In the history of international monetary and payment systems, very few developments have witnessed the same breadth and intensity of change in a short period of time as cryptoassets. Over the past three years, the industry has undergone significant shifts. The 2017-2018 initial coin offering (ICO) bubble sparked closer scrutiny from regulators resulting in greater efforts with regard to regulatory compliance, while new professional infrastructures and services have emerged to serve the increased interest from institutional investors. In the Third Global Cryptoasset Benchmarking Study conducted by the University of Cambridge’s Judge Business School, the Cambridge Centre for Alternative Finance (CCAF) tracked and analysed these market trends based on data gathered from 280 entities from over 50 countries across four major market segments: exchanges, payments, custody and mining.
The Study reveals that changes in the regulatory environment over the past few years have often translated into internal adjustments in how firms go about meeting mandated requirements. Though regulatory and compliance standards vary across industries and countries, irrespective of their size and locations, the surveyed service providers ranked an increasing regulatory burden as the second highest operational risk. Interestingly, more than 75% of the respondents reported having an in-house compliance team, with the share of cryptoasset-only companies that did not conduct any KYC checks on their users dropping significantly—from 48% to 13%—between 2018 and 2020.
From a regulatory perspective, 2019 was a particularly active year for the cryptoasset industry, with several regulators releasing new statements and guidance. EU member states were expected to transpose the 5th Anti-Money Laundering (AML) Directive, whose scope was broadened to include cryptoasset exchanges and custodial service providers into national law. At the same time, progressive harmonisation of KYC/AML standards across jurisdictions as well as the inclusion of firms exclusively supporting cryptoassets in FATF’s updated standards and recommendations is believed to have spurred greater compliance among this group of firms.
Regulatory developments have also been crucial in driving licensing and registration/authorisation processes globally, which mostly rely on three parameters: (i) the jurisdiction where a cryptoasset service provider is located, (ii) the type of services provided, and (iii) the assets supported. We find that just over two out of five surveyed firms are licensed or in the process of obtaining a license, while among the remaining three-fifths many entities either engage in activities that do not yet warrant any authorisation process (eg hardware wallet manufacturing or non-custodial functions) or operate in jurisdictions with no official regulatory guidance/framework. License holders primarily hold a crypto-specific license (42%), followed by payment or e-money licenses (29%) and money business licenses (28%). Location-wise, licenses and registration were primarily issued by British (23%) and American (23%) regulatory authorities, followed by Switzerland and Estonia (17% each).
The existence of a crypto-specific licensing regime arises either from the introduction of a bespoke regulatory framework, which specifically regulates cryptoasset-related activities as a standalone activity (eg Gibraltar’s Distributed Ledger Technology Provider licensing regime), or from the retrofitting of an existing law or regulation to include activities dealing with cryptoassets (eg Japan’s amendment of its Payment Service Act). Several other types of license also exist, including, inter alia, qualified custodian (5%) and banking (3%) licenses. We expect that, as the cryptoasset regulatory landscape continues to evolve, more firms will be licensed and registered in the coming years.
One common element of new regulatory developments worldwide has been the absence of any distinction between entities exclusively supporting cryptoassets and those supporting both fiat currencies and cryptoassets. This equal treatment of cryptoasset-only and cryptoasset-and-fiat entities seems to have led to an increase in fiat support among cryptoasset service providers. Our findings indicate that over 30% of the companies that exclusively offered cryptoasset in 2018 now support fiat currencies as well. This development is important. With the extension of the regulatory authorities’ supervisory mandate to the cryptoasset realm, the minimal discrepancies in compliance staff and costs observed in 2018 between cryptoasset-only and cryptoasset-and-fiat companies have been erased. While these discrepancies were already limited in 2018, greater homogeneity is observed across both types of firm groups in 2020.
Apart from a direct impact on companies’ internal compliance standards, regulation has also reshaped the geographical boundaries of the cryptoasset ecosystem. In heavily regulated industries, companies may choose to settle in jurisdiction(s) where they can exploit legal or regulatory loopholes. The Study finds that in the context of cryptoassets, regulatory arbitrage occurs in order to seek maximum regulatory certainty and most benign environments. When we compared respondents’ operational headquarters with their country of incorporation, the geographic relocation of entities to amenable jurisdictions becomes more evident: 22% were incorporated in a country different from where their operational headquarters are based. For these companies, top countries for incorporation include Switzerland, British Virgin Islands, the UK, and the Republic of Seychelles.
As the industry matures, individual cryptoasset holders have also come under scrutiny by regulatory and government bodies, in particular tax authorities. A significant majority of the surveyed service providers (67%) indicated that they provide users with compliance documentation, such as tax receipts. However, this might not be sufficient to ensure that users accurately report liabilities to authorities. Inconsistencies in transaction reporting, absence of uniformity in tax forms issued by various service providers, or lack thereof, may render compliance processes for cryptoasset holders more difficult. From the service providers' perspective, the tax treatment of cryptoasset does not seem to be a major concern, especially for European and North American actors. On average, service providers rank taxation seventh out of their top ten concerns.
The report will provide useful empirical findings for both industry stakeholders and policymakers.
Apolline Blandin is the Lead at the Cambridge Centre for Alternative Finance, Judge Business School, University of Cambridge.
Hatim Hussain is a Research Assistant at the Cambridge Centre for Alternative Finance, Judge Business School, University of Cambridge.