Global Cryptocurrency Regulations – Wild West to Outright Ban

What is Cryptocurrency?

Cryptocurrency is a digital asset that operates on a blockchain. A blockchain is a public ledger of transactions that’s visible to anyone and does not rely on a central authority. Unlike cash, crypto is impossible to counterfeit because it uses cryptography for transaction verification.

The first crypto, Bitcoin, emerged in 2009. Its creator, known by the pseudonym Satoshi Nakamoto, wanted to create a currency free from government or bank control.

This concept appeals to those who prefer privacy in their transactions and distrust traditional financial institutions.

Crypto’s accessibility has sparked crypto adoption in developing countries.

Fast and borderless transactions are another reason for using crypto.

There’s no need for a bank account – anyone can access their crypto wallet with an internet connection.

There are thousands of cryptocurrencies, each with its own features and purposes. Some act as payment methods, others as long-term stores of value, similar to gold.

Utility tokens unlock specific features within a project, while meme coins are created for fun and quick gains (or losses) on speculation.

What Does Regulation for Cryptocurrency Mean?

Cryptocurrencies operate outside the traditional financial system, allowing anyone with an internet connection to make payments globally.

Governments try to catch up with this new asset class and gain some control by establishing legal frameworks. These regulations are all over the place, differing wildly between countries and constantly evolving.

But why regulate something that was created to bypass regulations? Well, it’s not that simple. Here are some of the reasons.

Crypto’s anonymity can be a double-edged sword

Regulations aim to crack down on illicit activities like money laundering and tax evasion. For example, centralized crypto exchanges must verify user identities and monitor transactions for suspicious activity.

To create a fair environment for investors

Blockchain regulation strives to create a level playing field by preventing artificial price inflation and weeding out scams through licensing laws.

For tax purposes

Governments can treat crypto as property, securities, or something else to specify how capital gains, losses, and income generated from crypto activities are taxed.

To build investor confidence

Consumer protection laws encourage more people to participate in trade, increasing market liquidity and tax revenue.

To counter volatility

Dramatic crypto price swings can cause tremors in the broader financial system. Regulations act like an anchor, preventing sudden price drops that might force investors to flee to safer havens.

To foster innovation safely

Regulations outline how companies can experiment with blockchain technology and raise capital while protecting investors from fraudulent offerings.

Consequently, crypto legislation might encompass the following:

• Licensing and registration of crypto exchanges, custodians (services that hold your crypto for you), and initial coin offering (ICO) platforms
• Know your customer (KYC) and anti-money laundering (AML) procedures to verify user identities and monitor transactions to prevent financial crime
• Consumer protections, like risk disclosures, limitations on misleading marketing practices, and dispute resolution procedures
• Taxation, for example, some countries don’t collect any tax on crypto transactions, whereas others tax crypto as capital gains

Some governments employ extensive regulations for crypto businesses. For example, Japan enforces strict KYC, taxation, consumer protection, and licensing rules. Others have almost none.

Likewise, some governments encourage crypto trading and blockchain development, while others, like China, ban it entirely. That’s why you should do your due diligence before engaging in any crypto-related activity.

Naturally, such disparity can challenge global trade. This is where the International Monetary Fund (IMF), an international organization with 190 member countries, comes into play.

There’s no one-size-fits-all ‘IMF crypto law.’ Instead, the IMF gives individual countries policy recommendations and encourages them to cooperate. We can only hope that its members will eventually reach a consensus.

How is Crypto Regulated in the United States?

Now that you know the reasons behind digital asset laws, let’s unpack specific US crypto regulations.

The US regulatory landscape for cryptocurrency is a work in progress. The emergence of Bitcoin caught authorities off guard. There were absolutely no laws governing virtual currencies, which created grounds for speculation and manipulation.

As crypto gained popularity, the US government appointed three agencies to oversee the market and protect investors.

Securities and Exchange Commission (SEC)

The SEC focuses on securities – crypto investments made to raise capital. Therefore, cryptocurrencies that function as a medium of exchange or utility tokens don’t count as securities.

