What About Cryptocurrency Regulation?
Updated: Jul 22, 2022
Jacob Rubin & Adrian de Vernou, Summer Interns, 2022
As cryptocurrency becomes more widely recognized and used throughout the world, it can be seen that countries have different outlooks and regulations in the industry of blockchain and tokenized assets. Since the birth of Bitcoin in 2009, cryptocurrency has grown to levels that were never imagined before, and with this growth comes a major necessity for regulation. In this article, we aim to highlight the current and future regulation outlook for cryptocurrency in the United States and in many countries around the world.
In order to analyze how different countries regulate crypto, it is important to look at three main factors. These would be whether cryptocurrencies are legal tender, whether crypto exchanges are legal, and which governments or economic authorities control the exchanges. Whether or not cryptocurrencies are considered legal tender is significant because legal tenders are forms of money that must be accepted if offered as a payment to a debt. Typically legal tender in different countries is based on their national currencies or precious metals. Given the volatility of even major cryptocurrencies, using them as the main legal tender could cause exchange rates and tax evasion issues.
Understanding these three factors will allow us to comprehend any nation's stance with regard to crypto and future regulation. We will start by reviewing regulations in the United States and then move on to countries around the world going in order from loosest to strictest regulations.
In the United States, it is tough to find consistency in cryptocurrency regulation at the state level but the U.S. is slowly moving towards federal regulation. Throughout the states, cryptocurrency is not considered legal tender; cryptocurrency exchanges are legal but regulation of these exchanges varies by state. Due to its unique regulation, US-based traders are unable to trade on some major crypto exchanges. Coinbase, Gemini, and Kraken are some of the popular exchanges that are used and legal in the U.S. but other popular exchanges like Kucoin are not available for U.S. users.
Cryptocurrency exchanges that run in the United States are regulated by the Commodity Futures Trading Commission (CFTC) and The Financial Crimes Enforcement Network (FinCEN). The CFTC imposes anti-money laundering requirements and protects the public from fraud and manipulation in commodities and futures markets, while the FinCEN investigates a variety of crimes including identity theft and tax evasion.
The FinCEN considers cryptocurrency exchanges to be money transmitters, which ultimately means that currency is being transferred from one party to another. This is important in the regulation of cryptocurrency in the states because this places exchanges in the same regulatory category as traditional money transmitters and therefore the same regulatory rules apply. While there are many differences between each state’s outlook and laws regarding the role that cryptocurrency will play in the United States present and future, the U.S. is inching closer to federal regulation.
As of recent, the treasury of the United States has highlighted a pressing need for regulations in the crypto industry. In December of 2020, FinCEN proposed a new regulation to require data collection requirements on exchanges and wallets, and this rule is expected to be put in place by the end of 2022.¹ This would require exchanges to submit activity reports for transactions of over $10,000 and additionally require wallet owners to identify themselves when sending more than $3,000 in a single transaction.² In the near future, the United States is expected to regulate cryptocurrency on a federal level, which will lay the framework for other countries to follow in their regulation process.
Japan is seen as having one of the most progressive attitudes towards regulating crypto and other digital assets. In Japan, cryptocurrencies are actually considered legal tender. On top of that, the Payment Services Act (PSA) recognizes Bitcoin and other digital currencies as legal property. Crypto exchanges are legal but must be registered with the Financial Services Agency (FSA). Recent hacks in the crypto space have forced the FSA to respond with regulation.
Given the outrage and security threat these hacks created, future regulation is on its way. The FSA is likely to propose regulation on stablecoin tokens and create new obligations for crypto service providers to report suspicious activity this year. While this might make Japan slightly less progressive in terms of crypto regulation, it will still be a friendly country for cryptocurrencies.
Similar to Japan, cryptocurrency in Switzerland is considered legal tender. Crypto is also accepted as payment in many contexts, and exchanges are also legal in Switzerland as long as they are approved and regulated by the Swiss Federal Tax Administration. Cryptocurrency in Switzerland is considered to be an asset and therefore they are subject to wealth taxes.
In order for exchanges to operate in Switzerland, they must obtain a license from the Swiss Financial Market Supervisory Authority. In 2019, the government of Switzerland also approved that existing financial regulatory rules were to include cryptocurrency and this allows cryptocurrency to exist in the same way that any other asset class would. In the future, Switzerland is expected to continue to work towards an environment that is very friendly to cryptocurrencies.
