The US and Swedish approaches to blockchain and cryptocurrency regulation

Cryptocurrencies and non-fungible tokens ("NFTs") have been making headlines in recent years, with the rise of Bitcoin, Ethereum, other digital currencies, and NFT marketplaces capturing the attention of investors and the public at large. While these blockchain based creations offer exciting new opportunities for investment and financial innovation, they also present unique challenges for regulators and policymakers.

Before diving into the regulatory environments in the United States and Sweden, it is important to distinguish between public and private blockchains which are subject to different levels of regulatory scrutiny since public blockchains are available for the general public to use and interact with while private blockchains are used within organizations and are generally only regulated with respect to the types of data being stored on them.

For example, a private blockchain containing personally identifiable data would still be subject to the European Union (the "EU")'s General Data Protection Regulation (the "GDPR").

In this article, we will analyze and compare the regulatory frameworks for blockchain, cryptocurrencies and NFTs in both nations. By examining the similarities and differences in their approaches, we hope to give you a better understanding of how these regulatory environments can impact your involvement in this exciting and rapidly evolving sector.

Swedish law on blockchain and cryptocurrencies

Regulatory bodies

Since blockchain, cryptocurrencies and NFTs are in most aspects not (yet) governed under Swedish law, this area is largely unregulated. These are new technologies that cover many areas of life, sectors, and activities, and as such their use will fall under already existing sector or area specific regulation.

However, as cryptocurrencies are currently classified as a means of payment, they are subject to the same anti-money laundering ("AML") and counter-terrorism financing ("CTF") regulations as traditional currencies.

This means that all cryptocurrency exchanges and custodial wallet providers in Sweden must register with the Financial Supervisory Authority (the "FSA") and implement measures to prevent money laundering and terrorist financing. In addition to the AML and CTF regulations, if an NFT involves the transfer of personal data, it may be subject to the GDPR.

The FSA has also implemented measures to protect consumers and ensure the stability of the financial system. In 2018, the FSA issued guidelines for the supervision of cryptocurrency exchanges, which included requirements for the segregation of client assets, the maintenance of adequate capital buffers, and the establishment of sound risk management practices.

These guidelines were developed in response to the growing popularity of cryptocurrencies in Sweden and were designed to ensure that cryptocurrency exchanges were operating in a safe and transparent manner.

In terms of blockchain technology more broadly, the Swedish government has recognized the potential benefits of blockchain and is taking steps to promote its development. For example, the Swedish Tax Agency has issued guidelines on the taxation of cryptocurrencies, and the Swedish Parliament has passed a law allowing blockchain-based shareholder voting for certain companies.

In conclusion, while there is currently no specific legislation regulating NFTs or blockchain technology in Sweden, companies operating in this space should be aware of the potential regulatory implications of their activities.

MiFID II

The EU's revised Markets in Financial Instruments Directive ("MiFID") and Markets in Financial Instruments Regulation (together "MiFID II")¹ is an important regulatory framework that may impact cryptocurrency-related activities in Sweden. MiFID II aims to increase transparency in financial markets and protect investors by requiring financial market participants to comply with certain rules and regulations.

While cryptocurrencies and NFTs are not explicitly covered by MiFID II, some related activities such as the provision of investment advice or the marketing of cryptocurrency-based investment products, may fall under MiFID II's scope. In such cases, companies may need to comply with MiFID II requirements, such as obtaining appropriate licenses, conducting due diligence on clients, and providing appropriate disclosures.

Understanding the MiCA regulation: A step towards comprehensive cryptocurrency regulation in Europe

In September 2020, the European Commission proposed a new regulation on Markets in Crypto-Assets ("MiCA").² This proposed regulation seeks to establish a comprehensive framework for the regulation of crypto-assets within the EU with the intention to provide legal certainty for issuers and investors and to promote innovation in the crypto-asset market while ensuring consumer protection, environmental safeguards, and market integrity.

The MiCA regulation is expected to enter into force in Q2 2023, after which a phased implementation period of 18 months begins. This means that MiCA will most likely take effect no earlier than Q3 2024. The rules for stablecoins will start applying after a transitional period of 12 months and could, hence, take effect in the spring of 2024.

Regulatory Technical Standards ("RTS") and implementing technical standards will be adopted, as well as a delegated act, for which there is a three-month scrutiny period by the European Parliament.

The European Securities and Markets Authority will develop draft RTS on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact.

Within two years, the European Commission must provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.

What is the MiCA regulation?

The MiCA regulation proposes a set of rules for the issuance, trading, and custody of crypto assets, including stablecoins and utility tokens, within the EU.