Commodity Futures Trading Commission (CFTC)

The CFTC oversees derivatives markets. Put simply, derivatives are financial instruments whose value depends on the underlying asset. For example, if you believe Bitcoin’s ($BTC) price will rise, you could enter into a futures contract with another investor.

In this contract, you agree to buy or sell $BTC at a set price on a specific date. You make a profit if the $BTC price goes up by that date. In this case, $BTC is the underlying asset, and the futures contract derives its value from $BTC price fluctuations.

Internal Revenue Service (IRS)

The IRS is interested in crypto’s tax implications and requires US residents to report gains and losses on trading activities.

Apart from these three big players, the US government may involve the Financial Crimes Enforcement Network (FinCEN) in investigating money laundering cases.

Naturally, navigating the various regulations from each of these agencies can be overwhelming. Here are the key points you should know about crypto taxation in the US.

You must pay capital gains tax when selling cryptoYour losses can offset the gainsMining rewards are taxed as ordinary incomeThe IRS is watching

The tax rate depends on your tax bracket and how long you held the cryptocurrency before selling. Short-term gains (held for less than a year) are taxed at your ordinary income tax rate. Long-term gains typically are subject to lower tax rates.

Say you lost $8K during a bear market. You can use this loss to reduce your taxable capital gains from other investments. It’s worth noting that there’s a $3K capital loss cap for single tax filers.

Remember to report them on your tax return! What’s more, President Joe Biden recently proposed imposing a 30% electricity tax on mining. While the law is not yet in place, it highlights that crypto regulations in the US constantly evolve.

Just because crypto transactions are anonymous doesn’t mean that your activities are invisible. Centralized exchanges (CEXs) must comply with KYC procedures and report to the IRS.

While it may seem like the US government is only concerned with getting its cut, it also introduces investor protections:

• The SEC mandates transparent disclosures to reduce the risk of fraud. This includes details about the project, the team’s background, and the risks involved in investing.
• SEC offers educational resources to help investors understand crypto fundamentals, identify red flags, and make informed investment decisions.
• KYC rules help exchanges identify suspicious activities that may harm other users.

Also worth mentioning is that some states may have specific laws on crypto. For example, New York has a specific licensing regime called the ‘BitLicense’ for businesses dealing with virtual currencies.

Source: Finance Magnates

This license requires extensive background checks, compliance measures, and cybersecurity protocols. Likewise, California requires a Money Transmitter License for businesses that process over $10k in crypto within a year.

These are just a few examples, so always DYOR. You can find state-specific information on the North American Securities Administrators Association (NASAA) website.

Rules and Regulations for Cryptocurrency Around the World

Crypto transcends borders, but regulations don’t. Read on to discover how the rules of the game differ across the world.

Source: Statista

China

• Legal status: Owning crypto is permitted; exchanges and ICOs are banned
• Tax rates: N/A
• Governing body: People’s Bank of China (PBOC)

China has a reputation for its strict laws, and crypto is no exception. However, contrary to common belief, there’s no outright ban on virtual currencies. Owning crypto isn’t illegal, but trading it on foreign exchanges or using it for payments? While no specific law prohibits these activities, the government makes them extremely difficult.

In 2013, the People’s Bank of China issued a Notice on Preventing Bitcoin Risks, clamping down heavily on crypto businesses, including exchanges, ICOs, new tokens, and other projects.

Furthermore, China sees crypto as a virtual commodity rather than a real currency.

So, while you won’t be prosecuted for owning crypto, there’s virtually no use for it in the region. China prioritizes control over its financial system and is concerned about digital currencies destabilizing it and enabling illicit activities.

Additionally, China is currently revising its AML laws to include virtual assets. This could potentially result in stricter regulations and penalties for using crypto.

Since China doesn’t recognize crypto, there are also no specific tax regulations. Instead of worrying about Bitcoin, China is busy developing its own central bank digital currency (CBDC), which will give the government greater control over citizens’ financial activities.

Think of it as the polar opposite of crypto – one’s all about decentralization, and the other’s about keeping a tight grip. It’s a safe bet that most would prefer the freedom of crypto, which is probably why the Chinese government is working overtime to tighten the reins.

