Article reprinted from: Mankiw Blockchain
In the booming global financial technology, the virtual currency asset market has become a focus. Different countries and regions have built their own unique regulatory frameworks and licensing systems based on their own financial systems, regulatory objectives and market demands.
This article will delve into the licensing situation of virtual currency asset regulation in major European and American countries (the United States, the United Kingdom, Canada, and Switzerland), and provide a detailed analysis of their regulatory systems, policies and regulations, and the application requirements and scope of application of various licenses, to provide comprehensive and accurate information reference for relevant practitioners, investors, and those who are concerned about virtual currency asset regulation.
USA
1. Overview of the U.S. Virtual Currency Regulatory System
The U.S. virtual currency regulatory system is known for its complexity and multi-layered nature, covering multiple federal and state-level regulatory agencies. These institutions implement corresponding regulatory measures based on the different functions, properties and uses of virtual currencies. The following is a detailed review of the U.S. virtual currency regulatory framework and major institutions.
1. Federal level regulation
(1) Securities Law Regulation: The U.S. Securities and Exchange Commission (SEC) plays an important role in virtual currency regulation, and is primarily responsible for reviewing whether virtual currencies constitute securities. If virtual currencies meet the criteria of the Howey test (investment contract test), such as raising funds through ICO (initial coin offering), they are considered securities and must comply with relevant provisions of the (Securities Law). In recent years, the SEC has taken enforcement actions against multiple unregistered ICOs and certain cryptocurrency trading platforms to maintain market order and investor interests.
(2) Commodity law regulation: The U.S. Commodity Futures Trading Commission (CFTC) defines mainstream virtual currencies such as Bitcoin and Ethereum as commodities and regulates their derivative markets (such as futures and options). Although the CFTC has limited direct supervision over the spot market, it has enforcement power against market manipulation and fraud to ensure market fairness and transparency.
(3) Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Supervision: The Financial Crimes Enforcement Network (FinCEN) is the main agency responsible for anti-money laundering and counter-terrorist financing supervision. It requires virtual currency exchanges and custody service providers to register as money service businesses (MSBs) and comply with the relevant provisions of the (Anti-Money Laundering Act) (AML) and the (Bank Secrecy Act) (BSA). These companies are required to implement customer due diligence (KYC) procedures and report suspicious transactions to prevent the flow of illegal funds.
(4) Tax supervision: The U.S. Internal Revenue Service (IRS) treats virtual currency as property rather than currency and imposes capital gains tax on its holding and trading. In addition, the use of virtual currency to pay for goods or services may also generate taxable events. IRS tax supervision ensures the tax compliance of virtual currency transactions and provides a stable source of tax revenue for the government.
2. State-level regulation
There are significant differences in attitudes and regulations regarding virtual currencies across the United States. Among them, New York State’s BitLicense is one of the strictest regulatory frameworks, requiring virtual currency businesses to apply for a license and meet specific compliance requirements. Some states have adopted looser regulatory policies to attract cryptocurrency companies.
This interstate regulatory difference poses challenges to virtual currency companies and has prompted the U.S. government to seek to promote a nationwide unified virtual currency regulatory framework.
2. Important policies and legislation
1. (Digital Asset Market Structure Bill) (Draft): This bill aims to clarify the regulatory boundaries of securities-type and commodity-type crypto assets and provide legal protection for the healthy development of the virtual currency market. By clarifying the scope and standards of supervision, the bill will help reduce the risks of regulatory arbitrage and cross-market manipulation.
2. (Digital Tax Compliance Act) (DAC8): This act focuses on the tax transparency of virtual currency transactions and requires virtual currency exchanges and wallet providers to report transaction information to tax authorities. This will help combat tax evasion and improve tax compliance.
3. Executive Order: In 2022, the Biden administration issued an (Executive Order on the Development of Digital Assets), emphasizing the promotion of innovation and strengthening consumer protection. The executive order requires regulatory agencies to strengthen coordination and cooperation, promote the healthy development of the virtual currency market, and protect the legitimate rights and interests of consumers.
(III) Main licenses: MSB, BitLicense
1. Money Services Business (MSB) License
Money Service Business is a registration and regulatory requirement imposed by the government or regulatory authorities on companies that provide financial services such as money transfer, payment services or currency exchange.
