regulatory policies for crypto assets in 2020, including those in Singapore, Hong Kong, the European Union, and Japan, with a focus on the regulatory policies concerning stablecoins and related services.
1. Singapore's Payment Services Act
In January 2019, the Payment Services Act (PSA) was passed by the Singapore Parliament and officially enacted, coming into effect on January 28, 2020. This act replaces the Money-changing and Remittance Businesses Act (MCRBA) and the Payment Systems (Oversight) Act (PSOA), and amends several other payment-related acts.
The Payment Services Act includes two parallel regulatory frameworks. The "designated system" primarily targets large payment systems, similar to the designated payment systems in the PSOA. The Monetary Authority of Singapore (MAS) can designate a regulated payment system to maintain financial stability and uphold public confidence. The "licensing regime" is set up to respond more flexibly to market changes.
(1) Types of Services
The Payment Services Act regulates account issuance services, domestic remittance services, cross-border remittance services, payment digital currency services, electronic money issuance services, merchant acquiring services, and currency exchange services, allowing service providers to choose to offer one or more of these services.

1. Account Issuance Services
   Account issuance services refer to providing payment accounts to any person in Singapore or operating any services related to the necessary business of payment accounts, such as depositing or withdrawing funds from payment accounts (excluding domestic and cross-border remittances).
2. Domestic Remittance Services
   Domestic remittance services refer to providing funds remittance services within Singapore. In domestic remittance services, both the remitter and the payee are in Singapore and are not financial institutions. The service provider receives the remitter's funds and executes or arranges the execution of remittance transactions, including payment transactions executed through payment accounts, direct debit services through payment accounts, and credit transaction services through payment accounts, etc.
3. Cross-Border Remittance Services
   Cross-border remittance services refer to providing remittance services between Singapore and other countries or regions. The service provider receives the remitter's funds and executes or arranges the execution of remittance transactions to users outside Singapore, or the service provider collects remittances from abroad for any person within Singapore.
4. Payment Digital Currency Services
   Payment digital currency services mainly include two categories: one is providing services related to payment digital currency transactions, and the other is any services that facilitate payment digital currency transactions. The Payment Services Act defines payment digital currency as follows: payment digital currency is a digital representation of value that must meet the following conditions: this value is represented as a unit; it is not priced in any currency, and the issuer cannot anchor it to any currency; it has become or is intended to become a medium of exchange accepted by the public or part of the public for the payment of goods or services or the settlement of debts; it is transferred, stored, or traded in electronic form; and it meets other characteristics specified by MAS.
5. Electronic Money Issuance Services
   Electronic money issuance services refer to issuing electronic money to any person and allowing them to conduct payment transactions. The Payment Services Act defines electronic money as follows: electronic money is any monetary value stored electronically and must meet the following conditions: it is priced in a certain currency, and the issuer can anchor the electronic money to other currencies; it is prepaid for users to conduct payment transactions; the payment recipient cannot be the issuer of the electronic money; electronic money represents a creditor's claim against the issuer.
6. Merchant Acquiring Services
   Merchant acquiring services refer to the service provider receiving and processing payment transactions for merchants based on a contract with the merchants. In merchant acquiring services, the merchants are registered or operating businesses in Singapore, or the service provider has a contract with the merchants in Singapore.
7. Currency Exchange Services
   Currency exchange services refer to services related to buying and selling foreign currencies provided by the service provider.
   (2) License Application
   Service providers will apply for licenses based on their business models and the relationships between the above seven types of services. Currently, there are currency exchange licenses, standard payment institution licenses, and large payment institution licenses.
   The currency exchange license is limited to currency exchange services and applies to service providers offering currency exchange services. Due to the smaller scale of their business and lower associated risks, MAS mainly regulates the money laundering and terrorism financing risks of service providers. The standard payment institution license applies to any combination of the seven services mentioned above but has limits on the total amount of business, lower application requirements, and lower levels of regulatory scrutiny. The large payment institution license applies to all businesses exceeding the limits set for the "standard payment institution" license and is subject to the strictest regulation due to the larger amounts involved and higher risks, allowing large service providers to apply. If future business needs change, license holders can apply to change their licenses to comply with the requirements of payment services or licenses in new business operations.