Canada

• Legal status: Legal (treated as commodities)
• Tax rates: 15%–33% capital gains tax on profits
• Governing bodies: Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canadian Securities Administrators (CSA)

Unlike many countries that have vague or non-existent crypto legislation, Canada has a proactive approach. It was the first country to approve a Bitcoin exchange-traded fund (ETF) on the Toronto Stock Exchange.

This move shows Canada’s openness to innovation. Overall, the country opts for regulations over restrictions to mitigate risks without hampering progress.

While Canada allows the holding and trading of crypto, virtual money is not legal tender like the Canadian dollar.

The Canada Revenue Agency (CRA) treats crypto trading as barter transactions, meaning you must report your gains on your tax return. The rate depends on your marginal tax bracket.

Furthermore, if you mine crypto, your profit is considered business income and is taxed accordingly. However, there is no tax on buying or holding crypto.

Crypto firms are classified as Money Service Businesses (MSBs), which brings them under the purview of the FINTRAC, Canada’s financial intelligence unit. FINTRAC employs AML laws like KYC and Suspicious Activity Reporting (SAR) procedures.

The Canadian Securities Administrators (CSA) is also actively involved in regulating crypto trading platforms. They determine if a crypto asset qualifies as a security and falls under respective laws.

United Kingdom

• Legal status: Legal (treated as unregulated financial instruments)
• Tax rates: 10%–20% capital gains tax on profits
• Governing body: Financial Conduct Authority (FCA)

Similarly to Canada, the UK takes a proactive and balanced outlook on virtual currency regulations. Crypto businesses must play by the book and comply with KYC and AML procedures.

Here’s where things get interesting. Recently, the Financial Services and Markets Act 2022 (FSMA 2022) brought certain crypto assets under the FCA’s regulatory umbrella.

This means crypto trading now faces similar rules as traditional investments. Crypto businesses need to get a proper FCA license and implement consumer protection measures to ensure everyone plays fairly.

The FSMA might also pave the way for further regulations. By mid-2024, the UK government plans to introduce secondary legislation that outlines specific rules for crypto activities under FCA’s purview.

Stablecoins (cryptos pegged to traditional currencies) have caught the attention of UK authorities. Their perceived stability could lead to wider adoption, potentially impacting traditional financial systems as people flock to digital money.

Despite the name, stablecoins aren’t risk-free. The mechanism that maintains their value is complex and vulnerable to disruptions.

If a stablecoin loses its peg or experiences a significant price drop, it could cause wider financial instability.

That’s why the Financial Services and Markets Bill (FSMB) has been fast-tracked through Parliament’s Upper House. It aims to keep stablecoins in check.

Meanwhile, UK citizens must pay capital gains tax on their investment profits. Short-term and long-term capital gains fall under the same umbrella and are taxed at 10%-20%, depending on your early earnings.

Japan

• Legal status: Legal (treated as legal property)
• Tax rates: 15%–55% income tax
• Governing body: Financial Services Agency (FSA)

Japan is known for its progressive stance on technological innovation, whether humanoid robots, renewable energy, or blockchain. That’s why Japan recognized crypto as legal property and developed appropriate laws relatively early, in 2017.

The FSA regulates crypto exchanges in Japan, requiring them to register and comply with AML rules. Money laundering appears to be the government’s primary concern, with new laws trying to close any loopholes that malicious actors could exploit.

For instance, Japan introduced the ‘Travel Rule,’ which mandates exchanges share customer information when transferring crypto to other platforms. This law was first issued in 1995 with fiat currency in mind but was amended for crypto in 2023.

Applying an old law to a new technology wasn’t seamless.

Banks dealing with fiat money had to include information like transfer references and the sender’s legal name.

Crypto transactions include no data beyond the transfer amount and wallet address, so regulations are still underwork.

Unlike many countries that treat crypto as capital gains for tax purposes, Japan classifies it as miscellaneous income. This means you must pay the same tax as you would from freelance work or side hustle.

Japan has a progressive tax system, so the rate you pay depends on your overall income. Generally, it ranges from 15% to 55%, significantly higher than the capital gains tax rate of 20%.

On a good note, you don’t have to report crypto gains if they don’t exceed $1,5k a year.