The proposed regulation categorizes crypto-assets into three types depending on the type of risk they entail:

(1) E-money Token, which are digital representations of fiat currencies, such as the euro or the US dollar, and are backed by a central bank or an electronic money institution.

(2) Asset Referenced Token, which are digital representations of assets, such as commodities, real estate, or bonds.

(3) Other Crypto-assets, which covers a wide variety of crypto-assets, including utility tokens.

The MiCA regulation establishes requirements for issuers of crypto assets (including asset-reference tokens and e-money tokens), such as disclosure requirements and obligations to ensure the security of the underlying assets.

It also imposes obligations on service providers, such as crypto-asset exchanges and custodians, to ensure the integrity of the market and protect consumers. Consumers would be better informed about risks, costs, and charges. In addition, the new legal framework will support market integrity and financial stability by regulating public offers of crypto-assets.

Under the MiCA regulation, issuers and service providers will need to obtain authorization from their national regulator before operating in the EU. The regulation also imposes specific requirements on stablecoins, such as the obligation to hold reserves in a safe and liquid asset and to provide regular disclosures to investors.

Regulatory sandbox

The European Commission's European Blockchain Regulatory Sandbox (the "Sandbox") was launched in February 2023 with the aim of establishing a pan-European framework for regulatory dialogue between blockchain innovators and regulators, in a confidential environment, to increase legal certainty around the use of Blockchain technologies.

It aims to foster dialogue and cooperation between national and EU-level regulators and supervising authorities with companies and public entities via a validated proof of concept thereby removing regulatory and legal uncertainties for use cases based on fully and partially decentralized solutions.

Over three years, until 2026, three cohorts of twenty blockchain/DLT use-cases will be selected and matched with relevant national and EU regulators. The European Commission selected Bird & Bird LLP and its consulting arm OXYGY supported by blockchain experts of WBNoDE to provide legal advice, facilitate dialogue with regulators, and develop best practices.

If you wish to learn more about the Sandbox, please visit the project website: blockchain-sandbox.eu

What this means for clients in Sweden

For clients operating in Sweden, the introduction of MiCA is likely to have a significant impact. Companies that provide cryptocurrency exchange or custodial wallet services will need to obtain authorization from the FSA to continue operating. This will involve demonstrating compliance with AML and CTF regulations, as well as the new requirements introduced by MiCA.

Companies that issue cryptocurrencies will also need to comply with new disclosure requirements and will need to provide whitepapers that meet the standards set out in MiCA and to carefully consider how they can comply with these new regulations, while still providing innovative and competitive services to their customers.

US law and regulation on blockchain and cryptocurrencies

Regulatory bodies

Blockchain and cryptocurrency regulation in the United States is the domain of a myriad of regulatory agencies which each address a particular aspect of the sector.

(1) The Securities and Exchange Commission (the "SEC") oversees and enforces the federal regulation of securities, securities exchanges, other securities' market participants e.g., brokers and dealers, and the extended regulatory environment related to these. The SEC's role in the cryptocurrency and NFT market is evolving as more and more frequently the issuances from some of these projects are classified as securities.

(2) The Commodity Futures Trading Commission (the "CFTC") oversees derivatives markets including but not limited to market participants, exchanges on which derivatives contracts are traded, clearing houses and dealers and intermediaries. With respect to cryptocurrencies and NFTs the commission oversees derivative instruments and also has oversight over certain commodities transactions.

(3) The Federal Trade Commission (the "FTC") has a mandate under President Biden's March 9th, 2022 executive order on Digital Assets³ to study how they can police crypto transactions for fraud and abuse.

(4) The Internal Revenue Service (the "IRS") oversees the tax aspects of cryptocurrency investment, transmission, and exchange.

(5) The Office of the Comptroller of the Currency provides policy, guidance and information on the use of digital assets in the federal banking system.

(6) The Financial Crimes Enforcement Network is tasked with safeguarding the financial system from elicit use and combating money laundering and its related crimes. With respect to the cryptocurrency sector, it requires exchanges to: (1) register as money service businesses, (2) implement AML compliance programs, (3) comply with suspicious activity and sanctions reporting, and (4) to apply for a money transmitter license for every state in which they do business or apply to the nationwide multistate licensing system.

(7) The Department of Justice has a law enforcement mandate and can become involved in cryptocurrency and blockchain cases when there has been a violation of federal law.

These agencies' regulatory efforts are also supplemented by applicable state laws. Despite the many regulatory agencies and numerous enforcement actions by these agencies in the sector there has been limited formal rulemaking regarding cryptocurrencies or blockchain. The preferred approach, especially of the SEC, has been to rely upon existing law and to shape policy through enforcement actions.

The present regulatory environment

The SEC, CFTC and FTC all share similar functions in that they seek to maintain orderly markets within their control areas and to protect and regulate the participants in the markets which they oversee.

