Share Published on Jun 19, 2014 Bitcoin is growing in Singapore.In this presentation, I build upon my LLB thesis for a light-touch approach to its regulation, and consider three issues: (1) what Bitcoin is, (2) the benefits and legal risks of dealing with Bitcoin and (3) regulating Bitcoin with a light touch.... Law 0 Comments Statistics Notes Be the first to like this Views Actions 0 Embeds 0 1.Some legal and regulatory issues Bitcoin in Singapore Lam Pak Nian LLB (Hons), NUS Sim Kee Boon Institute for Financial Economics, SMU Presentation on 13 June 2014 at Lee Kong Chian School of Business, SMU What is Bitcoin?Benefits and legal risks Regulating with a light touch 2.– Medium of exchange, Unit of account, Store of value  Not legal tender – Currency Act: Only currency issued by MAS • (Not?)In a ‘virtual’, decentralised system?– Torts/Personal/Intellectual property law: conversion?

– Insolvency law: personal vs proprietary claim?– Contract law: mistake, fraud?13 June 2014 Lam Pak Nian 2 1.Regulators say Bitcoin is… Taxable – IRAS: Income from trading or mining Not subject to MAS’s oversight – Payment Systems (Oversight) Act targets identifiable operator – Not regulated per se but will be for AML/CFT: • Tharman (21 Feb 2014), MAS Press Release (13 Mar 2014) 13 June 2014 Lam Pak Nian 3 1.ethereum darkMain benefits • Faster and cheaper payments • Possibility for further innovation 13 June 2014 Lam Pak Nian 4 2.nfc bitcoin appBENEFITS AND LEGAL RISKS 5.buy bitcoin 7-11Legal risks • Money laundering and terrorist financing • Counterparty risk in a decentralised system – Who bears the loss in a defective transaction, mistake or fraud?bitcoin cost in inr

• Miner (who?), exchange, end user?– Unclear; needs to be sorted out in the law • Torts/Personal/Intellectual property law: conversion?• Insolvency law: personal vs proprietary claim?• Contract law: mistake, fraud?13 June 2014 Lam Pak Nian 5 2.BENEFITS AND LEGAL RISKS 6.Legal risks • Money laundering and terrorist financing – AML/CFT regime: criminalisation, confiscation and reporting • Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA) • Terrorism (Suppression of Financing) Act – Suspicious Transaction Reporting Office • Money changers and remittance businesses: keep records and do due diligence > $5000 • MAS will extend reporting requirements to “virtual currency intermediaries” 13 June 2014 Lam Pak Nian 6 2.bitcoin uk legislationBENEFITS AND LEGAL RISKS 7.bitcoin 796

Policy considerations • Prudential regulation of financial system – Reduce information asymmetry • Bitcoin is difficult to understand – Promote systemic stability • Reputation risk of financial institutions • Payment methods pose substantial systemic risk as failures impede the ability of parties in meeting their payment obligations 13 June 2014 Lam Pak Nian 7 3.set up bitcoin mining pool serverREGULATING WITH A LIGHT TOUCH 8.bitcoin china telecomPolicy considerations • Constructive involvement – Bitcoin is here to stay and impossible to shut down • Encourage beneficial uses and future innovation and meaningfully minimise risks – Impulsive to ban disruptive tech as knee-jerk reaction to illicit activity • Long-term reform – Uncertain laws and regulatory environment hamper breakthrough inventions like Bitcoin 13 June 2014 Lam Pak Nian 8 3.bitcoin dice hack

REGULATING WITH A LIGHT TOUCH 9.Three lenses for regulation • Micro lens: Address specific risks first – Prevent criminal activity via existing checkpoints (also US FinCEN’s approach) • Macro lens: Prudential regulation & stability – Advocacy and advisory to reduce information asymmetry – Promote systemic stability with self-disclosure – Allow laws, rules and confidence to develop • Int’l lens: Coordinate meaningful regulation – BIS’s Basel Committees?– Sui generis Bitcoin Convention?13 June 2014 Lam Pak Nian 9 3.REGULATING WITH A LIGHT TOUCHIn March 2017, Bitcoin, the controversial yet potentially revolutionary cryptocurrency that was created in 2009, hit a record high value of $1,290 compared to a low of $200 in 2015.The growth of Bitcoin and its ever-increasing popularity has led to a recent focus on the regulation of cryptocurrencies (also known as virtual currencies); in particular, the inclusion of Virtual Currency Exchange Platforms (VCEPs) and Custodial Wallet Providers (CWPs) in the Fifth EU Money Laundering Directive (5AMLD).

It has also fostered a significant interest in the technology behind Bitcoin — blockchain, the secure distributed ledger of digital events — for broader applications within the financial services industry, with many companies actively engaging in blockchain initiatives.Bitcoin is a virtual currency which is “mined” or created after solving complex mathematical problems.Anyone with enough computing power can mine bitcoins, however, the Bitcoin protocol — the rules that govern the Bitcoin network — allow for only 21 million bitcoins ever to be created.Bitcoins are not printed or minted like traditional currencies, but are stored electronically.The most distinguishing characteristic of Bitcoin is that it is decentralised i.e., it is not backed by an underlying asset and is not controlled by a single institution.As mainstream adoption has increased, the need for an intermediary between the cryptocurrency world and the traditional currency world has developed.In response, to this Bitcoin exchanges have been created to enable customers to buy or sell bitcoins using different currencies.

