by Johanna Collins-Wood, Associate, Pepper Hamilton
Globalization is no longer sexy. Brexit, the election of nationalist leaders across both Europe and the United States, and Russia’s resurrection have clearly proven that in today’s world, countries are back to focusing on themselves. The disparate approaches to regulating blockchain and cryptocurrency technology taken by the European Union (EU), Switzerland and the United States (US) all seek to promote their own bloc’s needs and views on technology, rather than to promote a global regulatory agenda. Unlike the post-2008 regulatory environment that sought to adopt international standards, such as the Basel III financial regulations, today’s regulators seek to ensure their own country’s interests when regulating this new industry.
The European Union is at a disadvantage when regulating because it must allow its member states the freedom to enact their own laws on the technology. As a result, the European Commission (EC) has been the most restrained in its approach to blockchain and cryptocurrency technology. Additionally, with its attention focused on Brexit and the general economic health of the bloc, the EC does not appear to have the resources or interest in promoting a global framework for the regulation of blockchain and cryptocurrency. Instead, it has focused on promoting the technology internally as a potential source of new technology jobs in the bloc, noting that the technology’s “almost limitless list of potential use cases makes it both very promising and challenging.” The establishment of the EU Blockchain Observatory and Forum in February 2018 is intended to support cross-border European engagement with the technology and its multiple stakeholders.
While blockchain is viewed somewhat positively for its job creation prospects, the EC has noted it sees little benefit to cryptocurrency, expressing concerns about its volatility, lack of consumer protections and its ability to be used for criminal purposes. In a January 2018 speech, the EC’s Vice President Valdis Dombrovskis noted that the EC’s money laundering rules had been updated to bring cryptocurrency exchanges and custodial wallet providers within the scope of existing money laundering regulations, and in February 2018, the European Supervisory Authorities issued a pan-EU warning to consumers regarding the risk of buying virtual currency. The idea of a truly globalized currency system has little appeal, as the EU has already experienced the complexity of maintaining a single stable currency for a region comprised of disparate countries. With the future of its existence at stake due to Brexit, the EU is focused on the preservation and promotion of its members, rather than engaging in a global dialogue about this complicated new technology.
While the US attempted to encourage the globalization of policies in the early 2000s, today the US approach, including to blockchain and cryptocurrency, has been to focus on its own markets. In regard to blockchain and cryptocurrency, the US has no interest in engaging in a Basel III-type of global rulemaking. Instead, it is focused purely on maintaining order in its capital markets and ensuring that its vast financial system is not undermined by the new technology.
Under US law, both federal regulatory agencies and individual states are permitted to regulate blockchain and cryptocurrency. Some states have created their own laws for the industry, such as New York’s Bitlicense, required if a company wants to sell cryptocurrency in the state of New York. In addition, four federal regulatory agencies have stated that certain aspects of blockchain or cryptocurrency come under their jurisdiction:
The Internal Revenue Service (IRS) has stated that, for tax purposes, virtual currency should be treated as property.
The Financial Crimes Enforcement Network (FinCEN) published a letter stating “a developer that sells convertible virtual currency, including in the form of ICO coins or tokens,” and “an exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency” should be deemed money transmitters and must apply for money transmitter licenses.
The Commodity Futures Trading Commission (CFTC) has stated that cryptocurrencies, including bitcoin, are commodities and are therefore subject to CFTC regulation.
The SEC has stated that certain cryptocurrencies are regulated by the SEC and that all ICOs or token sales that are deemed to be sales of securities are regulated by the SEC. In June, William Hinman, the Director of the Division of Corporate Finance at the SEC stated that Bitcoin and Ether, two of the most popular cryptocurrencies, are not securities. In addition, Hinman stated that there may be certain cases in which a digital asset that was originally sold in a securities offering could later be sold in a manner that would not constitute a securities offering. However, he indicated that the SEC would carefully consider the circumstances under which that would be the case.
