A Brief Report On Law & Cryptocurrency Regulations Around The World
Looking to understand cryptocurrency law & regulation in different countries? Here's a guide on how the regulation of cryptocurrency works across the world. Read now!
Cryptocurrency could be the future of how we define payments to be. Crypto is legalized in most parts of the world, but cryptocurrency regulations vary from country to country, with each having its own system of taxation on the asset. While some consider it as legal tender, others don’t, and almost every country attaches some sort of value to it definitely. The global cryptocurrency market stood at $1.49 billion in 2020 and is expected to reach nearly $5 billion by 2030.
Let us now look at what the cryptocurrency regulation is across the world, beginning with the country where cryptocurrency was first used for a transaction involving physical goods.
A Ready Reckoner on Crypto
Consideration for Cryptocurrencies
In the United States, despite being the first place where a retail bitcoin transaction took place, cryptocurrency regulation is done in different ways and is rarely considered a legal tender. However, some value is attached to it, both by several state governments and the IRS itself. The Financial Crimes Enforcement Network (FinCEN) in the United States considers cryptocurrency as having transmittable value, but does not consider it as legal tender.
According to the IRS, like other income modes, tax can be applied on bitcoin as well. It defines cryptocurrency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”. It issues tax guidelines accordingly for cryptocurrency. The IRS too does not consider cryptocurrency as legal tender.
Legality of Crypto Exchanges
How are cryptocurrency exchanges regulated in the United States? Cryptocurrency exchanges are considered legal across the United States, and they are regulated by the Bank Secrecy Act. When it comes to cryptocurrency regulations, the SEC considers them to be securities and therefore applies the rules that govern securities to both digital wallets and crypto exchanges. FinCEN wants all crypto exchanges and digital wallets to share information about the originator and beneficiary of every transaction involving cryptocurrency.
Future Regulations in the US
According to the FBI, the increase in crypto crime was as high as around 80% from 2020 to 2021. With increase in criminal activities, both globally and domestically, there is a call for more cryptocurrency regulations. A new rule by FinCEN will require cryptocurrency users to submit Suspicious Activity Reports (SAR) for every transaction that exceeds $10000 and require wallet owners to again identify themselves while sending more than $3000 in a single transaction. The rule is expected to be in force by Fall 2022. In 2021, new rules were also included in the bill released by the Biden administration. According to the bill, cryptocurrency exchanges were classified as brokers who also had to comply with AML/CFT regulations when monitoring and reporting transactions.
Consideration for cryptocurrencies
Despite Canada having active cryptocurrency regulations as early as 2014, there is no cryptocurrency regulation which allows their use as legal tender ever reported for cryptocurrencies. In January 2018, the Canada Central Bank classified cryptocurrencies as securities with the same laws applicable on them. Canada has levied tax on cryptocurrency transactions since 2013 and continues to do so.
Legality of Cryptocurrency exchanges
Cryptocurrency exchanges are considered legal. After amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in 2019, cryptocurrency exchanges came to be regulated in exactly the same manner as money service businesses. They are subjected to the same due diligence and have to record and report every cryptocurrency transaction. After further amendments made to the act in 2021, the concerned exchanges have to register with the Financial Transactions and Report Analysis Centre of Canada (FinTrac). In 2021, the Canadian Security Administrators (CSA) also required that crypto issuers disclose relevant risk factors and how they protect against loss and theft to customers.
Cryptocurrency regulations have been in effect in Canada since the inception of this new currency. It is highly unlikely that there will be any kind of immediate legislative changes that will affect the way it is used. The government will need to further study how the exchanges, the issuers and end customers are responding to recent legislative changes before any more will come into effect.
Cryptocurrencies are considered legal in Singapore, though not considered as legal tender. The tax authority in Singapore treats bitcoins as goods and therefore applies the goods and services tax on them. Since they are classified as a commodity, regulations are less stringent than in the US or Canada where they are classified as securities.
Cryptocurrency exchanges are considered legal in Singapore, but have to be registered with the Monetary authority of Singapore (MAS). However, recently in Jan 2022, owing to the volatility of cryptocurrency values, The Monetary Authority of Singapore (MAS) issued further guidelines to Digital Token Providers (DTPs). They are prohibited from actively advertising their service offerings to the general public.
Singapore’s regulatory authority further added that the developments in blockchain and the contribution of crypto tokens to specific use cases will help further progress. But trading in extremely volatile “goods” such as cryptocurrencies is extremely risky and not encouraged.
In April, 2022, The Singapore government passed a law that would require all virtual asset service providers (which includes crypto, since it is classified as a commodity) to get a license that they are functioning according to Anti-momney laundering (AML) and anti-terrorism laws. Singapore will continue to welcome Web 3.0 and companies with services based on the blockchain but will continue to remain cautious about crypto currency trading in the future as well.
