Supervision of Service Providers Engaging in Digital Currencies

With the development of blockchain technology, and the emergence of robust activities relating to the use and trading of digital currencies, a need has also arisen for various brokers and service providers that aid and promote the use of these currencies. As a result, many companies have begun to fill this void and to offer a variety of diverse solutions enabling the public to gain access to digital currencies and to use such.

While some uncertainty exists with regard to the regulatory regime that applies to public offerings of digital coins (ICOs), in the area of services related to digital currencies, regulations are expected to come into effect on June 1, 2018, within the scope of the Control of Financial Services Law.

The Financial Services Law regulates the activities of various bodies outside the traditional financial system (already regulated and controlled prior to this legislation), and addresses the following financial services: (a) the provision of credit, (b) financial asset services, (c) deposit and credit services, (d) the issuing of credit cards, and (e) the operation of P2P platforms.

The law’s definition of a “financial asset” also encompasses the term “Virtual Currency“. The law prescribes that any party providing a service that relates to a virtual currency, whether exchanging a virtual currency for another financial asset or managing and securing a virtual currency (including through a vault), falls within the law’s definition. That party is therefore obligated to obtain a license for this activity.

The law does not specify what constitutes a “Virtual Currency“, but, according to plain meaning of the law, the various digital currencies are deemed virtual currencies as defined in the law. Various kinds of tokens, such as those purchased in order to play a computer game or to use applications and that represent value within the game, are also likely to fall within this definition.

Therefore, anyone engaging in the provision of services that involve digital currencies -for instance, the provision of a physical or digital vault, the provision of e-wallet services, or the provision of currency exchange services from one digital currency to another or from a digital currency to a traditional currency – must ascertain whether this activity is subject to the Financial Services Law. Even a company engaged in the mining or minting of cryptocurrencies or issuing token through an ICO, actions that perhaps are not subject to any regulation at the issue stage, may find itself subject to the law if it also provides associated services to currency holders.

Consequently, companies engaging in this sphere of business, or those considering whether to offer solutions in this market, must familiarize themselves with the applicable laws, in order to prepare themselves for the inception of the regulatory provisions. Within this context, we note that a company that engaged in the provision of financial asset services prior to the effective date, and that held appropriate registration for this purpose and applied for a license prior to the effective date (June 1, 2018), will be classified as a “long-standing dealer”. This will enable the company receive a temporary permit to continue engaging in the provision of services, even before it receives its official license.