Australia

• Legal status: Legal (treated as virtual assets)
• Tax rates: 12%–35% capital gains tax on profits
• Governing bodies: Australian Securities and Investments Commission (ASIC), Australian Taxation Office (ATO)

Australia didn’t reinvent the wheel with its crypto taxation regulations. The government treats crypto as capital gains, so you must pay 12%–35% tax depending on your overall yearly income.

However, if you earn under $13,5K a year, you can enjoy your crypto profits tax-free.

Furthermore, holding your crypto for over 12 months before selling it gives you a 50% capital gains discount. It seems the Australian government is all in for HODLing.

Crypto exchanges operating in Australia must comply with regulations set by the Australian Transaction Reports and Analysis Centre (AUSTRAC). This includes KYC and AML procedures, which are the standard globally.

On the other hand, Australia threw a curveball with its ban on privacy coins. Tokens like Monero and Zcash make transactions difficult to trace, so the government is concerned about their use in money laundering. Most countries are still wrestling with how to handle privacy coins, and few have taken an equally bold step.

Singapore

• Legal status: Legal (treated as property)
• Tax rates: 0%–22% income tax
• Governing body: Monetary Authority of Singapore (MAS)

Like the UK, Singapore treats cryptocurrency as property, not legal tender, so it could be subject to capital gains tax. However, Singapore doesn’t tax income from the sale of assets, contributing to its image of a ‘safe haven’ for crypto investors.

Here’s the catch. Despite the lack of capital gains tax, you may have to pay income tax if authorities deem them part of your core business activities.

They consider the frequency of trading, your investment amount, and the use of special infrastructure. Still, the tax rate ranges from 0% to 22%, which isn’t that bad compared to Japan.

Singapore also has AML and KYC laws for crypto businesses, like most countries we discussed above. Exchanges, DeFi platforms, and other firms must report to MAS under the Payment Services Act (PSA).

In 2022, MAS advised crypto businesses to limit mass advertising. Such cautiousness indicates Singapore is rolling out the red carpet for seasoned crypto players, not those just dipping their toes in the water.

South Korea

• Legal status: Legal; privacy coins and ICOs are banned
• Tax rates: 5%–45% miscellaneous income tax
• Governing bodies: Korea Financial Intelligence Unit (KFIU), self-regulatory organizations (SROs)

Like most countries, South Korea requires all crypto businesses to register with the KFIU and comply with AML and KYC laws.

However, South Korean exchanges also have self-regulatory organizations (SROs) established by the crypto industry itself. These SROs operate under the KFIU’s provision but can set additional rules for token listings, trading practices, and investor protection.

South Korea takes a zero-tolerance approach to crypto shenanigans. For example, they’ve banned Initial Coin Offerings (ICOs) altogether due to the high risk of scams. Privacy coins also got the boot to combat money laundering and financial terrorism.

Profits from crypto trading are taxed at 5%–45% as miscellaneous income, depending on your total yearly earnings. But there’s more – authorities are discussing introducing a capital gains tax in addition to the income tax.

All in all, South Korea has some of the strictest crypto regulations worldwide, but it’s far from China’s or Egypt’s complete crackdown. The government is open to innovation in the space but adopts new trends with caution.

India

• Legal status: Unclear
• Tax rates: 30% miscellaneous income tax + 1% tax deducted at source (TDS)
• Governing body: Reserve Bank of India (RBI)

India’s crypto regulations are somewhat vague. Unlike some countries that have either embraced or outlawed digital currencies, India remains firmly on the fence.

Recently, the government proposed a bill banning unregulated virtual currencies. This could spell trouble for crypto investors, especially if India launches its own CDBC, a potential competitor to BTC and ETH.

Despite the unclear legal status, the Indian government isn’t shy about taking its cut.

They currently levy a hefty 30% tax on crypto profits, significantly higher than many other nations. To add insult to injury, they also impose a 1% TDS on crypto transactions over ₹50,000 (roughly $600).

With no clear-cut crypto laws, AML and KYC procedures also play a waiting game. It seems India’s current strategy is to keep an eye on the global crypto scene before making a decisive move.