The fact that this comprehensive regulatory scheme has deterred blockchain companies and cryptocurrency funds from entering the US market does not seems to concern the SEC. The clear expectation is that the size of the US market will eventually entice these outliers into compliance, just as most companies eventually complied with US “know your customer” and anti-money laundering laws. Protectionism, not globalization, is the US’s main concern.
Switzerland is the best-positioned to lead the effort to create a global approach to blockchain and cryptocurrency, however, there is little appetite for such an effort from other countries and Switzerland does not have the political or economic clout to force them to the table. Switzerland benefits from its policy of “technology neutrality” that requires regulators to examine markets, not services, to determine if additional regulation is necessary. As a result, the Swiss Financial Market Supervisory Authority (FINMA) has been able to issue favorable guidelines for the Swiss blockchain and cryptocurrency industry that have encouraged such companies to locate there, particularly in the canton of Zug (dubbed the “crypto valley”). There also does not appear to be as much fear of cryptocurrency fraud, as certain Swiss providers, including Switzerland’s national railway service, have begun to accept bitcoin.
If there was a global effort to standardize blockchain and cryptocurrency regulation, the FINMA guidelines would provide a good place to start. In September 2017, FINMA set out preliminary guidelines for ICOs, which FINMA defined as a digital form of initial public offerings that take place using blockchain technology.  FINMA issued additional guidelines in February 2018 that set out how it intended to apply financial market legislation to ICOs and defined three forms of tokens: 1) payment tokens, which have no further functions other than payment and includes all cryptocurrencies; 2) utility tokens, which provide digital access to an application or service; and 3) asset tokens, which represent participation in earnings and are analogous to traditional securities.  Companies are not completely free from comprehensive regulation, however, as the FINMA guidelines stipulate that companies or individuals who launch ICOs under Swiss law must comply with the requirements of Switzerland’s financial market laws, particularly in the areas of anti-money laundering, banking regulations, securities trading and collective investment schemes. The FINMA guidelines provide a solid framework to begin a discussion of a globalized regulatory scheme for blockchain and cryptocurrency, but there appears to be no interest in pursuing such a scheme.
As a result of countries’ disinterest in establishing a globalized blockchain and cryptocurrency regime, blockchain and cryptocurrency will not benefit all people in the same ways. Instead, the ways in which blockchain and cryptocurrency companies mature and the types of companies that are successful will differ depending on where those companies choose to locate. Companies located in EU member states will likely focus on producing technological innovations that can receive the support of EU cross-border initiatives, but will likely be constrained by needing to comply with the laws of each member state. Much of the truly innovative blockchain and cryptocurrency work will likely not be located in the US. Instead, US companies will focus on disruptions that can be accomplished while remaining within the bounds of US law, such as enterprise blockchain and token sales registered as securities offerings. Swiss companies will have the most freedom to be innovative, but it remains to be seen if they will be able to obtain the resources and traction to grow into global powerhouses. None of these scenarios, however, allows a company the security and benefits that would come with a truly globalized blockchain and cryptocurrency regime, because in this political and economic environment, there is no interest in establishing one.
 Under the Securities Act of 1933 (Securities Act), as amended, the definition of a security includes various financial instruments, including an “investment contract.” The term “investment contract” has been viewed as a catch-all for any security not enumerated in the Securities Act’s list. and, based on the US Supreme Court’s decision in the 1964 case SEC v. Howey, is defined as: 1) an investment of money; 2) with an expectation of profits; 3) in a common enterprise; 4) where the profit comes from the efforts of a third party. For an ICO or token to be deemed a security, it must fit this test. However, the test is elastic, and in practice it has been stretched to accommodate various financial structures that the SEC has chosen to regulate, even though on their face some of those structures might not appear to fit the Howey test.
 Hinman theorized that if there was “no longer any central enterprise being invested in” and “the digital asset [was] sold only to be used to purchase a good or service available through the network on which it was created,” the digital asset might be able to be sold in a manner that did not constitute a securities offering. https://www.sec.gov/news/speech/speech-hinman-061418.