Japan’s Financial Services Agency recognized bitcoin as a legal mode of payment. However, despite several news agencies reporting it as legal tender, it is not accepted as one. Recent amendments to the PSA and to the Financial Instruments and Exchange Act (FIEA) in May 2020 introduced the term “crypto-asset” (instead of “virtual currency”). The amendments placed greater restrictions on managing user’s crypto assets and eased the rules on trading of cryptocurrencies.
The taxation regime on cryptocurrencies has also changed from the consumption tax which was levied initially to miscellaneous income. This means that users will now not be able to offset the losses in other areas with gains from the sale of bitcoins. Moreover, an additional inheritance tax will be imposed on bitcoins secured from a deceased person.
The infamous Coincheck heist of $530M in 2018 changed the regulatory climate on bitcoins in Japan and called for stricter cryptocurrency regulations. Cryptocurrency exchanges must secure a license from the FSA to operate legally in Japan. This can take up to 6 months to obtain and the exchange will have to be AML and CTF compliant and have robust and fail proof cybersecurity measures in place. The Japanese Virtual Currency Exchange Association (JVCEA) and the Japan STO provide guidance to yet to be licensed cryptocurrency exchanges on compliance.
Japan is offering a fairly crypto-friendly regulatory climate. Japan is, however, concerned about threats such as money laundering and risks that cryptocurrencies such as stablecoins pose to end users. In 2022, Japan is expected to amend laws to regulate issuers of stablecoins to mitigate such risks.
India had warned investors from trading in cryptocurrencies as early as 2013.
As it stands today, cryptocurrency is not legal tender in India. It is also not given a classification as a commodity or security by the Government of India. India’s annual budget of 2022 also levied a tax of up to 30% on cryptocurrency transactions. But bitcoin trading is no longer illegal in India.
In the Financial year which began in April 2022, India also plans to release a digital currency. This would help give a boost to the Indian economy by leading to a cheaper and more efficient currency management system and would be an alternative to bitcoin. It will be based on blockchain too.
In the year 2018, the RBI sent out a notice to banks in India not to transact with crypto exchanges, but this was overruled by the Supreme Court in March 2020. There have since then been speculations and growing fears of a large amount of income being directed towards a volatile resource such as bitcoin. This sparked off a sale by a number of Indian investors in crypto in November 2021.
Presently, the Indian Government is working on establishing guidelines for cryptocurrency regulation and to regulate several crypto exchanges like WazirX which have come up in the country. The Government is working towards making transactions safer for the end user and to prevent the possibility of money laundering and illegal financing.
In 2021, the number of Australians using cryptocurrencies surged by as high as 63% from the previous year. Cryptocurrencies are legal in Australia, though not considered as legal tender. In Australia, initially there was a call to push crypto into the financial products category. But as there were none of the inherent risks of financial products in a decentralized crypto currency, Australia decided to classify it as a non-financial property. Why did it do so? According to the Reserve Bank of Australia, cryptocurrencies cannot be considered a form of money. It explains this by saying that it is still not a widely accepted form of payment, its purchasing power varies over time, and it cannot be used as a unit to measure and compare the value of a goods or service.
Cryptocurrency exchanges are legal in Australia. In 2018, laws were introduced by the Australian Transactions Report and Analysis Centre (AUSTRAC) which required exchanges to ensure proper customer KYC procedures. They also had to maintain a record of the transactions and comply with anti-money laundering laws. Many exchanges were also forced by Australian regulators to delist an anonymous cryptocurrency referred to as privacy coins in 2020.
In December 2021, Australia announced plans for further licensing requirements for the cryptocurrency exchanges operational in the country. The exchanges will now be further obligated to report any instance of a breach of security and have to comply with anti-money laundering laws. They also would have to assure that custody of the crypto is ensured for the end user and that he/she is allowed to access it for the purposes of trading. According to Australian Minister Jane Hume, the country has already grown the digital asset economy to AUD2.1 billion, and is expected to grow it to at least AUD68.4 billion by 2030. The minister believes that cryptocurrencies will be a vital part of this growth that is to come but all points at which the interactions happen with the non-crypto world would have to be safeguarded for security.
Despite the huge popularity of cryptocurrencies in Brazil, there have been no attempts by the Government until this year to regulate them. In Feb 2022, the Brazilian Government took the first step.
Brazilian tax law does not make specific provisions for cryptocurrencies. But it does say that virtual currencies must be declared in the income tax statements. And any income generated by the sale of cryptocurrencies is liable to income tax.
Cryptocurrency exchanges are legal in Brazil but the country is yet to come up with designating a regulatory body or regulatory policies for it. The Brazilian Federal Reserve Bank warns that these cryptocurrencies are neither issued nor guaranteed by a central or responsible money authority and therefore all risk lies with the holders.
