Cryptocurrencies have evolved from speculative investments into a new asset class, prompting governments worldwide to explore methods of regulating cryptocurrencies. As of September 2024, some governments have established frameworks to provide protection for users, while others are waiting for the right moment.
Key Takeaways
As cryptocurrencies become an increasingly important factor in the global investment landscape, countries have adopted different approaches to regulating 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 all busy battling it out in court.
In other countries, cryptocurrencies have different classifications and tax treatments.
United States
In 2022, the US announced a new framework that opened the door for further regulation. The new directive shifts power to existing market regulators, such as the 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 filed against cryptocurrency-focused companies and projects, such as actions against Ripple, Coinbase (COIN), Binance (BNB), and many others regarding their crypto products and services.
However, in 2023, a regional appellate court ruled that XRP sold by Ripple constituted a securities offering only when sold to institutions and not when sold on exchanges. This was a partial victory for the crypto industry – subsequently, another ruling in November overturned the Commission's rejection of Grayscale's application to convert its Bitcoin ETF trust into a Bitcoin-holding ETF. The court ordered the Commission to re-evaluate 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 what framework is introduced or the powers granted to regulators, the US continues to evolve.
As Gary Gensler, chairman of the SEC, has stated, this struggle may continue, 'It (approval) should never be taken to imply that the Commission is willing to approve standards for the listing of crypto asset securities. This approval also does not imply the Commission's view on the status of other crypto assets under federal securities law or that certain crypto asset market participants are currently in compliance with federal securities law. As I have said before, without prejudging any particular crypto asset, the vast majority of crypto assets are investment contracts, and thus subject to federal securities law... 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 are, by definition, decentralized and are 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 engaged in the activity to completely shut down operations or relocate to jurisdictions with a more favorable regulatory environment. In September 2021, cryptocurrencies were completely banned.
Canada
While cryptocurrencies are not considered legal tender in Canada, the country is more proactive in cryptocurrency regulation than others. Canada became the first country to approve a Bitcoin exchange-traded fund (ETF), 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 crypto trading platforms and dealers to register with provincial regulators.
Canada classifies all crypto investment companies as money services businesses (MSBs) and requires them to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). From a tax perspective, Canada's stance on cryptocurrencies is similar to that of other goods.
UK
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, expanding existing laws concerning all crypto assets, services, and providers.
There are specific reporting requirements related to cryptocurrency concerning Know Your Customer (KYC) standards, as well as Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT). Although investors still need to pay capital gains tax on profits from crypto transactions, more broadly, taxation depends on the type of crypto activity undertaken and the individuals involved in the transactions.
The UK prohibits trading in cryptocurrency derivatives.
Cryptocurrency exchanges and custodial wallet providers must comply with reporting requirements set forth 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 has committed a financial sanctions offense, it must notify OFSI as soon as possible.
Japan
Japan has taken a gradual approach to cryptocurrency regulation, treating it 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, of which all cryptocurrency exchanges are members. Japan treats transaction profits gained through cryptocurrencies as miscellaneous income and taxes investors accordingly.
The country has been working to refine regulations, including taxation. In September 2022, the government announced that remittance rules will be introduced as early as May 2023 to prevent criminals from using cryptocurrency exchanges for money laundering. The (Prevention of Money Laundering Act) has been amended to allow for the collection of customer information.
Australia
Australia classifies cryptocurrencies as legal property, subject to capital gains tax. Exchanges can operate freely in the country as long as they register 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 providing privacy coins, which are cryptocurrencies that maintain anonymity by obscuring the flow of funds in their networks. 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 published 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 against 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 unregulated stablecoins.
Singapore enjoys a reputation as a cryptocurrency safe haven in part due to the absence of taxes on long-term capital gains. However, the country taxes 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 Korea 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 South Korean government's (Virtual Asset User Protection Act) came into effect. The law formally designates the Financial Services Commission as the regulatory authority for virtual assets and outlines their legal and illegal uses. Additionally, the law requires issuers or service providers to adhere to certain practices to ensure user protection.
India
India remains cautious about cryptocurrency regulation, neither legalizing it nor penalizing its use. A bill is currently circulating that would ban all private cryptocurrencies in India, but it has not yet been voted on. All cryptocurrency investments are subject to a 30% tax, and cryptocurrency transactions may be subject to a 1% withholding tax (TDS).
Overall, India is still hesitant about 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 from them.
Brazil
Bitcoin is not legal tender in Brazil, but the country passed a law that legalizes cryptocurrencies as a payment method nationwide, thus driving the adoption of digital currency. On November 29, 2022, the Brazilian Chamber of Deputies approved a regulatory framework that legalizes the use of cryptocurrencies as a means of payment in the country.
The law has been enacted and came into effect on June 20, 2023, as Law No. 14,478 'Virtual Asset Legal Framework.' According to Decree No. 11,563 of June 13, 2023, the Central Bank of Brazil has been designated as the regulatory authority responsible for overseeing, authorizing, and supervising the operations of cryptocurrency exchanges.
European Union
Cryptocurrencies are legal in most EU countries, although exchange governance depends on individual member states. Meanwhile, tax rates also vary across 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 regulation of the crypto asset market (MiCA) – a framework designed to strengthen consumer protection, clarify the behavior of the crypto industry, and introduce new licensing requirements.
In April 2023, Parliament approved measures allowing legislation that requires certain crypto service providers to apply for operating licenses. MiCA received provisional 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 protecting users.
Is there any regulation on cryptocurrencies?
Globally, regulations governing cryptocurrencies are still being researched, developed, and implemented. Many countries are formulating policies and legislation, while others lag behind for various reasons.
Which state in the US is friendly towards cryptocurrencies?
Many states have a friendly stance towards cryptocurrencies, such as California, Florida, and Texas.
What are the rules for cryptocurrency trading?
It depends on where you live and the laws in place. You may also consider following a few general rules.
Bottom Line
Despite the existence of cryptocurrencies since 2009, governments and regulators worldwide are still exploring how to manage their use. It is essential to protect consumers and businesses from fraudulent activities and take preventative measures against the illegal use of cryptocurrencies. Many countries are making progress, but it is a slow and contentious process.