Regulation of the turnover of cryptocurrency futures: the approaches of China and Singapore
The use of digital tokens in the investment sphere is no longer something unusual. Electronic exchanges are emerging, where investors are offered to use derivatives that have as their base asset not only tokens certifying the rights to securities, but also payment tokens - cryptocurrencies. Cryptocurrencies and cryptocurrency futures are not regulated in Russia. In this regard, this article examines the experience of the leading financial and digital centers in East Asia - Singapore and China. The author analyzes the main regulatory legal acts of China and Singapore in this area, and also considers future amendments to the Singapore Securities and Futures Act. Based on the conducted comparative legal research, it is concluded that the Singapore model of legal regulation of crypto futures and cryptocurrencies is noteworthy as an example for the creation of Russian legislation in this area.
Keywords: tokens, digitalization, derivatives, cryptocurrency, digital financial assets, investments, bitcoin.
The development of digital technologies and, as a result, the emergence of cryptocurrencies have led to a significant change in the way investment activities are carried out <1>. The importance of modernizing legislation in order to ensure the transformation of the financial sector was noted in the Decree of the President of the Russian Federation "On the Strategy for the Development of the Information Society in the Russian Federation for 2017-2030" <2>, as well as in the Passport of the national project "Digital Economy of the Russian Federation" <3>. However, these policy documents have not been properly implemented. The steps taken to implement them are seen as insufficient and do not take into account world experience <4>, which, of course, "does not stimulate the development of the Russian financial market and does not meet the interests of Russian investors, primarily without protecting their legitimate rights and interests" <5>.
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<1> Khamenushko I.V. Transactions with cryptocurrencies: possible taxation models // Business law. The application "Law and Business". 2018. N 1. pp. 42-44.
<2> Decree of the President of the Russian Federation No. 203 dated May 9, 2017 "On the Strategy for the Development of the Information Society in the Russian Federation for 2017-2030".
<3> Passport of the national project "Digital Economy of the Russian Federation" (approved by the Presidium of the Presidential Council for Strategic Development and National Projects, Protocol No. 7 dated June 4, 2019).
<4> Fedorov D.V. Tokens, cryptocurrency and smart contracts in domestic bills from the perspective of foreign experience // Bulletin of Civil Law. 2018. N 2. pp. 30-74.
<5> Belykh V.S., Bolobonova M.O. Cryptocurrency derivatives: problems of legal regulation // Lawyer. 2019. N 5. pp. 35-44.
The content of the draft law "On digital Financial Assets" <6> does not allow us to say that the legislator has developed a conceptual approach to regulating cryptocurrencies. It can be seen that he focused only on those digital financial assets that represent the digital expression of securities such as stocks. Meanwhile, according to Bloomberg, the number of cryptocurrency derivatives traded worldwide for bitcoin alone ranges from 5 to 10 billion US dollars per day <7>. This shows that you should not lose sight of such a market segment as cryptocurrency futures.
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<6> Draft Federal Law "On Digital Financial Assets" // Federal Portal of draft regulatory legal acts.
<7> Singapore Poised to Allow Crypto Derivatives on Approved Venues.
The emergence of cryptocurrency futures is associated with digital tokens. An analysis of the literature has shown that there are three main types of digital tokens - securities tokens, payment tokens (cryptocurrencies) and utility tokens <8>. Such diversity leads to the difficulty of formulating a single concept that includes the essential features of this phenomenon <9>. Therefore, all these tokens must be considered separately, without mixing them with each other. Therefore, when studying cryptocurrency derivatives, it is necessary to take into account that for them the basic asset is exclusively payment tokens. Note that the concept of cryptocurrency in domestic jurisprudence is controversial, it is also absent in Russian legislation. Attempts to give a legal definition of this concept in the draft law "On digital Financial Assets" have not been successful. Based on this, there is an objective need to study foreign experience, where the legal regulation of cryptocurrencies is already being implemented.
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<8> Novoselova L.A. "Tokenization" of objects of civil law // Economy and law. 2017. N 12. pp. 29-44; Nakavachara V., Potipiti T., Lertmongkolnam T. Should All Blockchain-Based Digital Assets Be Classified under the Same Asset Class?
<9> Belykh V.S., Bolobonova M.O. Problems of determining the legal regime of cryptocurrencies // Journal of Entrepreneurial and Corporate Law. 2019. N 3. pp. 23-28.