   MAS officially implemented the Payment Services Act on January 28, 2020, and required all service providers to timely submit license application filing documents. At the same time, MAS also provided specific requirements for the eligibility of service providers, including the corporate entity and management structure, industry competitiveness, office or registered address, minimum capital, guarantee funds, and audit status, etc.
   (3) Changes Brought by the Payment Services Act
   First, the Payment Services Act integrates and improves the existing Money-changing and Remittance Businesses Act and Payment Systems (Oversight) Act, and the two parallel regulatory frameworks of designated systems and licensing regimes also reference existing regulatory ideas. The difference is that the regulatory scope of the Payment Services Act is broader, incorporating domestic remittance services, merchant acquiring services, payment digital currency services, etc.
   Second, domestic remittance services and cross-border remittance services will effectively replace the MCRBA's regulation of remittance businesses. It should be noted that the MCRBA did not regulate domestic remittances, but domestic remittance services must comply with the regulatory requirements of the Payment Services Act.
   Third, electronic money issuance services will effectively replace the PSOA's regulation of stored value facilities (SVF). From the definitions provided earlier, it can be seen that SVF and e-money have similarities as well as clear differences. Both SVF and e-money can be stored electronically as monetary value and involve prepayment, but e-money does not specify payments for goods or services. For example, if a merchant gives this electronically stored value to a user, it is considered e-money but not SVF based on the definition.
   Fourth, service providers engaged in payment digital currency services (such as digital currency exchanges, wallets, and OTC platforms) will be regulated and must apply for relevant licenses according to MAS's requirements and comply with anti-money laundering and anti-terrorism financing requirements. It is important to note that the Payment Services Act's definition of payment digital currency requires that it cannot be anchored to any currency, so stablecoins like Libra are not included in this regulatory scope.
   Fifth, the threshold for payment institutions protected by the Payment Services Act will be lowered, with the average daily float amount reduced from 30 million SGD to 5 million SGD. This means that if the average daily float amount exceeds 5 million SGD, any electronic money held by the payment institution will be fully protected. If the average daily float amount does not exceed 5 million SGD, the electronic money held by the payment institution will not be fully protected, and the payment institution must make appropriate disclosures to consumers. Lowering the threshold means that the number of protected payment institutions will increase, but these institutions must meet compliance requirements. Small payment institutions will not be protected but will face fewer compliance requirements, allowing them to develop their business without being hindered by excessive regulation.
   Sixth, the Payment Services Act takes preventive measures against the main risks present in the payment system, including preventing customer fund losses, preventing money laundering and terrorism financing risks, preventing technological risks, and addressing the lack of interoperability between different payment solutions.
   2. Hong Kong's Regulation of Crypto Assets
   (1) Regulatory Authorities
   The Securities and Futures Commission (SFC) of Hong Kong is responsible for regulating the operation of the securities and futures markets in Hong Kong and is also the main regulatory authority for crypto assets. The SFC's regulatory objectives include: maintaining and promoting fairness, efficiency, competitiveness, transparency, and order in the securities and futures industry; enhancing public understanding of the operation and functions of the securities and futures industry; providing protection to the public investing in or holding financial products; minimizing criminal and improper conduct in the securities and futures industry; reducing systemic risks in the securities and futures industry; and taking appropriate steps related to the securities and futures industry to assist the Financial Secretary in maintaining Hong Kong's financial stability.
   The Hong Kong Monetary Authority (HKMA) is responsible for Hong Kong's financial policy and banking and currency management, acting similarly to a central bank. The main functions of the HKMA include: maintaining monetary stability within the framework of the linked exchange rate system; promoting the stability and soundness of the financial system, including the banking system; and assisting in consolidating Hong Kong's position as an international financial center, including maintaining and developing Hong Kong's financial infrastructure and managing the Exchange Fund.
   In addition to the SFC and HKMA, other institutions such as the Hong Kong Insurance Authority (HKIA) also collaborate in the regulation of crypto assets. Currently, these regulatory authorities are testing and regulating crypto assets and blockchain technology through a "sandbox regulatory" approach in a controlled environment.
