On January 24, 2019, the UK financial regulator, the Financial Conduct Authority (FCA), released a 50-page consultation document titled “Guidelines on Cryptocurrency Assets.”
As the likelihood of a clear regulatory framework in the UK becomes increasingly likely, it is time to reassess how other cryptocurrency markets, especially major countries, approach cryptocurrencies at a legal level.
Crypto-Assets Guide Review: How does the UK treat virtual currencies?
Given the tone of the latest FCA report, the government appears to be leaning toward a more neutral approach toward cryptocurrencies.
The main goal of the document is to make the regulation of cryptocurrency market participants more transparent. The Financial Conduct Authority aims to help market participants understand whether their chosen digital assets are within the regulatory scope, what regulations apply to their business, and whether these businesses need to be authorized.
In the document, the UK regulator outlines various possible definitions of crypto assets and the laws that currently apply to these cryptocurrencies. The agency noted that crypto assets could be considered “specified investments” under the National Regulated Activities Order (RAO) or “financial instruments” regulated by the market in the Financial Instruments Directive II. The regulator also mentioned that these assets could be subject to the Electronic Money Regulation or the Payment Services Regulation.
The FCA’s consultation paper then categorizes cryptocurrencies into three categories: transaction tokens, security tokens, and utility tokens.
According to the agency, exchange tokens are “tokens that are not issued or backed by any central authority and are intended to be used as a means of exchange.” The FCA cited Bitcoin (BTC) and Litecoin (LTC) as examples of how Bitcoin is decentralized. The regulator also added that such tokens can be used to buy and sell goods and services without going through traditional intermediaries such as banks.
Security tokens are assets that are “identical or similar to traditional instruments such as shares, bonds or units in a collective investment scheme”. The FCA added that these tokens are likely to fall within the remit of national regulated activities orders and therefore they are “in the regulatory purview” of the regulator. The FCA did not mention specific examples of such security tokens. Cryptocurrencies known as utility tokens are those that give users access to a product but do not confer the same rights as security tokens and therefore are not covered by the regulatory regime unless they can be defined as e-money.
The Financial Conduct Authority of the United Kingdom cited data previously obtained by the UK Crypto Assets Task Force, pointing out that there are currently no more than 15 peer-to-peer cryptocurrency exchanges in the UK. The combined daily trading volume of these exchanges is about US$200 million, accounting for about 1% of the global daily cryptocurrency trading volume. In addition, there are 56 projects in the UK that have conducted initial coin offerings (ICOs), less than 5% of the world. This means that the size of the cryptocurrency market in the UK is still relatively small.
However, despite the small size of the UK cryptocurrency market, in December 2018, the UK Financial Conduct Authority revealed that it was investigating 18 companies using cryptocurrencies, and the UK Tax Service published detailed tax legislation for private cryptocurrency holders for the first time. As for the UK Financial Conduct Authority's consultation document, the agency is asking the public to comment on the document by April 5. The final version of the document will be submitted in the summer of 2019.
As a result, the UK may soon join the ranks of countries taking clear regulatory steps towards cryptocurrencies.
Japan
The status of cryptocurrency: a legally recognized payment method
Japan is one of the world's largest cryptocurrency markets. According to data collected by the Financial Services Agency (FSA), there are about 3.5 million cryptocurrency investors in Japan, and these investors trade more than $97 billion a year. Most of these investors are reportedly businessmen around 30 years old. In addition, a report from Japan also shows that 14% of young men in Japan are investing in cryptocurrencies.
The FSA’s actions against the Japanese cryptocurrency market are particularly active given the sheer size of the market, and due to its political stance, the Japanese government’s attitude towards the domestic cryptocurrency market can be said to be very positive relative to other countries.
Moreover, Japan was one of the first countries to legalize Bitcoin. Since May 2016, this cryptocurrency and other currencies can be legally accepted as a form of payment in the country. However, Japan still does not define cryptocurrencies as legal tender. In April 2017, Japan's Local Payment Services Act came into effect: the document recognized cryptocurrencies as a form of payment and outlined local regulatory measures for cryptocurrency exchanges and ICOs.
