Crypto Regulations: Navigating the New Landscape of Digital Currency Compliance
Crypto regulations are not only complex but they can vary significantly depending on the country. This is an evolving landscape, so many jurisdictions are yet to install crypto-specific legislation.
In this guide, we clear the mist by exploring key crypto regulations from around the world. We cover regulations related to crypto ownership, tax reporting, anti-money laundering, and much more.
Crypto Regulations Overview
Let’s start with an overview of crypto regulations in 2024:
- Sales Regulations: In most countries, selling a cryptocurrency is just one form of disposal. Other sales include crypto swaps (e.g. Bitcoin for Dogecoin) and using crypto to make purchases. In any of these instances, the crypto sale can trigger a taxable event.
- Securities Laws: The SEC considers some cryptocurrencies securities, although this doesn’t include Bitcoin or Ethereum. In other countries, cryptocurrencies are often treated as property or commodities. Whether a particular crypto is deemed a security is important, as it determines how the project is regulated
- Money Transmission: The US and many other Western countries view crypto exchanges as money service businesses (MSBs). This means that exchanges must comply with existing anti-money laundering regulations. This means fiat purchases and sales can only be executed after adequate KYC checks.
- Taxation: Most countries levy taxes on crypto capital gains after a disposal has been made. This can be triggered on sales, swaps, and purchases. It’s also common for crypto income to be taxed. For instance, staking and crypto savings accounts are often taxed as income.
- Mining: Mining is legal in most countries, although a notable exception is China. Mining is usually taxed as income, just like staking and savings accounts. However, those operating fully-fledged mining businesses will also need to consider corporation taxes. Upon disposal of the mining earnings, capital gains taxes are usually levied.
- Border Restrictions and Declaration: There are no global regulations on bringing crypto assets into and out of a country. Even so, enforcement would be challenging, considering the anonymous nature of crypto wallets. That said, the US and the EU have previously discussed tracking cross-border crypto payments, so this is a regulatory space to keep an eye on.
- Reporting Requirements: FATF recommendations advise that crypto assets should follow existing reporting standards. This means exchanges and other gatekeepers must report transactions above $10,000 (or the current equivalent). This ensures that anti-money laundering and terrorist financing regulations are upheld.
Who Regulates Crypto?
While crypto is a borderless and global asset class, regulation is determined on a country-by-country basis. What’s more, some countries have several different regulators responsible for overseeing the industry. For instance, in the US, the SEC governs crypto-related securities. This includes Bitcoin ETFs, Coinbase stock, and any crypto projects it deems to be selling unregistered securities.
The IRS, however, regulates crypto taxation laws. And then there’s the CFTC, which regulates crypto-related commodity markets, such as Bitcoin futures. In addition, FinCEN oversees crypto money laundering and terrorist financing regulations. This multi-agency approach to crypto is found in other major economies, including the UK and the European Union.
All that being said, very few countries have installed crypto-specific legislation. In most cases, existing legislation is applied to crypto assets. This is especially the case when it comes to taxation and financial crime laws. This can make it challenging for stakeholders, as some regulations are open to interpretation.
Crypto Regulations by Jurisdiction
Let’s take a closer look at crypto regulations in selected countries.
United States
The U.S. doesn’t have any specific legislation dedicated exclusively to crypto assets. That said, the U.S. has taken a multi-agency approach to govern the industry. In terms of taxation, the IRS views cryptocurrencies as property. This means that crypto disposals – including sales and swaps, can trigger capital gains tax. The IRS treats mining, staking, and other earning products as income.
To safeguard the industry from money laundering and terrorist financing threats, FinCEN enforces existing financial crime regulations. This means gatekeepers must comply with the Bank Secrecy Act. In simple terms, this means conducting customer due diligence checks on transactions involving fiat and reporting purchases and sales above the $10,000 threshold.
The SEC is responsible for governing crypto-related securities. It doesn’t view Bitcoin or Ethereum as securities, and therefore has no jurisdiction over these projects. However, the SEC does govern Bitcoin ETFs. It also regulates crypto-related stocks like Coinbase. That said, the SEC has filed charges against many crypto and NFT projects for selling unregistered securities – including Ripple.
The UK
The UK government first announced its intentions to regulate the crypto industry in 2013. Progress has been very slow. Nonetheless, HMRC is responsible for crypto-related taxes. Similar to most jurisdictions, realized crypto profits are subject to capital gains tax. What’s more, the UK’s NCA is responsible for upholding anti-money laundering regulations, which include crypto assets.