   (2) Regulatory Policies
   In Hong Kong, crypto assets are mainly classified into security-type crypto assets, functional crypto assets, and virtual commodities (e.g., Bitcoin). Different regulatory policies are adopted by Hong Kong regulatory authorities for different types of crypto assets. The SFC defines security-type crypto assets as: representing equity (entitling holders to dividends and participation in the distribution of remaining assets upon company liquidation); representing debt instruments (the issuer can repay the principal and pay interest to token holders on a specified date or upon redemption); and can be used to obtain returns from "collective investment schemes."
   Hong Kong does not have specific legislation targeting crypto assets and their related businesses, but existing laws regarding anti-money laundering, anti-fraud, and anti-terrorism financing must be complied with. Additionally, as the influence of crypto assets continues to grow, regulatory authorities have gradually introduced a series of regulatory policies to better protect investors' interests. The main regulatory policies related to crypto assets include the following: 1. Securities and Futures Ordinance; 2. Statement on Initial Coin Offerings (published in September 2017); 3. Circular to Licensed Corporations and Registered Institutions: Regarding Bitcoin Futures Contracts and Investment Products Related to Crypto Assets (published in December 2017); 4. Statement on the Regulatory Framework for Management Companies, Fund Distributors, and Trading Platform Operators for Virtual Asset Portfolios (published in November 2018); 5. Statement on the Issuance of Security Tokens (published in March 2019); 6. Standard Terms and Conditions Applicable to Licensed Corporations Managing Investment Portfolios in Virtual Assets (published in October 2019); 7. Warnings on Virtual Asset Futures Contracts and Position Paper: Regulating Virtual Asset Trading Platforms (published in November 2019).
   (3) Relevant Licenses
   The SFC has specified a total of 12 regulated activities, meaning that engaging in any of the following 12 activities requires obtaining the corresponding license and being regulated to legally conduct the corresponding financial activities in Hong Kong. Among them, the licenses related to over-the-counter derivatives, categories 11 and 12, have not yet been implemented.
   Table 1: Regulatory Licenses
   
   According to the current regulatory framework, the licenses related to trading platforms, funds, and fund management platforms associated with crypto assets mainly include categories 1, 4, 7, and 9 regulatory licenses. For example, funds investing in virtual assets and sales platforms need to hold category 1 licenses, while asset management platforms need to hold category 9 licenses.
   3. European Commission's Proposal for Stablecoin Regulation
   On September 24, 2020, the European Commission (EC) released a proposal regarding crypto asset regulations, covering parts not included in existing EU financial services legislation, providing a complete legal framework for the crypto asset market within the EU. In addition to providing regulatory guidance for crypto asset market participants, encouraging innovation is also one of the goals of the proposal. Consistency and proportionality are the underlying principles throughout the regulatory framework. Due to their uniqueness, stablecoins are easier to scale compared to other crypto assets, posing greater risks to investors and the financial system, leading to issues of financial stability and monetary sovereignty, and affecting the transmission of monetary policy. Therefore, stablecoins, especially significant stablecoins, will be subject to stricter regulation.
   (1) Regulatory Authorities
   Each member state must designate its own authority responsible for regulating stablecoins and notify the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). If multiple regulatory authorities are involved, one must be designated as the contact point for cross-border administrative cooperation.
   Regulatory authorities have sufficient powers over stablecoin issuers and crypto asset service providers, including requiring regulated parties to provide additional information, delaying or prohibiting the issuance and trading licenses of stablecoins or related applications from service providers. Regulatory authorities also have the power to penalize violations and publicly disclose stablecoin issuers that fail to fulfill their obligations.
   The EBA and ESMA, as highly specialized institutions, will be responsible for drafting technical standards that do not involve policy. For example, the relevant standard formats and processes for applicants issuing asset-related tokens, the types of assets invested by issuers, and the calculation methods for issuers' capital requirements, etc.