Brazil

• Legal status: Legal payment method
• Tax rates: 5%–45% miscellaneous income tax
• Governing bodies: Securities and Exchange Commission of Brazil (CVM), Central Bank of Brazil (BACEN)

Contrary to India, Brazil is the frontrunner in crypto adoption. Cryptocurrencies are a legal payment method countrywide, so Brazilian businesses can accept BTC, ETH, and other approved tokens alongside cash and credit cards.

This is unsurprising given Brazil’s history of an inflationary rollercoaster that made its citizens wary of fiat currencies. Some Brazilians might see crypto as a more reliable way to store their hard-earned cash.

However, Brazil isn’t going all-in without any guardrails. The BCB requires all crypto service providers to register and comply with standard AML and KYC regulations.

Furthermore, depending on your total annual income, the tax on crypto trading profits can get hefty. There’s no capital gains tax, but you must pay a 5%–45% miscellaneous income tax rate.

El Salvador

• Legal status: Legal tender
• Tax rates: 0% capital gains tax on BTC
• Governing body: SSF

El Salvador made headlines when it became the first (and so far, only) country to make Bitcoin legal tender. Unlike Brazil, where businesses can choose to accept BTC or not, El Salvador flipped the switch to mandatory.

Following this bold move, the government distributed free crypto wallets to citizens through their state-sponsored app, Chivo (which, for all you Spanish enthusiasts, means ‘cool’). This decision aimed to get everyone on board the Bitcoin train.

What’s more, El Salvador offers tax benefits for foreigners investing in crypto. With exemptions from capital gains taxes, the country hopes to attract foreign cash and fuel economic growth.

However, there are still a few kinks to iron out. Regulations for crypto businesses are still underway. There are no specific AML or KYC requirements or consumer protections, which raises concerns about illegal crypto activities.

Another hurdle El Salvador faces is BTC’s inherent volatility, making it a gamble for everyday transactions. Finally, let’s not forget the digital divide.

Not everyone in El Salvador has access to smartphones or the internet, which are crucial for using the Chivo wallet. This creates a situation where some citizens are left out of the Bitcoin bonanza.

Switzerland

• Legal status: Legal (treated as movable assets)
• Tax rates: 0%–0.99% wealth tax, no capital gains tax
• Governing bodies: Swiss Federal Tax Administration (SFTA), Swiss Financial Market Supervisory Authority (FINMA)

Similar to El Salvador and Brazil, Switzerland is pioneering crypto adoption. In 2020, it introduced laws concerning the notion of distributed ledger technology (DLT) securities. In essence, Switzerland created a legal framework that welcomes innovation within the crypto industry.

But let’s talk specifics. How is crypto taxed in Switzerland? Well, it depends on your tax status and how you use your crypto. For individual investors, things can be quite budget-friendly.

Switzerland treats crypto as movable assets and applies wealth tax at the cantonal level (think state level). These rates are capped at a chill 0.99% of your total assets.

The SFTA maintains a list with tax values for common cryptos to simplify the process.

Here’s the real kicker: there’s no capital gains tax on your crypto profits.

However, the capital gains tax exception only applies to private investors, not professional traders or businesses.

Furthermore, Switzerland operates a tiered licensing system for crypto businesses. For lower-risk activities like custody (holding crypto for clients) or basic trading platforms, a simpler ‘Finma Innovation License’ may suffice.

However, if you’re running a full-fledged crypto exchange, you’ll need a more comprehensive license from FINMA.

Of course, AML and KYC regulations are very much in play for crypto businesses in Switzerland. The Swiss government also recognizes the importance of educating consumers – for example, FINMA has a dedicated blog.

European Union

• Legal status: Legal (may vary by country)
• Tax rates: Varies by country
• Governing body: European Parliament

The EU leaves much of the responsibility for crypto rules to individual member countries, so it feels like a regulatory patchwork.

Taxation is a prime example of this diversity. Portugal welcomes crypto gains with open arms, treating them like tax-free income (under certain conditions).

Head north to Denmark, however, and you might face a whopping tax rate that could make your eyes water (up to 52.07%).

Cyprus, Estonia, Malta, and Slovenia residents enjoy a 0% capital tax on their crypto investments, whereas Finland, Germany, and Sweden impose some of the highest taxes, over 30%. Most countries, however, charge up to 20% tax.