Singapore and China occupy leading positions in the digitalization of the economy <10>. Thus, in 2019, the volume of China's digital economy reached 31 trillion yuan <11>, and by 2023 it will amount to about 51.3% of GDP <12>. As for Singapore, it is a leading center of blockchain technology innovation, we can say a "crypto hub". In particular, in 2018, Singapore became the second largest country in the world in terms of attracted financing with the help of digital tokens, and their registered sales amounted to more than 1.6 billion US dollars <13>. It is noteworthy that Singapore and China adhere to completely different approaches to regulating the cryptocurrency market. While Singapore is taking steps to include transactions with cryptocurrency and cryptocurrency derivatives in the legal sphere, the PRC has outlawed this activity. The domestic legislator should, based on the already established foreign experience, develop a regulatory framework that will clarify the legal status of cryptocurrency derivatives in Russia.
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<10> Afro-Asian countries and new technologies: Col. monograph / ed. by N.N. Tsvetkova; Institute of Oriental Studies of the Russian Academy of Sciences, Moscow: IV RAS, 2019. p. 30.
<11> The volume of China's digital economy has reached 31 trillion yuan.
<12> The digital economy will account for more than half of China's GDP by 2023 - IDC.
<13> Greene R.W., Chuen D.L.K. Singapore's Open Digital Token Offering Embrace: Context & Consequences // The Journal of The British Blockchain Association. 2019.
In 2019, Singapore adopted the Law "On Payment Services" <14>. This regulatory legal act has consolidated the concept of cryptocurrency (payment tokens). Thus, according to Article 2(1) of the Law, a digital payment token means any digital representation of value that is expressed in units, is not denominated in any currency and is not linked by its issuer to any currency, acts as a means of exchange, is accepted by the company or part of the company as payment for goods or services or to repay a debt; can be transferred, stored or sold electronically; satisfies other characteristics that the Monetary Authority of Singapore may prescribe. This definition is criticized by some authors, as, in their opinion, it is extremely broad <15>. Meanwhile, one can hardly agree with this. On the contrary, by avoiding mixing all digital objects together, Singapore has unambiguously and clearly defined cryptocurrency as a measure of value, which made it possible to characterize it as a unit of account. According to the researchers, due to the consolidation of the legal status of cryptocurrencies and other tokens, Singapore will benefit from the concentration of token projects, which will contribute to deeper and faster innovation <16>. It seems that this approach should be applied in Russia as well. Bitcoin and other payment tokens should be clearly perceived not as a means of payment, but as a unit of account, otherwise it is unlikely to be possible to talk about effective regulation of these objects due to the inability to overcome contradictions in the field of monetary circulation.
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<14> Singapore Payment Services Act 2019 N 2.
<15> Lin Lin. Regulating FinTech: The Case of Singapore (October 30, 2019). Banking and Finance Law Review, 2019, Forthcoming; NUS Law Working Paper N 2019/028; NUS Centre for Banking & Finance Law Working Paper 19/04.
<16> Greene R.W., Chuen D.L.K. Op. cit.
According to the Singapore Securities and Futures Act <17>, derivative financial instruments that rely on securities tokens as the underlying asset are already regulated on an equal basis with other derivatives. This is due to the fact that in such a situation, the token should be considered as a digital expression of a security or as a unit of a collective investment scheme, which fully corresponds to the prevailing ideas about the underlying asset <18>. As for cryptocurrency futures (payment tokens), their turnover in Singapore was not included in the legal field. This is due to the fact that "the value of a cryptocurrency is determined by the ratio of its supply and demand" <19>, which means it is unclear whether it has any internal economic value. However, in November 2019 The Monetary Authority of Singapore has proposed measures to regulate the cryptocurrency futures market <20>, which are expected to be adopted by June 30, 2020 in the form of amendments to the Singapore Securities and Futures Act and a number of by-laws. It is known that a futures contract can be based on any asset, including even the index <21>. Therefore, the law will expand the concept of an underlying asset for a futures contract by including a payment digital token traded on an approved exchange.
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<17> Securities and Futures Act (Cap. 289).
<18> Annunziata Filippo. Speak, If You Can: What Are You? An Alternative Approach to the Qualification of Tokens and Initial Coin Offerings (February 11, 2019). Bocconi Legal Studies Research Paper N 2636561.
<19> Belykh V.S., Stepanchenko A.V. On the question of the concept of foreign currency as an object of civil rights // Civil law. 2017. N 5. pp. 3-6.
<20> MAS Consults on Proposed Changes to Regulate Payment Token Derivatives traded on Approved Exchanges.
<21> Belykh V.S., Bolobonova M.O. Cryptocurrency derivatives: problems of legal regulation.