   The EBA will also be responsible for determining whether a stablecoin is a significant stablecoin, with the criteria being: 1. The number of users, investors, and participating third-party entities is no less than two million; 2. The total value or market value of the issued tokens (if any) is not less than one billion euros; 3. The number of transfers per day is no less than five hundred thousand or the transfer amount is no less than one hundred million euros; 4. The value of reserve assets is not less than one billion euros; 5. It is significantly important in cross-border activities, involving no less than seven member states in the use of tokens for cross-border payments and transfers; 6. The stablecoin and its issuer are considered interconnected with the financial system. If three of the above conditions are met, the EBA can determine it as a significant stablecoin. Additionally, issuers can proactively apply to be classified as significant stablecoin projects.
   If a stablecoin is determined to be a significant stablecoin according to the above standards, its regulation will be handled by the EBA. The EBA will establish a regulatory association, consisting of all regulatory authorities related to significant stablecoins and crypto asset service providers (for e-money tokens, the corresponding regulatory authority is the one under Directive 2009/110/EC), and they will exchange information to promote cooperation. The EBA will charge fees to significant stablecoin issuers to cover expenses, with fees proportional to the scale of the stablecoin's reserve assets.
   (2) Specific Requirements for Stablecoin Issuers
   For stablecoin issuers, the first principle to follow is that they cannot issue to the public within the EU or seek to trade on trading platforms without the authorization of the regulatory authority in their home member state (i.e., the location of their registered office), and only legally established entities within the EU can obtain authorization. Before issuing to the public or seeking trading, they must notify the regulatory authority and publish documents containing the required disclosure information, namely a white paper, with the information presented in a fair, clear, and non-misleading manner. The information provided to the public should be subject to civil liability management rules for stablecoin issuers and management bodies. Depending on the different definitions of stablecoins, the regulatory authority's requirements for disclosure information and issuer obligations will also vary.
8. Requirements for Asset-Related Tokens
   Asset-related tokens are crypto assets that reference multiple fiat currencies, one or more commodities, one or more crypto assets, or a combination thereof to maintain their value stability.
   Before issuing asset-related tokens, issuers must obtain authorization from the regulatory authority in their home member state, and the relevant application materials include information about the applicant, the white paper, and descriptions of relevant business and obligations. If the asset-related token is related to currencies within the EU, the regulatory authority must consult the EBA, ESMA, European Central Bank (ECB), and the central bank of the country issuing that currency before approving or rejecting the application. Once approved by the regulatory authority, this crypto asset will be valid throughout the EU and can be traded on crypto asset platforms.
   The basic information that needs to be disclosed for crypto assets includes: basic information about the issuer, relevant project information, information related to public issuance or platform trading, rights and obligations related to the crypto asset, underlying technology, and risks, etc. When it comes to asset-related tokens, the white paper must also include: the issuer's management plan, token value stabilization mechanism, investment strategy for reserve assets, custody plan for reserve assets, etc. If the issuer does not provide direct claims or redemption rights to holders regarding reserve assets, the white paper should clearly warn about this, and marketing should also include reminders.
   There are also disclosure requirements for the corresponding reserve assets, including the number of tokens in circulation and the value and composition of reserve assets, which the issuer must update on their website at least monthly. Regardless of whether these crypto assets are being traded, the issuer must disclose any significant events that may affect the value of the tokens or reserve assets.
   Issuers of asset-related tokens must act honestly, fairly, and professionally, prioritizing the best interests of token holders and establishing a transparent and efficient complaint handling process. Issuers must also develop identification and management plans for potential conflicts of interest arising from relationships with managers, shareholders, users, and third-party service providers. Issuers should establish an orderly gradual liquidation plan to ensure the protection of token holders' rights in the event of ceasing operations or legal bankruptcy.
   Issuers need to establish robust management plans, including a clear organizational structure with defined responsibilities, processes for monitoring and reporting relevant risks, and a sound internal management mechanism. The requirement for the issuer's own funds is at least 350,000 euros and at least 2% of the average amount of reserve assets over six months. If defined as a significant asset-related token, the own funds must account for at least 3% of the reserve assets, and issuers are required to pay more attention to risk management. The relevant management members of the issuer must also have a good reputation and capability in terms of qualifications, experience, and technology, and must have the time and ability to fulfill their functions.
