Cryptocurrency regulations: an overview

The regulatory landscape for cryptocurrency is evolving, As an increasing number of transactions occur across international borders, financial institutions looking to expand their services into blockchain-related technologies will be required to comply with new regulations, depending on where they are located and where they operate. 

What is cryptocurrency?

Units of cryptocurrency, known as tokens, are digital units of value. While they do not physically exist, tokens are a form of virtual currency and can be exchanged for traditional money (also known as fiat currency). In some countries, such as El Salvador, cryptocurrency can also be used to pay for goods and services.

Cryptocurrency is enabled by blockchain, which ensures crypto is, for the most part, secured and verified. The purpose (and main benefit) of blockchain is that it records and stores information in a way that is currently difficult to hack or change at a later date.

In very simplified terms, each new transaction that occurs is added to the ‘ledger’ of every single participant. It means that, while anonymous, the information is incredibly visible  and is managed in such a way where no single person or group has control – which is why blockchains are often referred to as ‘decentralised’. 

After a transaction has taken place, such as the buying and selling of tokens, it is recorded in blockchain and considered a digital asset.

But the anonymity that blockchain provides for cryptocurrency investors also makes it harder for governments to protect and regulate activities surrounding cryptocurrency. Plus, without a central bank, governance is largely down to its users.

Crypto regulations around the world

The lack of government input for crypto is not for lack of trying. As the types and numbers of digital currency being offered are constantly increasing, many organisations around the globe recognise the need for standardisation. 

Some have tried to implement regulations. Their levels of success have varied thus far in trying to enforce compliance for cryptocurrency miners, exchanges and users.

North America

North American regulation is largely juxtaposed. Canada was the first country in the globe to approve a multi-cryptocurrency exchange fund, whereas the USA has been much slower to implement regulations. 

Canada cryptocurrency regulations

Canada is considered fairly bitcoin progressive, with the launch of the Fidelity Crypto Mutual Fund in late 2021. This enables the public to directly invest in a fund containing a mix of cryptocurrency assets. It is a popular choice for investors looking to diversify their portfolios and spread the risk.

The Canadian government also treat gains on cryptocurrency in the same tax category as other commodities. 

USA cryptocurrency regulations

In the USA, there is an ongoing debate about whether cryptocurrency is a commodity or security. Commodities are investments into physical objects such as grains and oil, whereas securities are more ‘theoretical’ investments, for example into stocks. This is one of the major reasons for no clear federal rulings around cryptocurrency, even after much attention from the SEC. Recent action from the SEC, however, would suggest that crypto is a security.

The current nationwide regulation states that the sale of cryptocurrency is only regulated when considered a monetary transmission under Federal Law. The Howey Test enables officials to decide whether new coins and transactions are regulated as deemed by the SEC. Two of the main points of the Howey Test state that the broker or dealer must be licensed by the SEC or FINRA, and secondly, that trading must occur on a licensed platform or crypto exchange.

However, some states have taken cryptocurrency regulation into their own hands. For example, Wyoming is largely considered the most crypto-friendly state with the approval of special-purpose depository institutions and banks, allowing residents to legally hold crypto. On the other side of the spectrum, Colorado exempts cryptocurrency transactions from all other state-wide regulations.

European Union crypto regulations

In the EU, cryptocurrency is considered legal tender. However, each country has their own regulations which means that gains are taxed variably from 0-50%. 

As part of the anti-money laundering regulations, the European Commission has recently tightened up regulations around financial institutions that deal with cryptocurrency. For example, the reporting requirements relating to the Know Your Customer framework.

The FATF released information regarding the ‘Crypto Travel Rule’ last year in 2021. Regulated by the European Banking Association, the rule requires exchanges and cryptocurrency originators to share the personal data of those buying and selling crypto assets. This includes the name and account information- opposing the Blockchain’s purpose of keeping transactions anonymous.

UK crypto regulations

In the UK, cryptocurrency is considered valid property, but not legal tender by the Financial Conduct Authority. Some tokens are considered transferable securities, which is significantly different to the commodity view in the EU. 

Furthermore, crypto exchanges are required to comply with the FCA in order to operate. In fact, in 2021, the regulator imposed a ban on the sale of so-called “unregulated assets” such as cryptocurrency. 

The standard capital gains tax rates apply, but exchanges are more regulated. Plus, financial institutions that work within the cryptocurrency industry are required to be registered with the FCA. The Know Your Customer framework, which relates to more high-risk financial categories such as gambling, also applies. 

Asia cryptocurrency regulations

China may be considered the birthplace of large-scale cryptocurrency adoption, with the creation of the Binance exchange in China in 2017. However, they have recently cracked down on cryptocurrency gains, for example through the application of high inheritance tax. China have also banned cryptocurrency mining altogether, citing its poor environmental impacts.

The Indian regulators have largely followed China’s lead, banning individuals from holding and mining cryptocurrency. Indian regulators also apply tax to trading profits gained from the buying, selling and staking of cryptocurrency. 

Alternatively, Japan and Singapore are considered more crypto-friendly. For example, Singapore’s tax haven status extends to the cryptocurrency world, with tax-friendly advantages that lower the tax rate below 17%.

The payment services act of Japan means that cryptocurrency assets are considered legal property. For tax purposes, crypto is deemed ‘miscellaneous income’ and exchanges are required to register with the Japanese Financial Services Authority.

CUBE tracks and analyses regulations for crypto on a global scale. So you know what your regulatory obligations are now, and for the future.