Cryptocurrencies have evolved from speculative investments to a new asset class, prompting governments around the world to explore ways to regulate cryptocurrencies. By September 2024, some governments have developed frameworks to protect users, while others are waiting for the right moment.
Key Points
As cryptocurrencies become an increasingly important factor in the global investment landscape, countries are taking different approaches to regulate this asset class.
The EU has become the first to take measures requiring crypto service providers to detect and prevent the illegal use of cryptocurrencies.
The US is slowly moving towards regulation, but users, issuers, businesses, and regulators are busy battling it out in court.
In other countries, cryptocurrencies have different classifications and tax treatments.
United States
The US announced a new framework in 2022 that opened the door for further regulation. The new directive shifts power to existing market regulatory bodies, such as the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The SEC has begun to regulate the industry, as evidenced by a series of lawsuits against cryptocurrency-focused businesses and projects, such as those against Ripple, Coinbase (COIN), Binance (BNB), and many others related to their crypto products and services.
However, in 2023, a regional appeals court ruled that XRP sold by Ripple is considered a securities offering only when sold to institutions, and not when sold on exchanges. This was a partial victory for the crypto industry — another ruling in November overturned the commission's rejection of Grayscale's application to convert its Bitcoin ETF trust into an ETF that holds Bitcoin. The court ordered the commission to re-examine the application, ultimately leading to the approval of the first Bitcoin spot ETFs in January 2024 and Ethereum spot ETFs in July 2024.
The ongoing struggle between regulators, broker-dealers, investors, and the crypto industry indicates that, regardless of the framework introduced or the powers granted to regulators, the United States is still evolving.
As SEC Chair Gary Gensler stated, this struggle may continue, 'Its (approval) should not indicate that the commission is willing to approve the listing standards for crypto asset securities. This approval also does not signify the commission's view on the status of other crypto assets under federal securities law or that certain crypto asset market participants are currently not complying with federal securities law. As I have said in the past, without prejudging any specific crypto asset, the vast majority of crypto assets are investment contracts and therefore subject to federal securities laws... While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin.'
Central Bank Digital Currency (CBDC) is issued by central banks and backed by the government. Cryptocurrencies, by definition, are decentralized and not CBDCs, so this article does not discuss CBDCs.
China
The People's Bank of China (PBOC) prohibits cryptocurrency businesses from operating in the country, stating that they facilitate public financing without approval.
Additionally, China banned Bitcoin mining in May 2021, forcing many involved in the activity to shut down operations entirely or relocate to jurisdictions with more favorable regulatory environments. In September 2021, cryptocurrencies were completely banned.
Canada
Although cryptocurrencies are not considered legal tender in Canada, the country has been more proactive in cryptocurrency regulation than other countries. Canada became the first country to approve Bitcoin exchange-traded funds (ETFs), with several trading on the Toronto Stock Exchange.
For cryptocurrency trading platforms, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) require the country's cryptocurrency trading platforms and dealers to register with provincial regulatory authorities.
Canada classifies all cryptocurrency investment companies as money service businesses (MSBs) and requires them to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). From a tax perspective, Canada's attitude towards cryptocurrencies is similar to that of other goods.
United Kingdom
In October 2022, the UK House of Commons recognized crypto assets as regulated financial instruments. The (Financial Services and Markets Bill) became law in June 2023 and expanded the existing laws regarding all crypto assets, services, and providers.
There are specific reporting requirements related to Know Your Customer (KYC) standards and anti-money laundering (AML) and counter-terrorism financing (CFT) for cryptocurrencies. While investors still need to pay capital gains tax on profits from crypto transactions, tax liability more broadly depends on the type of crypto activities engaged in and the parties involved in the transactions.
The UK has banned cryptocurrency derivatives trading
Cryptocurrency exchanges and custodial wallet providers must comply with reporting requirements set by the Office of Financial Sanctions Implementation (OFSI). If a cryptocurrency company knows or has reasonable grounds to suspect that someone is subject to sanctions or committing a financial sanctions offense, they must notify OFSI as soon as possible.
Japan
Japan takes a gradual approach to cryptocurrency regulation, considering cryptocurrencies as legal property under the (Payment Services Act) (PSA). At the same time, cryptocurrency exchanges in the country must register with the Financial Services Agency (FSA) and comply with anti-money laundering/anti-terrorism financing obligations. Japan established the Japan Virtual Currency Exchange Association (JVCEA) in 2020, and all cryptocurrency exchanges are members. Profits generated from cryptocurrency transactions are classified as miscellaneous income and taxed accordingly.
The country has been working to refine regulations, including taxation. In September 2022, the government announced that remittance rules would be introduced as early as May 2023 to prevent criminals from using cryptocurrency exchanges for money laundering. (Proceeds of Crime (Money Laundering) Act) has been amended to allow the collection of customer information.
