Back in 2018, there was the talk of introducing a global regulatory structure for an asset class that has no borders.
While a standardized regulatory landscape did not materialize, a lot has happened since the crypto meltdown of 2018.
Governments and regulatory bodies had to decide whether to be a friend or foe to the crypto markets.
That decision saw some governments come down hard, while others welcomed exchanges and investors.
The More Rigid
Looking at some of the more significant crypto jurisdictions:
China is considered as one of the most anti-crypto governments. Back in 2018, the government banned initial coin offerings. The government also forced the closure of exchange platforms that trade cryptocurrencies.
While the government rolled out wide-sweeping changes, it is not actually illegal to hold, buy, or sell cryptocurrencies.
Government agencies in China had been swift to classify Bitcoin and other cryptos as a virtual commodity. By classifying cryptos as a virtual property and not as a currency, the freedom to buy, sell, or hold remains.
In contrast to many geographies, the government is very much in favor of blockchain technology, however. The government encourages only the development of blockchains that service the real economy.
While there are a number of government agencies involved in the regulation of cryptos, the PBoC is the more widely known regulator.
Other government agencies that issued bans on all ICOs included:
- The Central Cybersecurity and Information Technology Lead Group of the Communist Party of China.
- Ministry of Industry and Information Technology.
- State Administration for Industry and Commerce.
- China Banking Regulatory Commission.
- China Security Regulatory Commission and China Insurance Regulatory Commission.
In July 2020, the South Korean government finalized a new tax rate for crypto trading income. The tax threshold for income from crypto assets is set at 2.5m won, equivalent to US$2,000 per annum.
Back in March 2020, the South Korean National Assembly also unanimously passed the amendment to the Act on Reporting and Use of Specific Financial Information.
Following a prolonged period of debate and review, the amendment provides a regulatory framework for cryptos and related service providers.
Cryptocurrency exchanges and service providers must be in compliance with the Financial Action Task Force (“FATF”) AML standards.
All G20 countries have declared their commitment to follow these standards.
Additionally, South Korea had introduced the real-name verification system in 2018. Real-name accounts is an AML measure. The law requires the assigning of verified individuals to single bank accounts. This then allows individuals to withdraw and deposit fiat currency to and from an exchange.
Regulated entities are required to go a step further and obtain an Information Security Management System (“ISMS”) certification. The Korea Internet Security Agency (“KISA”) is responsible for issuing certifications.
The Financial Services Agency (“FSA”) is responsible for the regulation of cryptocurrencies and the crypto market.
Earlier this year, the FSA made amendments to the Payment Services Act (“PSA”) and the Financial Instruments and Exchange Act (“FIEA”).
The new cryptocurrency regulatory framework was introduced and made effective on 1st May.
- The PSA regulates crypto-asset exchange service providers. These include persons engaged in the business of selling, purchasing, or intermediating the sale and purchase of or providing custody services for, crypto assets.
- Previously, custody service providers that are not engaged in the business of selling, purchasing, or intermediating the sale and purchase of crypto assets were not previously regulated under the PSA.
- The FIEA regulates crypto asset-related derivatives businesses and registration under the FIEA is required.
- Previously such businesses had fallen under the purview of the PSA.
- In the event of a business also providing custody services, they must also register as a crypto exchange that falls under the purview of the PSA.
In addition to the above regulations, the FSA also announced the approval of 2 self-regulatory organizations.
- Japan STO Association
- Japan Virtual and Crypto Assets Exchange Association (“JVCEA”)
Both organizations work alongside the FSA to enforce strict standards on the crypto sector.
Currently, Japan neither treats nor considers cryptocurrencies as fiat money.
Virtual currencies are also not considered securities. The PSA defines a virtual currency as follows:
- The proprietary value that may be used to pay an unspecified person the price of any goods purchased or borrowed or any services provided and which may be sold to or purchased from an unspecified person (limited to that recorded on electronic devices or objects by electronic means and excluding Japanese and other foreign currencies and Currency Denominated Assets) that may be transferred using an electronic data processing system.
- The proprietary value that may be exchanged reciprocally for the proprietary value specified in the preceding item with an unspecified person and that may be transferred using an electronic processing system.
Currency Denominated Assets means any assets which are denominated in Japanese Yen or other foreign currency, and which do not fall under the definition of Virtual Currency.
While cryptocurrencies are legal, regulations vary by each member state. One consistency, however, is in regard to taxation. Here, the European Court of Justice 2015 exempted cryptocurrencies from value-added tax.