Of the three agencies the SEC has the reputation for being the most aggressive with enforcement and this reputation has been clearly shown under the leadership of Chairman Gary Gensler who has moved the SEC into a more aggressive enforcement role with respect to cryptocurrency and blockchain initiatives.

The SEC Chairman's view is that nearly all circulating cryptocurrencies with the exception of Bitcoin and some NFT projects are unregistered securities and should be regulated as such.⁴ Acceptance of this view would radically alter the crypto and blockchain environment because the current crypto exchanges and majority of the crypto and NFT projects are not compliant with the registration and disclosure requirements required for registered and unregistered securities offerings.

While this change would bring consumer protections to this sector in a significant way many crypto proponents argue it would end the egalitarianism of crypto and NFTs by restricting access, with limited exceptions, to qualified purchasers and accredited investors (both of which contain net worth requirements and/or experience qualification requirements) and restricting the manner in which offerings can be made to primarily private placements with very limited public offering paths.

The SEC has had some recent success in advancing this view in Securities and Exchange Commission v. LBRY, Inc.⁵ in which the coins being offered and sold in support of a blockchain based video sharing platform were deemed to be unregistered securities which had not gone through the registration requirements for such an offering.

The main ongoing lawsuit in which the SEC is asserting that a cryptocurrency is an unregistered security is in Securities and Exchange Commission v. Ripple Labs Inc. et al.,⁶ which has been ongoing since 2020 and focuses upon Ripple labs' XRP coin which currently has a market cap above USD 25 billion making it the sixth most capitalized coin on the market.

The implications of this lawsuit are significant due to both the size of the coin in question and the potential, if the SEC prevails, for more cryptocurrencies to be classified as unregistered securities.

Tax overview

Convertible virtual currency, cryptocurrency, stablecoins, and NFTs are all seen as property and classified as digital assets by the IRS and their purchase and sale are generally subject to short-term and long-term capital gains rates while rewards from activities such as staking and mining are generally subject to standard income tax rates.

Any market participant that is subject to US tax should review the available IRS guidance⁷ on the appliable tax events for digital assets as the IRS view is quite broad in terms of tax events and it is important for market participants to keep track of their cost basis at purchase and the amount realized at any applicable tax events.

Upcoming developments in the US cryptocurrency and blockchain regulatory space

Going forward it will be important for legal professionals and market participants to pay close attention to the outcome of the SEC v Ripple Labs case and other enforcement actions by the SEC and CFTC, if any further legislation and emerges from congress, any pertinent executive orders regarding the space, and any state efforts to police the crypto and blockchain spaces.

At this time, it appears unlikely that there will be further rulemaking from the SEC or any successful legislation from congress on this sector in the near future.

The Swedish vs US system and the market impacts of each

Generally, the Swedish approach through MiCA is a proactive approach with respect to fostering innovation and providing a clear regulatory framework to guide market participants, as opposed to the US's reactive approach that gives the market less clear guidance and relies upon continued policing of the sector through enforcement actions under existing law.

In the European Union and Sweden, the coming MiCA regulations will provide new guidance and clarity for this developing sector while the existing MiFID II regulatory framework provides a partial framework for cryptocurrencies that can be classified as financial instruments.

While in the US, a hesitancy to create new law and regulations, or engage in significant rulemaking, regarding these new technologies has left the future of public policy and regulation to be shaped through executive orders, agency enforcement actions, and forthcoming court decisions unless new legislative efforts succeed where they have failed in the recent past.

In particular, the combination of the Sandbox and MiCA should alleviate some of the uncertainty and anxiety which currently exist in the EU and Sweden by providing a path to a more certain legal and regulatory environment with the added benefit of a dialogue between the market participants via the Sandbox.

Notes

1 Directive 2014/65/EU, OJEC L 173, 15 May 2014, 349-496.

2 2020/0265 (COD) / COM(2020) 593, final proposal for a regulation on markets in cryptoassets.

3 Exec. Order No. 14067, 87 FR 14143, 2022 WL 742681. At 14143-52 (2022).

4 Ankush Khardori, Can Gary Gensler Survive Crypto Winter? D.C.'s Top financial cop on Bankman-Fried blowback, NEW YORK MAGAZINE INTELLIGENCER (February 23, 2023), https://bit.ly/3UVECgk.

5 No. 21-CV-260-PB, 2022 WL 16744741 (D.N.H. Nov. 7, 2022).

6 No. 1:2020cv10832 - Document 103, 2021 WL 1335918 (S.D.N.Y. 2021).

7 Notice 2014-21, 2014-16 I.R.B. 938, 2014 WL 1224474.

This article is originally published on Westlaw and can be found here