According to local media reports in December last year, the Japanese Financial Services Agency decided to classify Bitcoin and other cryptocurrencies as "crypto assets." The government was also worried that because cryptocurrencies are called "virtual currencies," investors would mistakenly believe that they were buying government-approved legal tender.
China
Status of Cryptocurrency: Unrecognized, Trading Prohibited
China used to be a huge player in the cryptocurrency market, with the vast majority of the world’s bitcoin miners (estimated at 50% to 70% in 2017) and bitcoin trading volume coming from China. However, since the government cracked down on local exchanges and ICOs in September 2017, miners and trading volume have fallen sharply. Of course, China has not completely given up on crypto, but has become a serious blockchain power.
The government said that domestic regulators do not recognize cryptocurrencies as legal tender or a tool for retail payments, and the Chinese banking system does not accept any cryptocurrencies.
USA
The status of cryptocurrencies: Different regulatory agencies have different characterizations and attitudes
In the United States, Congress has ultimate authority over federal regulatory agencies such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) and requires these agencies to follow laws enacted by Congress.
However, Congress has remained silent on regulating and defining cryptocurrencies. Meanwhile, different regulators have taken steps to regulate cryptocurrencies, but each has its own way of defining them.
The SEC considers cryptocurrencies to be securities. According to the 70-year-old Howey Test, the definition of a security involves the investment of money in a common enterprise where investors expect profits to come primarily from the efforts of others. Nevertheless, the SEC ruled that Ethereum (ETH) and Bitcoin are not securities, meaning that ICOs for these assets will not be reevaluated by the regulator. The regulator has been shutting down "unregistered securities projects" during its comprehensive investigation.
The Commodity Futures Trading Commission, which controls commodity derivatives trading, says that tokens are commodities. At the same time, in their view, Bitcoin is more like gold than traditional currencies or securities because Bitcoin has no government backing and no responsibilities tied to it.
The Financial Crimes Enforcement Network (FinCen) believes that tokens are money. They believe that ICO sales are subject to money transmission regulations under the Bank Secrecy Act, so projects need to register with the government, collect customer information, and report any suspicious financial activities.
The U.S. Internal Revenue Service (IRS) considers cryptocurrencies not currencies but property, which means that when cryptocurrencies are sold at a profit, the government will impose capital gains taxes on investors.
However, the complex regulatory landscape in the United States may change in the future. At the end of December last year, two congressmen proposed a bipartisan bill called the Investment Classification Act, which aims to prevent the US government from over-regulating the domestic cryptocurrency sector. The bill further provides clearer instructions on ICO registration and tax policies.
Germany
Cryptocurrency’s place: Private money
Cryptocurrencies are not considered legal tender in Germany, but the Ministry of Finance has recognized them as "private money" since 2013. Therefore, any profits made from trading, mining, or exchanging Bitcoin or altcoins are subject to capital gains tax. However, according to the Income Tax Act, if investors hold these cryptocurrency assets for more than one year, then holders can qualify for tax exemption.
Cryptocurrencies appear to be more popular among young people. According to a survey conducted by the Consumer Center of Hesse and Saxony in November last year, more than a quarter of people aged 18 to 29 were interested in buying digital assets.
Meanwhile, Germany’s Federal Financial Supervisory Authority (BaFin) has been taking a rather tough stance on ICOs, publishing a report on unauthorized initial coin offerings and warning individual investors to “stay away from such projects.” In addition, BaFin has called for international regulation in the field.
Switzerland
Cryptocurrency’s Status: Property
Switzerland is known for its friendly attitude towards cryptocurrency-related technologies, with the famous Crypto Valley (located in Zug). In Switzerland, cryptocurrencies are considered assets. According to a report published by the Swiss Federal Council in 2014, the Swiss government classifies cryptocurrencies as "virtual currencies," or more specifically, "a digital form of value that can be traded on the Internet but is not accepted as legal tender anywhere."