In terms of the crypto trading markets, this is overseen by the FCA. Any crypto businesses serving UK clients must be registered with the FCA unless they have an e-money license. In 2022, the FCA banned retail clients from trading crypto derivatives, such as Bitcoin futures, options, and CFDs.
In late 2023, the FCA introduced its travel rule on crypto transactions. This requires crypto exchanges to collect additional information on incoming and outgoing wallet transfers. This includes the identity of the transacting parties. There have also been discussions on regulating crypto assets as gambling products. However, the proposal was rejected by UK lawmakers.
Canada
In general, Canada is considered a crypto-friendly nation. It treats crypto assets as commodities, meaning disposals are subject to capital gains taxes. FINTRAC oversees anti-money laundering and terrorist financing compliance. This means exchanges must implement adequate KYC checks on their clients.
The CSA – which regulates the securities markets, has previously stated that some crypto assets could be securities. In particular, this includes initial coin offerings (ICOs) that haven’t sought approval from the CSA. Crucially, however, some Canadian provinces have their own regulations on crypto assets. This means Canadians must be aware of provincial and federal guidelines.
European Union
The European Union aims for a harmonized approach to crypto regulations across all member states. For example, the most recent Anti-Money Laundering Directives specifically cover crypto assets. This requires stakeholders to report suspicious activities to their national financial intelligence unit.
It also requires exchanges to identify their customers and report transactions above the €10,000 threshold. The European Union is also developing the Markets in Crypto-Assets Regulation (MiCA). This will offer comprehensive guidance on crypto service providers, including exchanges, wallets, and decentralized finance platforms.
It will also cover crypto-asset issuers, such as ICOs. ESMA – which regulates the European financial markets, limits retail clients to leverage of 1:2 when trading crypto derivatives. Taxation, however, is determined on a member-state level. While countries like Portugal offer favorable tax treatment on crypto profits, this isn’t the case throughout the continent.
Japan
Japan was one of the first countries to recognize crypto assets as a payment currency. Many retailers within the country accept Bitcoin and some of the best altcoins. Japan’s FSA oversees the crypto trading markets. It dictates standards and rules for crypto exchanges, including consumer protections, security, and ethical practices.
Exchanges and other gatekeepers must comply with existing regulations on money laundering controls. While Japan is considered a crypto-friendly country, it has an aggressive stance on crypto taxes. Capital gains are treated as miscellaneous income, meaning they can be taxed at up to 55%. What’s more, businesses holding crypto are taxed at 30%, even if the assets haven’t been disposed of.
China
China is the complete opposite of crypto-friendly. It has some of the most draconian regulations across most areas of the industry. For a start, China banned ICOs in 2017 after a wave of successful campaigns. It ordered several high-profile projects to return funds to ICO investors. After the ICO ban, the Chinese government then moved on to domestic crypto exchanges.
This forced some of the best crypto exchanges to move overseas, including OKX and Huobi. And then in 2021, China turned its sights to mining operations. Back then, China dominated the Bitcoin mining industry. However, the government has since cracked down, forcing local operations to close.
China has since banned all crypto trading activities, including buying, trading, and selling. It’s also illegal to use crypto as a medium of exchange. All that said, the bans have proven challenging to enforce. Crypto ownership is still significant throughout China.
India
India previously took an anti-crypto stance. In 2018, the central bank instructed financial institutions to prohibit crypto-related transactions. This made it challenging for Indians to buy cryptocurrencies within the country. However, the central bank’s regulatory stance was overturned in 2020.
This means that Indian financial institutions can now facilitate crypto transactions for account holders. That said, crypto is taxed heavily in India. There’s a flat 30% capital gains tax on all crypto disposals – irrespective of the individual’s income. What’s more, there’s a 1% withholding tax on the full value of the disposal, which is withheld by crypto exchanges.
Australia
Australia has embraced crypto assets for many years. For a start, Australia views cryptocurrencies as legal property. This means that crypto assets are taxed the same as other investments. Crypto taxes are overseen by the ATO. What’s more, AUSTRAC is responsible for enforcing anti-money laundering regulations on crypto stakeholders.
This includes reporting large crypto transactions and suspicious activities and conducting adequate customer due diligence procedures. However, there have been some recent regulatory changes, largely aimed at protecting retail clients. For example, major high-street banks – including Commonwealth Bank and Westpac, Block certain crypto transactions.