2008 October: Bitcoin created by Satoshi Nakamoto1 2009 January: The first block is mined The first Bitcoin transaction occurs 2010 February: October: 2011 February: 2013 May:October:November: 2014 February: April: 2015 August: 160,000 merchants in the USA accept Bitcoin The BitLicense comes into effect in New York state October: The EU recognises Bitcoin as a currency and transactions are exempt from VAT2 2016 February: Prompted by terrorist attacks in November 2015, the European Commission published an Action Plan to strengthen the fight against the financing of terrorism, including reopening aspects of the Money Laundering Directive such as the anonymity associated with virtual currenciesJuly: A judge in Miami, USA ruled that Bitcoin is not captured under the Florida statute that defines “monetary instruments” i.e., Bitcoin is not actually money3 2017 March: The value of one bitcoin surpasses the value of an ounce of gold for the first time The Winklevoss Bitcoin Trust Exchange Traded Fund (ETF) was rejected by the United States Securities and Exchange Commission due to the lack of regulation in the Bitcoin space At its inception, Bitcoin flourished among parties that wanted to remain anonymous, as personally identifiable information is not required to create a Bitcoin address or account, and thus transact using bitcoins.

These parties included both libertarians wishing to be free of a centralised authority, as well as counterparties in underground marketplaces, such as Silk Road, using bitcoins to trade contraband items without the risk of being identified.The latter led to the association of Bitcoin with illegal activities in the early days.However, this stigma is now a perception of the past.A recent study analysing patterns in Bitcoin transactions from 2009 to 2015 found that, while the initial growth stage consisted largely of transactions for “sin” enterprises, the system matured into largely legitimate transactions by the end of 2013.4 Obi Nwosu, Managing Director of Coinfloor, says that its clients, who all undergo know-your-customer (KYC) compliance checks, are using bitcoins for currency hedging, investment, trading, payment processing and many other legitimate activities.Demand for legitimate Bitcoin services is growing.As of April 2017, there are approximately 200,000-350,000 global Bitcoin transactions per day, making it by far the most dominant cryptocurrency in the world.5 Virtual Currency Exchange Providers (VCEPs) and Custodial Wallet Providers (CWPs) are presently not regulated in the European Union and, therefore, are under no obligation to identify suspicious activity.6 This could allow the misuse of Bitcoin and other cryptocurrency networks to go undetected and, the use of bitcoins to integrate dirty money into the financial system or to fund terrorist activity to remain unnoticed.

Following the terrorist attacks in France in November 2015, it was discovered that cryptocurrencies were used as a form of income to fund terrorists’ ongoing operations and that a single Bitcoin address was found to contain $3 million worth of bitcoins.7 In response, the European Commission published an action plan to strengthen the fight against terrorist financing in February 2016, which included provisions around cryptocurrencies due to their inherent anonymity.8 In July 2016, the European Commission published its proposal to amend the Fourth EU Anti-Money Laundering Directive.These amendments form a separate directive, the 5AMLD, which may be enacted as soon as mid-2017.Once enacted, organisations will have a defined period to implement measures to satisfy the directive.The 5AMLD will better define virtual currencies and bring VCEPs and CWPs into scope under the list of obliged entities required to perform customer due diligence, including: The attraction to the cryptocurrency world varies across the customer base.

While some users desire anonymity for legitimate privacy or economic reasons, others welcome regulation as a perceived sign of stability and security.Although these are not mutually exclusive, care must be taken not to emphasise one at the expense of the other.Coinfloor says that it considers strong compliance as an efficient means of attracting the right type of customers.The company is vocal about prohibiting customers that wish to engage in illegal activities including those that wish to transact on the darkweb and states that it is committed to providing its users with a compliant Bitcoin exchange to capture the unfulfilled demand for legitimate Bitcoin services.Bitcoin blockchain customers stress the importance of maintaining their privacy, which makes focusing on pre-emptive compliance a difficult balancing act.“Cryptocurrency exchanges are best positioned to manage the balance between user privacy and regulatory compliance,” says Coinfloor’s Nwosu.“Cryptocurrency exchanges can provide the desired privacy between on-exchange counterparties and help improve “on-Bitcoin blockchain” privacy while recording sufficient information to help minimise money laundering and terrorist financing.” Several recent global events have caused Bitcoin to once again make headlines.

The uncertainty following the US election, Brexit and demonetisation in India and Venezuela have caused traditional currencies (such as GBP, EUR, USD, and CNY) to fluctuate, creating a surge in Bitcoin trading.This level of adoption of Bitcoin has accelerated the global push to bring virtual currencies under regulation.The 5AMLD is not the only attempt to regulate the virtual currency space.In May 2016, Japan passed a regulation requiring virtual currency operators to register with the Japanese financial services regulatory body, the Financial Services Agency.The regulation follows two years of discussion after the collapse of the Japanese Bitcoin exchange Mt.Gox and includes provisions for AML compliance.In January 2017, the People’s Bank of China also announced that it was looking into Bitcoin exchanges to ensure they had implemented AML controls.This resulted in the major exchanges partially suspending their operations for a number of months while they reviewed their AML practices.

In the United States, New York’s “Bit License” was introduced in August 2015 and Bitcoin companies have started to become compliant.In March 2017, the Winklevoss Bitcoin Trust ETF was rejected by the United States Securities and Exchange Commission (SEC) due to the lack of regulation in the Bitcoin space.However, the SEC’s explanation for the rejection has provided clear guidelines to achieve approval in the future.9 It is important to understand the changing view of Bitcoin in the public’s perception in order to appreciate the ongoing transformation of it and other cryptocurrencies into legitimate financial instruments.Bitcoin has decidedly moved away from early darknet associations, and moved towards regulatory compliant use cases — as much as 80% of Bitcoin trading is now carried out by professionals mimicking Wall Street strategies.10 However, as the adoption of Bitcoin grows, the pressure for regulation also grows due to the increasing risk of money laundering, terrorist financing, and other misuse.