In many ways, such changes were facilitated by the recognition of payment tokens as units of account, as well as the increasing interest of international institutional investors, in particular hedge funds. These investors need a regulated product to hedge their dependence on payment tokens, as working in a legal field will help protect their interests.
The position of the Monetary Authority of Singapore on the regulation of cryptocurrency futures is based on the following <22>. Firstly, payment tokens that are recognized by market participants as "ordinary", such as bitcoin and ether, can be considered as an underlying asset. Secondly, since cryptocurrencies have high volatility, they are not suitable for most retail investors, so they can only be traded on specialized exchanges that have received a license for this. Thirdly, since investors may suffer financial losses greater than the entire amount they invested in cryptocurrency futures, approved exchanges are required to inform retail investors about possible risks. Fourth, in order to reduce the risks of investors, they should be charged additional margins of 50% margin, which will reduce the scale of involvement of retail investors in derivatives trading. These proposals were supported by the Parliament of Singapore, which on January 6, 2020 He published an official response to a request from the Monetary Authority of Singapore on the expediency of regulating cryptocurrency futures <23>.
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<22> Consultation on the Payment Services Act 2019: Scope of Emoney and Digital Payment Tokens. P016-2019, December 2019.
<23> Reply to Parliamentary Question on regulation of crypto derivatives on Approved Exchanges, January 6, 2020.
So, the proposal of the Monetary Authority of Singapore will satisfy the need of investors to protect their rights. At the same time, derivatives based on payment tokens that are not offered by approved exchanges will not be included in the scope of regulation of the Singapore Securities and Futures Act. Many exchanges trading cryptocurrency and its derivatives are located outside Singapore. This means that their activities are also not regulated by the Monetary Authority of Singapore, so investors involved in their activities are exposed to risks. This approach, on the one hand, encourages investors to work with Singapore exchanges, on the other hand, pushes foreign exchanges seeking to operate legally and attract more market participants to receive approval from the Monetary Authority of Singapore. Moreover, paragraph 339 of the Law "On Securities and Futures" provides for the extraterritorial effect of this regulatory legal act when it comes to attracting funds from Singaporean investors to the exchange.
In the People's Republic of China, unlike Singapore, legal investment through cryptocurrency derivatives is not possible. This is due to the fact that cryptocurrency is banned in China, which means it cannot be considered as an underlying asset. In 2013, the People's Bank of China, together with a number of other government departments, issued a Notice "On the prevention of risks arising from bitcoin" <24>. According to it, Chinese financial institutions are prohibited from exchanging yuan or foreign currency for bitcoin.
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<24> Notice "On the prevention of risks arising from Bitcoin" dated December 6, 2013 (in Chinese).
The negative reaction of the People's Bank of China is largely due to the fact that the use of cryptocurrencies can lead to the withdrawal of capital from the country, concealment of funds, money laundering and legalization of proceeds from crime <25>. Given the fact that transactions are conducted via the Internet, and exchanges can be located in any country in the world, it is hardly possible to completely avoid these risks, moreover, due to the specified position of the regulator, Chinese citizens who carry out transactions with cryptocurrency and its derivatives may face problems protecting their rights. These circumstances give rise to a fair criticism of the existing approach by a number of Chinese researchers <26>. However, while the authorities in China adhere to the fact that bitcoin is understood as a kind of virtual asset, with which it is impossible to measure the value of goods (services), it is unlikely that the position of the People's Bank of China can be changed.
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<25> Wang Yuanyuan. Analysis of the need to ban Bitcoin trading // Law and Society. 2018. N 5. p. 11 (in Chinese).
<26> Qi Tong, Zhou Junfan. Legal attributes and regulatory framework of cryptocurrencies: a perspective of comparative research // Financial Law. 2019. N. 4. pp. 126 - 141 (in Chinese).
The analysis showed that Singapore has chosen an approach to the legal regulation of cryptocurrencies, which allows, by recognizing transactions with cryptocurrency futures as legitimate, to protect the rights of investors and thereby attract large cryptocurrency exchanges under its jurisdiction. Therefore, this option of regulating cryptocurrency derivatives seems more appropriate than the one chosen by the PRC. The Russian legislator should consider the possibility of recognizing cryptocurrencies as a digital unit of account, which can act as an underlying asset in the derivatives market. It is also necessary, adhering to the experience of Singapore, to develop rules allowing the turnover of cryptocurrency futures on exchanges licensed by the Central Bank of the Russian Federation.