Regulator: Financial Crimes Enforcement Network (FinCEN) under the U.S. Treasury Department
Scope of application: (1) Money Transmission: providing services to transfer funds from one place to another. For example, cross-border payments made through banks, wire transfers, or online platforms. (2) Currency Exchange: providing exchange services between currencies, such as exchanging US dollars for euros, RMB for US dollars, etc. (3) Issuance and sale of payment instruments: for example, companies that provide traveler's checks, prepaid cards or e-wallet recharge services. (4) Digital currency services: including cryptocurrency transactions, wallet services, and the exchange and trading of Bitcoin or other digital currencies.
Require:
(1) Registration: The business must register as an MSB with FinCEN and comply with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.
(2) Compliance Program: Develop and implement an effective AML compliance program, including customer due diligence (KYC) and suspicious activity reporting.
(3) Reporting obligations: Submit reports to FinCEN regularly, such as large cash transaction reports and suspicious activity reports.
2. New York State Virtual Currency License (BitLicense)
BitLicense, "New York State Department of Financial Services VirtualCurrencyLicense", is a regulatory framework launched by the New York State Department of Financial Services (NYDFS) in 2015, specifically for regulating companies engaged in virtual currency-related businesses in New York State. Applications are divided into the following two types based on the specific business the company is engaged in:
VirtualCurrencyLicense: A license for basic virtual currency business. This type of license is applicable to businesses that do not involve the transmission of legal currency.
Virtual Currency and Money Transmitter License: Applicable to companies that not only deal in virtual currency, but also involve converting virtual currency into legal currency or making transfers.
Regulator: New York State Department of Financial Services (NYDFS)
Scope of application: Companies engaged in virtual currency business in New York State, including (1) receiving, storing and transferring virtual currency. (2) virtual currency exchange: exchanging virtual currency for U.S. dollars or other currencies, or vice versa. (3) virtual currency trading: buying and selling virtual currency such as Bitcoin. (4) payment processing: payment services using virtual currency.
Require:
(1) Capital requirements: Meet the minimum capital requirements prescribed by NYDFS to ensure financial soundness.
(2) Compliance Program: Establish a comprehensive compliance and risk management program, including AML, KYC, and cybersecurity measures.
(3) Reporting obligations: Submit financial and compliance reports to NYDFS on a regular basis.
U.K.
1. The main regulatory framework in the UK
The United Kingdom (and Switzerland below) are not EU member states and have their own independent legal framework for virtual assets, which is not under the MicA framework of EU member states.
1. Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)
Under the Anti-Money Laundering Regulations 2017 (as amended in 2020), all virtual currency businesses must register with the FCA.
Enterprises need to meet: Customer Due Diligence (KYC): verify user identity and assess transaction risks. Suspicious Transaction Report (SAR): report suspicious transactions to regulators in a timely manner. Compliance Plan: establish internal control processes to comply with AML/CFT regulations.
2. Consumer Protection
Virtual currencies themselves are not considered legal tender or financial instruments, so user funds are not protected by the Deposit Protection Scheme (FSCS). The FCA has imposed a ban on some crypto derivatives (such as CFDs, options, etc.) to prevent retail investors from suffering heavy losses due to high volatility.
3. Tax policy
Capital Gains Tax (CGT): The sale of virtual currency may generate capital gains tax. Income Tax: Profits from mining or receiving virtual currency payments may be subject to income tax. Value Added Tax (VAT): Some virtual currency transactions involve VAT, but virtual currency used for payment is generally exempt from VAT.
4. Stablecoin Regulation
The UK plans to impose stricter regulation on stablecoins, especially those used as a means of payment.
The Bank of England views stablecoins as a potential systemic risk and proposes transparency requirements for reserve assets and operational audits.
5. Market abuse and fraud prevention
The FCA warns investors of the high risks of investing in virtual currencies and encourages them to trade through registered service providers.
Unregistered or unlicensed firms may be placed on the FCA’s warning list.
1. Financial Conduct Authority (FCA)
The FCA is the core agency for virtual currency regulation in the UK.
Regulated businesses include: cryptocurrency exchanges, custodial wallet service providers, etc.
2. Bank of England (BoE)
Regulate stablecoins and payment systems.
Focus on risks related to financial stability and play a leading role in future central bank digital currency (CBDC) research.
3. HM Revenue and Customs (HMRC)
Responsible for virtual currency-related tax policies, including capital gains tax and value-added tax.
