Bragging rights mostly. “We are a regulated crypto exchange” does sound better!

by Kevin Koo

In the crypto world, there is a trend. “We are a regulated crypto exchange.” “We are an approved e-money licence services provider.” “Our securities token offering is regulated by the government of bla bla bla.” This is a trend, a response to the increasing regulation that is creeping up in countries all over the world.

Just as crypto projects in unregulated environments will lead to uncertainties, crypto projects in regulated environments lead to certainty. Regulation means licensing, and getting a licence often means complying with the licensing laws. The costs can be quite high, but the rewards can be even higher. In the long term, it means turning a handsome profit. It might even mean longevity, and survival. This is the backdrop to the race for crypto licences.

The consideration of governments

Crypto licences implies licences issued by municipal authorities, and national governments. Everywhere, blockchain evangelists, ICO gurus, crypto advisors, HODLers, and investors, talk about the power and potential of new blockchain platforms. These platforms, they say, will replace the old legacy systems. They will make things transparent. You will be able to audit transactions, and ensure that things transacted on the blockchain, remain on the blockchain. For all posterity.

Everything starts with a first step, however. National governments will need to tokenize their systems. There will need to be interconnectivity between systems. The existing back ends of legacy systems, built on PHP and MySQL, Java and other creaky old code, will eventually have to give way to newer code. All of it sounds great, but national governments will need to pick and choose their partners. After all, some tokens are mere placeholders for the final project that will need to be developed.

Why is there a race for crypto licenses?

The crypto licence is a means of filtering good blockchain organizations from bad. After all, the space is maturing, and there are new projects popping up. Some of them will become reality, but many will be empty promises. Which organizations to approve? Which to deny? This is the backdrop of the race for crypto licenses.

As the industry matures, various types of blockchain projects can be identified. When you clump disparate projects together, you can categorize them. It should become clear that some of the proposed services, if they originated and operated in the non-blockchain, non-token world, would have to be strictly regulated. These are services like remittance, e-money, lending, fundraising, currency exchanges, issuance of securities, fractional ownership of assets, and such similar things. Just because these projects are recreated and remade using the blockchain, using tokens and smart assets, it does not make them exempt from the laws. Indeed, all existing laws will apply on blockchain projects, such as tax laws, and company laws. Additionally, they will need to be regulated under new laws, with new licensing requirements, to fit the new paradigm of the blockchain era.

Philippines / CEZA Crypto License

In the Philippines, for example, the special economic zone, CEZA (Cagayan Economic Zone Authority), has the right to issue licences for crypto projects. Having spoken to a Philippines lawyer, I understand that this special region of Cagayan had previously given out licences for gaming. Perhaps out of a need for revenue, or innovation, or both, the government has begun to give out licences for cryptocurrency companies. The first project to receive a provisional license in July 2018 was a Hong Kong company, to operate a crypto exchange.

So why get a crypto license? First scenario

You may feel that this race for crypto licenses is rather silly. Why should you get your blockchain company licensed at all? What if you feel that blockchain was championed by anarchists, and governments should not try to regulate the unregulable? To that question, I answer with a question!

Imagine that you go to a restaurant for lunch. It looks fine, and the food on the menu looks good. While reading the menu, however, you read, “This restaurant is not licensed. We do not have a license from the government, even though a license is required to run a restaurant. Accordingly, you understand and agree, that by eating at this establishment, you will bear all risks, including risks of food poisoning, etc.”

If you knew that 99% of the other restaurants in the neighbourhood have a restaurant license, but the one you are in does not, would you eat there? I think you know the answer.

Why get a crypto license? Second scenario

But then there’s an alternate scenario. What if, you read the following words in the menu instead: “This restaurant is not licensed. We do not have a license from the government, but no license is required to run a restaurant. Restaurants in this country are unregulated, but we run and operate our restaurant in the best possible way, to comply with the standards expected of similar restaurants located in First World countries. However, you understand and agree, that despite our best efforts to comply with international standards, by eating at this establishment, you will bear all risks, including risks of food poisoning, etc.”

If you knew that restaurants in a certain place don’t have licenses because, very simply, there is no license to be given out, you would be more likely to accept the non-licensed status of the restaurant. Or you might be afraid of what might happen, if things just fall apart — like when your favourite crypto exchange gets hacked.

Using the same mindset, if the government regulates the crypto industry, getting a license would be desirable. But if the government does not regulate the crypto industry, getting a license might be irrelevant.

Conclusion

Thus, if you run a crypto platform, or a blockchain based solution, it may be worth looking into getting a crypto license. Just because the country in which you are based, does not have a licensing regime, does not mean that you cannot get a license. You could consider setting up a branch office in another jurisdiction — a jurisdiction which issues crypto licences.

In some countries, licenses are issued in limited numbers. Licenses become valuable when there is a limit to the number of licensees that a government will license. Licenses become like land, when things are like that. And as licenses become valuable, because of their scarcity, so too will their value increase — and the value of the company that holds the licenses, will also increase.