South Korea
The Status of Cryptocurrencies: Yet to Be Defined
South Korea has been a leader in the cryptocurrency industry since the investor boom in 2017. In July 2017, South Korea's local Bitcoin exchange market processed more than 14% of global Bitcoin transactions, making it the third largest cryptocurrency exchange market after the United States and Japan. But not long ago, South Korea's cryptocurrency industry was hit by a Chinese-like blanket ban on ICOs, which was implemented by South Korea's financial regulator and lifted later in May 2018. At the same time, South Korea has also made continuous progress in the field of fintech and steadily become an international blockchain center.
Although there are many regulatory uncertainties in South Korea during this process, the form of regulation in South Korea will gradually become clear in the near future. Just at the end of December last year, South Korean lawmakers proposed as many as six bills to regulate the cryptocurrency industry. These proposed legislative schemes aim to provide more protection for private investors and address deficiencies in "the current law's definition of virtual currency and regulations on virtual currency transactions."
malta
The status of cryptocurrency: digital medium of exchange, unit of account, store of value
Malta is known as the Blockchain Island. The country has developed a very cryptocurrency-friendly environment, and several foreign cryptocurrency exchanges, including OKx, Binance, and BitBay, have established their operations here.
In July 2018, the local parliament passed and enacted three distributed ledger technology bills: the Digital Innovation Authority Act, the Innovative Technology Arrangements and Services Act, and the Virtual Financial Assets Act.
Silvio Schembri, undersecretary for financial services, digital economy and innovation in the Maltese prime minister’s office, announced the bill on Twitter, saying that Malta became “the first jurisdiction in the world to provide legal certainty in this area.”
Under the Virtual Financial Assets Act, cryptocurrencies are officially referred to as virtual financial assets (VFA), likely to avoid the stigma that the term “cryptocurrency” might carry: for example, ICOs have been named initial virtual financial asset offerings, and cryptocurrency exchanges have become virtual financial asset exchanges.
Specifically, virtual financial assets refer to "any form of digital media record used as a digital medium of exchange, unit of account or medium of value storage", but such assets "are not electronic money, financial instruments or virtual certificates". Virtual certificates are only allowed to be used on the "DLT platform that issued the certificate", and the corresponding funds are only allowed to be redeemed on the "platform of the DLT asset issuer".
Malaysia
The Status of Cryptocurrencies: Securities
Starting January 15, 2019, cryptocurrencies are classified as securities in Malaysia, meaning they fall under the jurisdiction of the Securities Commission of Malaysia. Crypto exchanges or ICOs that continue to operate without the regulator’s approval could face 10 years in prison and fines of up to $2.4 million.
However, these changes also bring a glimmer of hope to the country’s cryptocurrency sector: According to Malaysia’s Finance Minister Lim Guan Eng, the government sees the potential of cryptocurrencies and blockchain to boost the country’s economy:
Singapore
The status of cryptocurrency: not legal tender and unregulated
The Monetary Authority of Singapore (MAS) expanded the country's existing regulatory regime to include certain cryptocurrencies under its jurisdiction in November 2018. The central bank introduced a mandatory licensing system for payment service providers and required them to apply for one of three licenses depending on the nature and scale of their cryptocurrency activities. However, the MAS has previously stressed that cryptocurrencies are not legal tender in Singapore and the agency does not regulate them.
Italy
Status of Cryptocurrency: Unregulated
A committee of the Italian Senate has passed an amendment to the blockchain industry, which appears to be the first regulatory move of its kind in Italy and will gradually make Italy a blockchain-oriented country. The document published on the Senate website shows that the amendment provides basic industry terms for blockchain, such as the definition of distributed ledger technology (DLT)-based technology and smart contracts.
The document also states that blockchain-powered digital data records will give documents legal validity when they are registered.
Of course, the decree now needs further approval from the Italian Parliament.
Currently, there are no existing regulations in the country as far as cryptocurrencies are concerned. However, the Italian Ministry of Economy and Finance has been working on a bill that aims to classify the use of cryptocurrencies in Italy. Interestingly, the decree clearly stipulates how and when "service providers related to the use of digital currencies" should report their related activities to the government, which means that the country's regulation of cryptocurrencies will be stricter.