(III) Main license: Virtual asset service provider registered with FCA
The FCA's Virtual Asset Service Provider (VASP) is a license established by the UK government under the Anti-Money Laundering Regulations 2017 (revised in 2020), requiring companies engaged in virtual asset-related businesses to register with the FCA (Financial Conduct Authority) and be regulated. Its core goal is to prevent money laundering and terrorist financing while promoting transparency and compliance in the virtual asset industry.
1. Enterprises that need to apply for VASP licenses include:
(1) Virtual currency exchanges:
Provide fiat currency and cryptocurrency exchange services.
Providing cryptocurrency exchange services (such as trading between Bitcoin and Ethereum).
(2) Custodial wallet service provider:
Provide services for hosting virtual assets, including storing private keys and protecting the security of digital assets.
(3) Other virtual asset services:
Activities involving ICO/IEO (initial coin offering), token sales, etc.
2. When applying for a virtual asset service provider license, the company must meet the following requirements:
(1) Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) Compliance
Companies must develop and implement a comprehensive anti-money laundering and counter-terrorist financing program that includes:
Customer Due Diligence (KYC): Verify customer identity and monitor transaction activities.
Suspicious Activity Report (SAR): When unusual transactions are discovered, they must be reported to the FCA.
Risk Assessment: Conduct dynamic risk assessments of customers and business relationships.
Data Retention: Transaction and KYC records are kept for at least 5 years.
(2) Senior management team review
The FCA will conduct a "Fit and Proper" test on the management of the company:
Managers need to have compliance experience and a good ethical record.
A criminal record certificate and financial background check results are required.
(3) Funding and resource requirements
Applicants must demonstrate that they have sufficient financial resources and technical capabilities to support operations.
There needs to be a clear business model and compliant funding plan.
(4) Appointment of Compliance Officer
Firms are required to appoint a Compliance Officer to oversee the implementation of AML/CFT policies and report to the FCA.
(5) Network security and technical requirements
Companies need to demonstrate that their IT systems and cybersecurity measures meet industry standards and are able to protect customer funds and sensitive information.
Conduct security audits and stress tests regularly.
(6) Consumer Protection
It is necessary to ensure that customer assets are separated from company operating funds.
The terms of service and potential risks must be clearly disclosed to customers.
Canadian MSB license
1. Canada’s key regulatory framework
1. Money Services Business (MSB) Registration
Effective June 1, 2020, Canada will include virtual currency service providers (VASPs) in the definition of MSBs, including:
Provide virtual currency and legal currency exchange services.
Provide virtual currency exchange services.
Provide virtual currency transfer services.
2. Applicability of Securities Law
Virtual currencies may be considered securities or derivatives, and the following businesses must comply with relevant securities regulations:
Crypto asset exchanges: need to register with provincial securities regulators.
Token issuance (ICO/IEO): If the token has the nature of an investment contract, it must comply with securities regulations.
Investment management: Investment funds involving virtual assets must obtain registration as an investment manager.
3. Tax policy
The Canada Revenue Agency (CRA) considers virtual currencies to be commodities rather than legal tender, which involves the following tax requirements:
Capital gains tax: Selling or exchanging virtual currencies requires reporting capital gains.
Income tax: Income from mining or receiving virtual currency payments must be included in taxable income.
Goods and Services Tax (GST)/HST: Certain virtual currency transactions may apply.
4. Consumer Protection
Canada requires virtual asset platforms to protect user funds, usually through the use of escrow mechanisms.
Platforms must clearly disclose transaction risks and prohibit misleading advertising.
5. International cooperation
Canada complies with the Financial Action Task Force (FATF) virtual asset regulatory standards to ensure consistency with international AML/CFT frameworks.
2. Main regulatory agencies
1. Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
Responsibilities: Responsible for anti-money laundering and counter-terrorist financing supervision of virtual currency service providers (VASPs).
Registration requirements: All companies engaged in the business of trading or transmitting virtual currencies must register with FINTRAC as a money services business (MSB).
2. Canadian Securities Administrators (CSA)
Responsibilities: Regulate crypto-asset activities involving securities or investment contracts (such as exchanges, investment platforms, etc.).
Scope of application: When virtual currencies are considered securities, they must comply with (Securities Law) requirements.