This includes deposits made with ‘high-risk’ exchanges. Some Australian banks hold crypto-related transactions for 24 hours or more, allowing time to investigate the transfer. ASIC – which regulates the Australian financial markets, regulates securities brokers with crypto exposure. Domestic exchanges must also be registered with ASIC.
The Interactive Gambling Amendment (Credit and Other Measures) Bill 2023
Crypto assets were included in Australia’s latest regulatory development. The Interactive Gambling Amendment (Credit and Other Measures) Bill 2023 prohibits online gambling sites from accepting crypto payments. The rules will come into force in June 2024.
Benefits of Regulating Crypto
Globally, crypto regulation is still in its infancy. Let’s explore some of the benefits of regulating this high-growth industry.
Consumer Protections
Regulations must be installed to protect consumers from unethical crypto practices. The FTX bankruptcy, for example, resulted in billions of dollars worth of customer funds being lost.
In addition, scams related to ICOs are still prevalent. Crucially, sensible regulation can protect consumers without hindering the industry. Exchanges, for example, could be required to hold minimum reserves.
Legitimize the Industry
Creating a regulatory framework for cryptocurrencies will further legitimize the industry. Those who are yet to enter this market would have greater confidence in buying and selling crypto assets.
In their current form, cryptocurrencies are still treated as unregulated financial products. This means that traditional securities protections don’t extend to crypto projects. Ultimately, regulation will encourage a new wave of capital inflows – which benefits the industry as a whole.
Financial Crime Prevention
Financial crime is a major issue in the crypto industry. Especially when it comes to money laundering and terrorist financing. Suitable regulations will help financial intelligence units keep the industry safe.
This means following existing guidelines on customer due diligence, suspicious activity reporting, and politically exposed persons.
Promote Innovation
Crypto regulation can help the industry grow organically. It will also encourage innovation from startups and established companies alike. With a clear regulatory framework, innovators will take the crypto markets to the next level.
Market Stability
Many commentators argue that Bitcoin prices are heavily manipulated. This not only reduces market confidence but creates speculative and volatile trading conditions. A strong regulatory framework – similar to securities laws in the US, can create long-term market stability.
Risks of Regulating Cryptocurrency Market
While regulation can take the crypto industry to new heights, there are also some drawbacks to consider.
- Cost Implications: Regulatory red tape can be costly for crypto stakeholders. Specialist compliance teams are needed to ensure regulations are followed. This can negatively impact new market entrances.
- Privacy Concerns: The best cryptocurrencies to buy offer a level of anonymity when sending, storing, and receiving funds. Too much regulation can lead to privacy concerns. For instance, the UK now requires domestic exchanges to collect information from clients that make wallet transfers.
- Market Barriers: The crypto markets are borderless and inclusive. However, increased regulations can create barriers to entry, which could hinder growth.
- Enforcement: On a consumer level, enforcing crypto regulations can be challenging. This is especially the case when using decentralized products, such as exchanges and self-custody wallets.
Conclusion
Crypto regulations are an evolving space, with many countries implementing new guidelines and laws to protect consumers. Governments are particularly interested in preventing crypto scams, malpractice, and access to high-risk products.
What’s more, there is increased harmony when it comes to anti-money laundering and taxation rules. Future regulation can only help the industry grow further. Regulation must be sensible, ensuring that risks are reduced without hindering innovation.
References
- IRS: Digital Assets
- FCA: FCA sets out expectations for UK crypto-asset businesses complying with the Travel Rule
- FINTRAC: Reporting large virtual currency transactions to FINTRAC
- ESMA: Markets in Crypto-Assets Regulation (MiCA)
- Financial Times: Japan’s FSA shows how to war game cryptocurrency risks
- CNBC: China bans companies from raising money through ICOs, asks local regulators to inspect 60 major platforms
- Reuters: India’s Cenbank tells lenders to re-consider ties with crypto exchanges, traders
- Australian Financial Review: Crypto platforms a ‘getaway’ for half of scam proceeds
FAQs
Are there regulations on cryptocurrency?
Yes, there are crypto regulations covering taxation, money laundering, investor protection, and sales. However, specific regulations vary from one jurisdiction to the next.
Why should crypto be regulated?
Proponents of crypto regulation argue that it will legitimize the industry. Regulation can help protect investors from crypto scams and prevent market manipulation.
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