Cryptocurrency Licenses for Dummies: Everything You Need to Know
Did you know that in some jurisdictions, it is necessary to get a special license to trade or own cryptocurrency? When cryptocurrencies first came out, the main attraction was their decentralised nature and their potential to remove intermediaries from transactions and reduce costs. However, as more time has passed since the emergence of these digital currencies, more regulations have been introduced to protect consumers in light of some ICO scams and other fraudulent activities. Therefore, check if your jurisdiction requires a special license for trading or owning cryptocurrency to avoid unpleasant consequences. In this article we will explain what is a cryptocurrency license, how do they work and which are the benefits of getting one.
What is a Cryptocurrency License?
A cryptocurrency license is a license issued by a regulatory authority that authorises its holder to engage in activities related to cryptocurrencies or blockchain technology. Cryptocurrency licenses are mandatory in some jurisdictions, such as Malta, and optional in others, such as the UK. In some places, cryptocurrency regulations do not exist yet. A cryptocurrency license is similar to a cryptocurrency exchange license in that it allows the holder to trade tokens and coins. The main difference between the two is that an exchange license requires the company to operate its own trading platform, while a cryptocurrency license allows the company to use another platform to trade cryptocurrencies.
How do Cryptocurrency Licenses Work?
Most cryptocurrency licenses do not give the holder the right to trade cryptocurrencies with fiat currencies, such as USD. They are issued to companies that want to engage in activities related to cryptocurrencies, such as operating a cryptocurrency exchange, developing blockchain technology, and so on. It’s important to note that the specific activities that a company can engage in depend on the jurisdiction. Crypto exchanges, for example, are usually regulated in all jurisdictions. Cryptocurrency licenses can be granted to businesses that want to become crypto exchanges, or to those that want to engage in other activities related to blockchain technology. Some jurisdictions, such as Malta and Gibraltar, offer crypto licenses to both. Companies that want to operate as exchanges must apply for a cryptocurrency exchange license.
Advantages of Having a Cryptocurrency License
Reduce the risk of being shut down
When a company applies for a special licence, it is usually granted because the government wants to promote the development of the industry. Therefore, the government may shut down companies without a license. With a special crypto licence, however, regulatory authorities can’t shut down a company for lack of a license.
Better access to financial resources
When a company applies for a special crypto licence, it has better access to financial resources, such as venture capital, thanks to the government’s oversight of the industry. This is particularly true for jurisdictions where cryptocurrency licenses are mandatory.
Having a special crypto licence shows that the company has passed the government’s scrutiny and is following regulatory compliance. This means that the company has a good reputation and is less likely to engage in fraudulent activities.
A special crypto licence also provides more credibility for a company and its products since government agencies have confirmed that the company is legitimate. –
Better communication with regulators
When a company has a special crypto licence, it can communicate more easily with regulators. A company with a special licence has direct access to regulators and can more easily ask them questions. This leads to better communication and more efficient solutions.
Countries with mandatory cryptocurrency licenses
Gibraltar introduced a new law in 2018 that makes it mandatory for crypto entities to obtain a license from the Gibraltar Financial Services Commission (GFSC). The law came into effect in April 2018, and it also applies to non‐Gibraltar companies that want to offer services to residents.
Malta’s Malta Financial Services Authority (MFSA) introduced the Virtual Financial Asset Act (VFAA) in July 2018 to regulate the crypto and blockchain industry. The VFAA requires companies that want to provide exchange services for cryptocurrencies to obtain a licence from the MFSA, and foreign companies to also apply for a licence.
The majority of the states in the US have introduced a licensing programme for crypto exchanges. These states, such as New York, Texas, and California, all have different licensing requirements and procedures.
In December 2018, Hong Kong published a consultation paper that proposed the introduction of a licensing regime for crypto exchanges and other entities. However, nothing has been passed yet.
China’s government has been very strict when it comes to cryptocurrencies, and it has taken extreme measures to suppress the industry. The authorities have shut down local crypto exchanges and ICOs, and they have also blocked access to overseas crypto exchanges.
Cryptocurrency licenses are issued by regulators to companies that engage in activities related to cryptocurrencies, such as running crypto exchanges. These licenses are beneficial to companies and to end users, as they provide better access to financial resources, a reputation boost, and better communication with regulators. In addition, the introduction of a licensing programme for crypto exchanges has made it harder for malicious actors to break the law, as these actors cannot obtain a licence. That being said, not all jurisdictions require companies to obtain a special crypto licence. In these jurisdictions, companies can operate freely and without having to get a special licence.