It’s not all doom and gloom for high-rolling crypto enthusiasts, though. Countries like Cyprus, Estonia, Malta, and Slovenia have a 0% capital gains tax.

This stands in stark contrast to Finland, Germany, and Sweden, where tax rates can climb past 30%. Most EU countries fall somewhere in the middle, levying a tax rate of up to 20% on crypto profits.

Despite the tax chaos, the EU is making strides towards a more unified approach to crypto regulation.

The Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) are now in place across the bloc. They require cryptocurrency service providers to adhere to KYC and combating the financing of terrorism (CFT) regulations.

In April 2023, the European Parliament took another step towards harmonization. They now require crypto service providers, such as exchanges and custodians, to obtain an operational license.

If you live in the EU, it’s important to do your due diligence on your local tax, reporting, and registration implications before diving headfirst into trading.

What are the Downsides to Regulating Digital Assets

We’ve briefly touched on the benefits of crypto regulations. However, excessive government control also has downsides. Let’s discuss some of them.

Stifling innovation

Blockchain technology is still evolving, and strict laws could dampen innovation. Do we want a world where groundbreaking ideas are shelved because they don’t tick all the regulatory boxes?

Market entry hurdles

Regulations often throw up roadblocks like licensing requirements and mountains of paperwork. These barriers prevent new startups from entering the market, hindering healthy competition.

Individual investors may also suffer. For example, the US SEC is considering regulations limiting participation in certain ICOs to accredited investors. These are typically individuals with a high income or a net worth of over $1 million.

Excessive regulations can limit the investment opportunities available to the general public and potentially concentrate wealth in the hands of a select few.

Enforcement challenges

Crypto transactions are borderless. However, there’s no global consensus on how to regulate them, so it’s hard to understand which rules apply to specific cases. For instance, a crypto exchange operating in one country might be subject to stricter KYC procedures than in another.

Operational overheads

The crypto space might be virtual, but the bills are very real. Businesses might have to shell out for specialized software and compliance specialists, which translates into higher fees for customers.
Smaller crypto companies might get squeezed out entirely, unable to afford the ever-growing compliance burden.

Market volatility

Sudden changes in regulations can send the crypto market on a wild ride. To illustrate, if people are unsure how new rules will impact their investments, they might panic sell, leading to sudden price drops.

Investor outflow

Ultimately, any government’s primary goal is to balance restrictions with investor support. After all, they want to collect as much tax revenue as possible while fighting illegal activities and keeping an eye on citizens’ transactions.

If cryptocurrency regulations are too strict, investors might flee to a country with a more lenient approach. This may hinder the country’s technological development and leave it behind the global curve.

Final Thoughts

The spectrum of global crypto regulations is broad. While some governments fully legalize crypto and incentivize investors with low tax rates, like El Salvador, others remain wary or ban crypto altogether.

Remember, the regulations are a work in flux. Before you plunge into trading, it’s crucial to Do Your Own Research (DYOR) about your local laws.

FAQs

Is there any regulation on cryptocurrency?

Yes, but each country has its own crypto regulations. Some countries have strict KYC, AML, and consumer protection rules, while others have almost none. It’s important to research crypto payment regulations in your region before diving into crypto. Read more under ‘What Does Regulation for Cryptocurrency Mean?’.

What is the new regulation for crypto?

New crypto regulations appear all the time. For example, the UK government plans to introduce secondary legislation that outlines specific rules for crypto activities by mid-2024. Likewise, many other countries are working on legislation or updating existing frameworks to address cryptocurrencies.

Should the SEC regulate crypto?

The SEC focuses on securities rather than all cryptocurrencies. Securities are crypto investments made to raise capital. Usually, investors don’t actively manage the asset. Therefore, cryptocurrencies that function as a medium of exchange or utility tokens don’t count as securities. Read more under ‘How is Crypto Regulated in the United States?’.

What regulatory protections currently apply to crypto assets?

Regulatory protections vary by country. For example, many countries have AML and KYC procedures in place. Some mandate crypto project disclosures and provide educational resources to investors. Read more under ‘Rules and Regulations for Cryptocurrency Around the World.’

References

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