   To maintain the stability of the token's value, issuers must ensure that there are sufficient asset reserves behind it. Issuers must take prudent measures in managing reserve assets, ensuring that the creation and destruction of tokens correspond to the growth and reduction of reserve assets. Issuers should detail the content related to the stabilization mechanism, especially the composition and allocation of reserve assets, assessment of reserve asset risks, the process of token creation and destruction, investment plans and principles for reserve assets, and the process for purchasing and redeeming tokens. Token issuers must ensure that reserve assets are segregated from their own assets and can be quickly accessed to meet redemption requests from holders. Reserve assets should be held by credit institutions and crypto asset service providers, with the issuer responsible for selecting and appointing custodians to ensure that custodians have the necessary expertise and good market reputation.
   Reserve assets should be invested in safe and low-risk assets that can be liquidated with minimal price impact. Any income or losses generated from investments should be borne by the issuer. To ensure that asset-related tokens are primarily used for transactions rather than as value storage tools, neither the issuer nor crypto asset service providers will distribute interest to users holding tokens.
   For issuers of significant asset-related tokens, they should establish strict liquidity management strategies to ensure that the entire system can continue to operate normally even in times of liquidity stress.
9. Requirements for e-money Tokens
   E-money tokens are crypto assets anchored to a single fiat currency to maintain their value stability, primarily used for transactions. Since the definition of e-money tokens is similar to that of e-money, the regulatory requirements for e-money tokens also draw from the relevant content of e-money.
   The white paper for e-money tokens should include information about the issuer and the project, information related to public issuance or trading on platforms, rights and obligations related to e-money tokens, underlying technology, and risks. The white paper should clearly state that e-money token holders have the right to redeem e-money tokens at face value at any time.
   The issuing institution of e-money tokens should be a credit institution under Directive 2013/36/EU or an electronic money institution under Directive 2009/110/EC, and they should comply with the relevant operational requirements of Directive 2009/110/EC. The issuer should grant holders the right to redeem tokens at face value at any time, and during the redemption process, the issuer may charge fees to the redeemer. Similarly, neither the issuer of e-money tokens nor crypto asset service providers will distribute interest to users holding tokens. The issuer should invest the funds obtained through e-money tokens in currencies that are the same as the denomination of e-money tokens to avoid cross-currency risks.
   If defined as a significant e-money token, the rules for the custody and investment of reserve funds can be based on the requirements for significant asset-related tokens rather than referring to the relevant content of Article 7 of Directive 2009/110/EC, including establishing an orderly gradual liquidation plan, etc.
   4. Japan's Payment Services Act Amendment
   On May 31, 2019, the amendment to the Payment Services Act (PSA) proposed by the Financial Services Agency (FSA) of Japan was passed and came into effect on May 1, 2020. The amendment added activities related to crypto assets, including crypto asset custody services and crypto asset trading service providers, further expanding the regulatory scope.
   The Payment Services Act includes several important changes, including the scope of providing crypto asset custody services, additional requirements for registration as a crypto asset trading service provider, requirements related to customer assets, requirements and prohibited actions, margin trading regulations, advertising and marketing restrictions, etc.
   (1) Crypto Asset Custody Services
   The revised PSA introduced regulation for service providers offering custody services for crypto assets, previously only regulating those engaged in buying and selling or acting as intermediaries for buying and selling crypto assets. If a service provider holds private keys sufficient to transfer customers' crypto assets for themselves or subcontractors and related service providers, or can actively transfer customers' crypto assets without customer involvement, they are considered to be providing crypto asset custody services and must register under the PSA. If a multi-signature system is used or the private keys are divided into several parts, and the service provider and its subcontractors do not hold or control the necessary parts of the private keys, they will not be considered as "managing" customers' crypto assets.