3. Provincial financial regulatory agencies
For example, the Ontario Securities Commission (OSC) exercises direct regulation over cryptoasset platforms within the province.
(III) Main license: MSB
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has included virtual currency-related businesses in the regulatory scope of the Money Service Business (MSB) license. Companies holding MSB licenses must comply with relevant regulations on anti-money laundering (AML) and counter-terrorist financing (CFT).
1. Scope of application
The following businesses need to apply for an MSB license:
(1) Providing exchange services between virtual currency and legal currency.
(2) Providing exchange services between virtual currencies.
(3) Providing virtual currency transfer services (such as transfer, payment, and clearing).
(4) Providing any other financial services related to virtual currencies.
2. License application requirements
To apply for an MSB license, you must meet the following conditions and requirements:
(1) Registration requirements
·Registration with FINTRAC: Any company engaged in virtual currency business must register as an MSB.
·The registration application must be completed before the company starts business.
(2) Anti-Money Laundering and Counter-Terrorist Financing Compliance (AML/CFT)
Companies must develop and implement an AML/CFT compliance program that includes:
Risk Assessment: Assess the risk of money laundering and terrorist financing based on the business model.
Customer Due Diligence (KYC):
Verify the identity of the customer (proof of identity, proof of address, etc.).
Monitor customer transactions and identify suspicious behavior.
Record keeping: Keep all transaction records and customer information for at least 5 years.
Reporting obligations: Suspicious transaction reporting (STR): Identify and report unusual transactions.
Large virtual currency transaction reporting: Transactions exceeding 10,000 Canadian dollars in a single transaction must be reported to FINTRAC.
Compliance Officer Appointment: Appoint a Compliance Officer to oversee the implementation of the compliance program.
(3) Technical and safety requirements
·Secure technical measures must be adopted to protect customer assets and data.
Conduct regular cybersecurity audits to ensure that technical systems meet industry standards.
(4) Funding and financial requirements
·The company needs to demonstrate that it has sufficient financial resources to support its operations.
Ensure that client funds are separated from company funds to avoid conflicts of interest.
Switzerland
Switzerland is known as the "heaven of cryptocurrency and blockchain". Its regulatory framework supports innovation while focusing on financial stability and anti-money laundering (AML) requirements. Switzerland adopts the principle of technological neutrality and adjusts existing laws and regulations to cover virtual currency and blockchain-related businesses.
1. Switzerland’s key regulatory framework
The Swiss regulatory framework is based on existing financial regulations and is mainly divided into the following categories:
1. Anti-Money Laundering and Anti-Terrorist Financing (AML)
All businesses involved in virtual currency exchange, trading, custody or transfer services must comply with AML regulations.
Businesses must:
Registration as a financial intermediary (either through FINMA or a designated self-regulatory organization).
Implement customer due diligence (KYC).
Report a Suspicious Transaction (STR).
2. Financial Market Infrastructure Act (FMIA)
Tokens that are securities (such as stock tokens or bond tokens) are regulated by the (FMIA).
Any business providing a trading platform or custody service must meet the requirements of a securities exchange or financial market infrastructure.
3. Classification of Crypto Assets
FINMA classifies virtual assets into the following three categories:
(1) Payment tokens: mainly used for payment or transfer, such as Bitcoin and Ethereum; subject to anti-money laundering regulations, but not considered securities.
(2) Utility Tokens: provide access to blockchain applications or services; they are considered securities only when used as investment vehicles.
(3) Asset Tokens: represent rights to assets (such as debt, equity or physical assets); regulated by securities laws.
4. Blockchain and DLT Act
Introducing the legal status of DLT securities: Giving securities issued on DLT the same legal status as traditional securities.
Custody and bankruptcy protection: Clarify the legal responsibilities of DLT asset custodians and provide bankruptcy protection for custodial crypto assets.
2. Main regulatory agencies
1. Swiss Financial Market Supervisory Authority (FINMA)
Responsibilities: Responsible for regulating virtual currency businesses involving financial markets and financial services, especially those involving securities, payment and banking services.
Regulatory core:
Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).
Investor protection and market integrity.
Compliant with the Swiss Financial Market Infrastructure Act (FMIA) and the Anti-Money Laundering Act (AMLA).
2. Swiss National Bank (SNB)
Responsibilities: Focus on the potential impact of virtual currencies on monetary policy and financial stability.