The Economic Affairs Committee in Brazil approved legislation that will help regulate cryptocurrencies, if passed by the Parliament. The legislation will bestow powers on the Central Bank of Brazil to regulate crypto assets. There is debate over how many people actually invest in cryptocurrencies in Brazil. Some estimates put the numbers at a little over 3 million. The Brazilian Securities and Exchanges Committee’s (SEC) initial role would be only overseeing Initial Coin Offerings (ICO). The executive branch would then be tasked with the role of either creating a regulator for crypto assets or delegating the power to SEC or Central Bank of Brazil.
El Salvador is one of the two countries in the world where cryptocurrency is legal tender and considered as an official currency. The Government even created bitcoin wallets called Chivo for its citizens and gave away $30 in bitcoin to every citizen in September 2021. But the value of Bitcoin has fallen since November 2021. In February 2022, the International Monetary Fund (IMF) requested El Salvador to remove the legal tender status from bitcoin as it entails great risks and may lead to financial instability. IMF also added that it would make it difficult for the country to avail loans from IMF as well.
Concerning cryptocurrency exchanges
Bitcoin service providers are defined as those entities that provide bitcoin services for third parties and includes exchanges, wallets, payment processors and custodians. Under Salvadoran law, bitcoin service providers must register with the Central Reserve Bank within 20 days of commencing operations. They must also be willing to operate according to other guidelines that the law introduces. The service providers must implement an AML/CFT plan. The measures and controls must be set as per Salvadoran legislation and the AML practices as per the Financial Action Task Force (FATF). The service providers must also protect the assets of clients and include measures to safeguard value and prevent theft.
Cryptocurrency is still not legal tender in the UK. But it is legal to own and trade in cryptocurrencies. The Bank of England declares that cryptocurrency is not ‘real money’ and that it does not pose a threat to the traditional banking ecosystem. However, the legal consequences and status of crypto assets can change with time on their type, nature, and how they are used. Due to this, the Bank of England and the Financial Conduct Authority (FCA) have issued warnings and guidance on how cryptocurrency must be used in the UK. Retail cryptocurrency derivatives were banned in December 2020, citing volatility risks to customers.
Concerning taxation of cryptocurrencies, the HM Revenue and Customs (HMRC) has said that the taxation on cryptocurrencies would be of a different kind as they cannot be considered investments or payments of the traditional kind. The tax levied would also depend on the parties involved and their activities. A Cryptoassets Manual published in March 2021 details what tax liabilities cryptocurrency holders have and what records they must keep.
Cryptocurrency exchanges are legal in the UK, but they have to be registered with the FCA. From January 10, 2020, all crypto firms in the UK (including recognized cryptocurrency exchanges and advisers) that have a presence in the UK or provide services to UK resident clients compulsorily have to register with the FCA. AML/CFT reporting and protection of customer assets from theft and deterioration of value is a requirement for every registered cryptoservice provider.
The UK, despite having left the EU, will still continue to probably follow suit as legislations are implemented in the future by the body. This pertains to regulatory policies for CFT and AML. In January 2021, the UK Treasury stated that it would like to bring some cryptocurrencies under the umbrella of financial promotions regulation while it will continue to take a broader approach to other virtual currencies.
The European Union
Cryptocurrencies are legal in the EU, though not legal tender in any member state. Member states may be prevented from launching their own cryptocurrencies if the states are backed by the EU. When dealing in cryptocurrencies people were not covered by the EU’s consumer protection rules, but that changed in March 2022. MEPs agreed on a set of guidelines for the supervision, consumer protection, and the environmental sustainability of bitcoins. The environmental concern for bitcoins comes from the fact that bitcoin mining consumes a lot of power, in fact a single bitcoin transaction is expected to use up as much power as would be by a typical American household for six weeks.
In the EU, cryptocurrencies are classified as Qualified Financial Instruments (QFIs). All investment firms and banks who make use of cryptocurrencies are allowed to freely hold them, gain an exposure to, or provide services in them. The exchanges, if they already have a QFI license can continue using them, or else can procure one at a regional level to start offering their services. The exchanges must also comply with EU regulatory requirements such as AML/CTF, EMD2, and CRD/CRR.
The EU is looking proactively at further legislations with regard to cryptocurrencies, and concerned about the risks it poses to customers. The European Central Bank is considering releasing its own digital currency. The European Banking Authority (EBA) is also looking at adopting one AML/CTF manual that will help with guiding crypto exchanges and users in all the member states, much like the UK.
Cryptocurrency regulations are pretty relaxed across the world with most of the countries globally having accepted it for the benefits it provides, a decentralized, private, tamper-proof and secure system for transactions. However, there are concerns linked to it, owing to its volatile nature and its non-applicability as a legal tender or actual replacement for currency. Only El Salvador and the Central African Republic accept cryptocurrency as legal tender and give it a footing on the same level as national currencies. What does the future look like for cryptocurrencies? Will they be regulated more and will the rules governing them be relaxed. This will be determined only by how consumers and service providers respond to changes in the economic climate worldwide.