   (2) Crypto Asset Trading Service Providers
   The revised PSA imposes more requirements on crypto asset trading service providers. When registering, holders of 10% or more of the voting rights among the applicants must disclose their information to the FSA. The PSA also imposes more requirements on managing customer assets. If customer assets are cash, the service provider must separate them from their own cash and keep them in a trust account opened with a licensed trust company, with the beneficiaries being the service provider's customers. The agent representing the beneficiaries must be designated by the crypto asset trading service provider, with at least one being a lawyer, accountant, or professional designated by the FSA. Trust assets can only be invested in low-risk financial products under strict limitations. If the license of a crypto asset trading service provider is revoked, becomes insolvent, or exits the business, the trust assets will benefit the beneficiaries. Each working day, the service provider must compare the total amount of cash held for customers with the outstanding trust assets, and if there is a shortfall, they must adjust the trust asset amount within two working days to equal or exceed the cash held by users.
   If customer assets are crypto assets, the same requirement applies that the service provider must separate them from their own assets and keep them in cold wallets or similar places. The PSA defines cold wallets and similar places as: recording information on electronic devices, electromagnetic media, or other media including paper, while ensuring that these media are always disconnected from the internet or using other methods to ensure the same level of security. To ensure that trading services can proceed smoothly, a service provider may keep crypto assets outside of cold wallets, but this must not exceed 5% of the total value of all customer crypto assets under custody, and the service provider must isolate an equal type and quantity of crypto assets in a separate cold wallet or similar place, with customers prioritized over other creditors.
   Crypto asset trading service providers must manage the aforementioned cash and crypto assets and undergo annual audits by accounting firms. In contracts, service providers must develop emergency plans to prepare for situations where they cannot provide services.
   The revised PSA also adds additional requirements and prohibited actions for crypto asset trading service providers, similar to the requirements for securities traders or foreign exchange product traders under the Financial Instruments and Exchange Act. Requirements include providing customers with the latest prices of other customers' orders and quotes from the Japan Virtual Currency Exchange Association; if the service provider acts as a counterparty to the customer in a transaction, they must notify the customer and provide a written explanation of such behavior; service providers must adopt strategies to detect conflicts of interest in the aforementioned transactions; and service providers must take measures to identify and suspend improper trading, etc. Prohibited actions include providing unreasonable and unsubstantiated information; manipulating or assisting in manipulating market prices; disseminating or using non-public material information that affects investment decisions; and front-running trades, etc.
   For margin trading conducted by crypto asset trading service providers, the PSA sets forth similar but stricter requirements than those for foreign exchange traders. This includes disclosure and explanation of trading terms and associated risks, mandatory obligations for receiving margins (with a minimum amount not less than 50% of the trading value), etc.
   Regarding advertising and marketing by crypto asset trading service providers, the PSA requires the following information to be specified: company name; the advertiser is a registered crypto asset trading service provider and provides a registration number; crypto assets are not "currency"; the nature of crypto assets that significantly affects users' decisions to participate in trading, referring to the fact and reasons that customers may suffer losses due to fluctuations in crypto asset value; and crypto assets can only be used for payment when the counterparty agrees to accept crypto assets as payment.
   5. Reflections and Conclusions
   From the above discussion, it can be seen that the officially promulgated laws and amendments fill the regulatory gaps for crypto assets, providing clear regulatory requirements for stablecoins, crypto asset payments, crypto asset trading, and other emerging phenomena. This is of great significance for improving the regulatory policies in the field of crypto assets, as regulatory policies are a crucial factor determining the development direction of the blockchain industry.
   The blockchain industry remains an emerging sector, and relatively moderate regulation will provide space for the development of blockchain and crypto assets. These regulatory laws are all aimed at protecting investors' interests to maintain the stability of the financial system, and licenses and permits are necessary for conducting crypto asset-related services, with relevant services only able to be carried out through review. Regulation reflects the principle of proportionality of risk; if relevant businesses pose higher risks to financial stability, the requirements will be stricter.
   It is expected that more countries will improve their regulatory laws regarding crypto assets in the future, which is related to the accelerated penetration of crypto assets and is also aimed at preventing regulatory arbitrage. The borderless nature of crypto assets gives them a significant advantage in cross-border transactions, posing challenges to regulation, and a comprehensive regulatory system will require cooperation between countries and international organizations.