Aligned with other G20 nations, all EU member states have introduced regulatory standards as per the recommendations made by the Financial Action Task Force (“FATC”).
FATC states that any crypto site should comply with KYC and AML standards. Additionally, all cryptos sites must share data with their respective regulators.
In 2020, the 5th AMLD came into effect. This requires that crypto exchanges register with financial regulators and provide client wallet addresses to them.
In the UK, the crypto market falls under the purview of the Financial Conduct Authority (“FCA”).
Since January 2020, The FCA monitors crypto businesses to ensure their compliance with AML and counter-terrorist financing.
By contrast to more rigid jurisdictions, however, the FCA is not responsible for the oversight of crypto exchanges in general. This means that the FCA is not monitoring how exchanges protect the assets of its clients.
Under the Inland Revenue, the amount of tax due from cryptocurrency earnings depends on the individual’s personal circumstances. This includes the consideration of an individual person’s residence and domicile status.
For UK tax residents, the buying and selling of crypto assets by an individual will normally amount to investment activity. In such cases, if an individual invests in crypto assets, they will typically have to pay Capital Gains Tax on any realized gains.
Regulatory authorities that are relevant to Bitcoin and the broader crypto market include the SEC, the IRS, FinCEN, and the CFTC.
Securities and Exchange Commission (“SEC”)
The SEC’s main area of focus has been on assessing the legality of ICOs and approvals of crypto ETFs.
Under SEC guidelines, an ICO must be evaluated under the Howey Test to determine classification as a security.
Howey Test: An investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of deriving profits from the efforts of others.
Inland Revenue Services (“IRS”)
As a government tax agency, the IRS enforces the taxation of earnings from crypto assets.
Follow this link to access the FAQ section of the IRS website related to virtual currency transactions.
The Financial Crimes Enforcement Network (“FinCEN”)
As a branch of the U.S Treasury Department, FinCEN ensures that crypto-related businesses are compliant with AML and KYC regulations.
FinCEN also assesses whether individuals or firms operate as money transmitters.
The Commodity and Futures Trading Commission (“CFTC”)
The CFTC is a government agency responsible for approving and regulating the trading of crypto futures and options. Certain levered spot transactions also fall under the purview of the CFTC.
Unwelcoming Governments and Regulators
Some governments made it simple and introduced absolute bans or implicit bans on cryptocurrencies. The following countries have reportedly imposed outright bans on cryptocurrencies:
Algeria, Bolivia, Ecuador, Egypt, Morocco, Nepal, Pakistan, and the UAE.
Other countries that have imposed implicit bans or restrictions include:
- Bangladesh (Banking ban)
- Cambodia (Banking ban)
- Canada (Banking ban)
- China (Banking ban)
- Columbia (Banking ban)
- Indonesia (Illegal as Payment Tool)
- Iran (Banking Ban)
- Jordan (Banking ban)
- Russia (Banking ban)
- Saudi Arabia (Banking ban)
- Taiwan (Banking ban)
- Vietnam (Illegal as payment tool)
A number of exchanges have established in crypto-friendly jurisdictions to woo crypto investors and traders.
As the crypto market matures, however, there has been a material shift in the profile of investors and traders.
Exchanges have had to adapt to meet the needs of the diverse set of requirements.
For some, security and anonymity remain key and supersede all other attributes. In such cases, crypto exchanges have sought crypto-friendly havens. For others, however, there is a preference for a solid regulatory environment and transparency.
As the crypto market develops further, the loopholes in maintaining anonymity may erode further.
For many governments and regulators fighting financial crime and the funding of illegal and terrorist activity will continue remain high on the list.
Until then, however, crypto-friendly jurisdictions include:
Bermuda, Gibraltar, Hong Kong, Malta, Mauritius, Puerto Rico, the Cayman Islands, and Seychelles.
The outcome of the regulatory reforms over recent years achieved one key goal. Bitcoin and the broader markets failed to return to the dizzy heights of late 2017.
While that may be bad news for those in search of 1,000% returns, the market has seen much less volatility relative to 2018.
Back in 2018, the crypto market had been in the hands of governments and regulators.
Regulatory chatter and raids on exchanges had caused unprecedented daily swings. For now, regulatory risk has abated.
The good news, however, is that the crypto market has stabilized and the talk of bubbles has all but ended.
More reforms are likely, though the market may now remain under the radar until levels begin to approach 2017 highs.
As we have seen within the banking world, light-touch regulatory jurisdictions may be forced to eventually tighten controls. This may not happen, however, until there is a more standardized global regulatory framework is in place.