In the town of Zug, which is widely considered a global cryptocurrency hub, Bitcoin is used as a way of paying city fees. In January 2018, the Economics Minister of Switzerland stated that he was aiming to make Switzerland “the crypto-nation” and this leads many to believe that Switzerland will continue to be friendly in terms of regulation in the country.³
Unlike Japan and Switzerland, cryptocurrencies are not legal tender in Singapore. Crypto exchanges are legal but registration with the Monetary Authority of Singapore (MAS) is required. Singapore is much friendlier towards cryptocurrencies than other countries in the region, such as China, Thailand, and Indonesia. Thanks to this more relaxed stance on crypto regulation, Singapore has been able to attract many international crypto providers who have migrated to the city-state.
The MAS has stated in the past that its position was not to regulate virtual currencies, though it would regulate digital tokens classified as securities. However, the attitude is slowly shifting, with Singapore passing a law tightening rules for crypto providers in April of this year. These new rules give the MAS the power to inspect digital token service providers conducting business internationally, as well as collaborate with the investigations of foreign regulatory bodies and agencies. In terms of future regulation, the MAS is likely to align itself with recent legislation passed such as the Payment Services Act 2019 (PSA), and issue additional regulations.
Luxembourg is also a country whose government generally has a progressive attitude on crypto. As a tax haven and financial powerhouse internationally, the country is known for having looser regulations across all financial sectors. Though cryptocurrencies are not legal tender, Finance Minister Pierre Gramegna has said that crypto ought to be welcomed and accepted as, “a means of payment for goods and services,” within the country.
Regarding crypto exchanges, they are legal but must register with the Commission de Surveillance du Secteur Financier (CSSF). The only real regulation of crypto in Luxembourg is in the form of licenses that impose Anti-Money Laundering and Countering the Financing of Terrorism (AML/CTF) reporting requirements on electronic money. There are currently no specific legislative steps planned out, though some are expected given that the EU’s 5AMLD and 6AMLD are now in effect.
Canada is one of the few countries that had early measures and regulations towards cryptocurrencies. Though crypto is not legal tender in Canada, crypto exchanges are legal and have been required to register with the Financial Transactions and Reports Analysis Centre (FinTRAC) since June of 2020.⁴
Crypto can be used to buy goods and services online or in retail stores that accept them. Canada has been proactive in addressing crypto, with the first entities dealing with digital currencies introduced in 2014 under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Cryptocurrencies have also been taxed since 2013 by the Canada Revenue Agency. Since a 2019 amendment to the PCMLTFA, crypto exchanges are regulated the same way as money services businesses. This became especially significant after the Virtual Currency Travel Rule came into effect in February 2020, which put requirements on tracking all cross-border crypto transactions.
As of now, there are no future plans on increasing regulation on cryptocurrencies in Canada. The Canadian Government will continue to assess the current landscape of the crypto space given that more and more Canadians are adopting crypto.
Compared to the rest of the world, China can be viewed as having the toughest regulation on cryptocurrency. In China, cryptocurrency is not considered legal tender, and exchanges are considered illegal. In 2013, the People’s Bank of China banned financial institutions from handling Bitcoin transactions and in 2017 they banned all Initial Coin Offerings (ICOs). This was the first step in outlawing the usage and handling of cryptocurrency and they have taken many steps towards totally banning it since. In 2021, China banned all domestic cryptocurrency mining and shortly after outlawed cryptocurrency completely, which prompted a major token sell-off.⁵
In the future, there are no signs that China intends to lift or loosen its ban on crypto. Although China has no intentions of lifting its ban, China’s central bank has been working on introducing its own digital currency since 2014.⁶ This digital yuan was worked on with the intention to replace cash and coins and was released in January of 2022. This digital currency is not considered a cryptocurrency because it does not operate through a blockchain and it is a centralized operation. The digital yuan is available for use at select retailers and China plans to expand its usage throughout the entire country.
¹ Calin. “Cryptocurrency Regulations around the World.” ComplyAdvantage, 10 June 2022, https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/. ² Calin. “Cryptocurrency Regulations around the World.” ComplyAdvantage, 10 June 2022, https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/. ³ Calin. “Cryptocurrency Regulations around the World.” ComplyAdvantage, 10 June 2022, https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/. ⁴ Calin. “Cryptocurrency Regulations around the World.” ComplyAdvantage, 10 June 2022, https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/. ⁵ Calin. “Cryptocurrency Regulations around the World.” ComplyAdvantage, 10 June 2022, https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/. ⁶ Kharpal, Arjun. “China Launches App for Its Own Digital Currency as It Looks to Expand Usage.” CNBC, CNBC, 4 Jan. 2022, https://www.cnbc.com/2022/01/04/china-launches-digital-currency-app-to-expand-usage.html#:~:text=The%20digital%20yuan%20or%20e,the%20People's%20Bank%20of%20China.