Australia
Australia classifies cryptocurrencies as legal property and requires capital gains tax to be paid. Exchanges can operate freely in the country as long as they are registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific anti-money laundering/anti-terrorism financing obligations.
In 2019, the Australian Securities and Investments Commission (ASIC) introduced regulatory requirements for Initial Coin Offerings (ICOs). It prohibits exchanges from offering privacy coins, which are cryptocurrencies that maintain anonymity by hiding the flow of funds in their network. In 2021, Australia announced plans to establish a licensing framework around cryptocurrencies and may introduce a Central Bank Digital Currency (CBDC). In October 2023, the Australian Treasury announced plans to introduce a regulatory framework, with a draft expected to be released sometime in 2024. If the framework is approved and implemented, there will be a 12-month transition period.
Singapore
Like the UK, this island nation classifies cryptocurrencies as property rather than legal tender. The Monetary Authority of Singapore (MAS) licenses and regulates exchanges under the (Payment Services Act) (PSA).
In 2022, Singapore issued guidelines warning digital payment token (DPT) providers to avoid promoting their services to the public.
In August 2023, the Monetary Authority of Singapore (MAS) announced a framework that will regulate the issuance of stablecoins in the country, requiring any issuer to meet specific standards. Stablecoins must obtain MAS approval to use the label 'MAS-regulated stablecoin' to distinguish them from non-regulated stablecoins.
Singapore enjoys a reputation as a cryptocurrency haven partly because long-term capital gains are not taxed. However, the country does tax companies that engage in regular cryptocurrency trading, treating the profits as income.
South Korea
In South Korea, cryptocurrency exchanges and other virtual asset service providers must register with the Korean Financial Intelligence Unit (KFIU) under the Financial Services Commission (FSC). South Korea also banned exchanges from issuing all privacy coins in 2021.
In 2023, the Korean government's (Virtual Asset User Protection Act) came into effect. This law officially appointed the Financial Services Commission as the regulatory body for virtual assets and outlined the legal and illegal uses of virtual assets. Furthermore, the law requires issuers or service providers to comply with certain practices to ensure user protection.
India
India remains cautious regarding cryptocurrency regulation, neither legalizing it nor penalizing its use. Currently, there is a bill in circulation that bans all private cryptocurrencies in India but has not yet been voted on. All cryptocurrency investments are subject to a 30% tax, while cryptocurrency transactions enjoy a 1% withholding tax (TDS).
Overall, India is still hesitating whether to completely ban cryptocurrencies or regulate them. The country's 2022 Finance Bill defines virtual digital assets as property and outlines tax requirements for income derived from them.
Brazil
Bitcoin is not legal tender in Brazil, but the country passed a law legalizing cryptocurrencies as a payment method nationwide, thereby promoting the adoption of digital currencies. On November 29, 2022, the Brazilian Chamber of Deputies approved a regulatory framework that legalized the use of cryptocurrencies as payment means in the country.
The bill has been enacted into law and came into effect on June 20, 2023, as Law No. 14,478 'Virtual Asset Legal Framework'. According to Decree No. 11,563 dated June 13, 2023, the Central Bank of Brazil was designated as the authority responsible for regulating, authorizing, and supervising the operation of cryptocurrency exchanges.
European Union
Cryptocurrencies are legal in most EU countries, although the governance of exchanges varies by member state. Tax rates also differ among countries within the EU, ranging from about 0% to 48%.
Recently, the EU's Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) came into effect, strengthening KYC/CFT obligations and standard reporting requirements.
In September 2020, the European Commission proposed the Regulation on Markets in Crypto-Assets (MiCA) — a framework to strengthen consumer protection, clarify conduct in the crypto industry, and introduce new licensing requirements.
In April 2023, Parliament approved measures allowing legislation requiring certain crypto service providers to apply for operating licenses. MiCA received temporary approval in 2022 and came into effect in July 2023. This legislation aims to provide regulators with the tools needed to track cryptocurrencies used for money laundering and terrorism financing while providing user protection.
Is there any regulation on cryptocurrencies?
Globally, cryptocurrency regulations are still being researched, formulated, and implemented. Many countries are developing policies and legislation, while others lag behind for various reasons.
Which US state is friendly towards cryptocurrencies?
Many states are friendly towards cryptocurrencies, such as California, Florida, and Texas.
What are the rules for cryptocurrency trading?
It depends on where you live and the laws that have been implemented. You may also consider following a few general rules.
Bottom Line
Although cryptocurrencies have existed since 2009, governments and regulators around the world are still researching how to manage their use. It is necessary to protect consumers and businesses from fraudulent activities and take preventive measures against the illegal use of cryptocurrencies. Many countries are making progress, but it is a slow and contentious process.