3. Implementing bodies of the Blockchain and Distributed Ledger Technology (DLT) Act
Switzerland passed the Distributed Ledger Technology Act (DLT Act), regulating the legal status of DLT and crypto assets.
(III) Main license: FINMA
The Swiss Financial Market Supervisory Authority (FINMA) is responsible for managing and issuing various licenses related to virtual assets and financial services.
1. Banking License
Scope of application: Providing deposit services, crypto asset custody, and fiat currency exchange-related businesses. Cryptocurrency exchanges or platforms that hold customer funds usually require this license.
Main requirements:
Minimum capital requirement: At least CHF 10 million in capital.
AML Compliance: Implement Anti-Money Laundering (AML) and Customer Due Diligence (KYC) programs.
·Risk management: effective risk control system and internal audit mechanism.
·Separation of customer funds: Customer funds must be strictly separated from company funds to ensure fund security.
Regulatory advantages: After obtaining a banking license, the company can legally handle customer funds and attract more institutional investors.
2. Securities Dealer License
Scope of application
Trading platforms, brokers or token issuers that are involved in security tokens (e.g. asset tokens).
Providing securities trading, matchmaking services, or sales of tokenized assets to clients.
Main Requirements
· Capital requirement: minimum CHF 1.5 million.
Regulatory reporting: Submit transaction reports and financial data to FINMA on a regular basis.
Transparent operations: ensuring that the platform or service complies with the transparency and fairness requirements of the Financial Market Infrastructure Act (FMIA).
Compliance Program: Establish a strong internal compliance program to manage market risks and money laundering risks.
3. FinTech License
Scope of application
Targeting companies involved in innovative financial technologies, such as providing blockchain technology, smart contract services or DLT platforms.
Companies are allowed to accept customer deposits of up to CHF100 million, but they cannot use the funds for loans or interest payments.
Main Requirements
· Capital requirement: at least CHF 300,000.
Compliance obligations: comply with AML regulations; implement a strong KYC policy.
·Customer fund protection: Provide fund custody guarantee and clarify the scope of fund use.
Technical standards: ensuring the security and stability of the technical platform.
·Applicable advantages: Designed for small innovative companies, it lowers the high threshold for traditional banking licenses.
4. Asset Management License
Scope of application
·For companies that provide virtual assets or traditional financial asset management.
Includes fund management companies or businesses that manage tokenized assets.
Main Requirements
Capital requirements: Depending on the size of assets under management, capital requirements are usually between CHF 500,000 and CHF 2 million.
AML Compliance: Implementing anti-money laundering and counter-terrorist financing policies.
Reporting and transparency: Regular reporting of asset management activities to FINMA.
·Customer fund custody: Ensure the safe custody of customer funds and meet bankruptcy protection requirements.
Regulatory advantages
Attract high net worth clients and institutional investors and enhance corporate credibility.
Attorney Mankiw's Summary
Europe and the United States show diverse characteristics in the regulation of virtual currency assets.
The United States has established a complex multi-level regulatory system covering both the federal and state levels, with a variety of laws defining the scope of regulation. Its main licenses, such as MSB and BitLicense, are applicable to different virtual currency businesses, with strict requirements on registration, compliance, and reporting.
The UK uses the FCA as its core regulatory body to regulate virtual currency companies based on anti-money laundering, consumer protection, tax policies and other regulations. Its virtual asset service providers register for FCA licenses and require companies to meet compliance standards in multiple dimensions to prevent money laundering and protect consumer rights.
Canada includes virtual currency service providers in the definition of MSB, and regulates them through institutions such as FINTRAC, making regulations on the registration of money service businesses, the application of securities laws, and tax policies. Its MSB license application involves multiple requirements such as registration, compliance, technology, and funding.
Switzerland uses FINMA as the main regulatory agency and builds a regulatory framework based on existing financial regulations to regulate virtual currencies in a classified manner. The banking licenses, securities brokerage licenses, fintech licenses and asset management licenses issued by FINMA have different focuses in terms of scope of application and requirements, and are applicable to different types of virtual currency-related businesses, providing companies with a variety of options for conducting compliant businesses in Switzerland.
In general, the regulatory measures of these countries are aimed at balancing innovation and risk in the virtual currency market, protecting the rights and interests of investors, and maintaining financial market stability. As the virtual currency market continues to develop, regulatory policies will continue to evolve and improve.