One of the biggest issues regulators around the world face in 2018 is developing appropriate regulation for cryptocurrencies and the blockchain technology in general. While we still have to see a country publish a complete guide that covers all regulatory issues with cryptocurrencies, authorities everywhere are actively working to reign in the new technology in the reaches of the law. Currently, as these activities are mostly unregulated, authorities are forced to put a complete ban on them or condone their use for illegal purposes. Countries that are not willing to take the risk, like China, have prohibited related activities altogether, while others, who might not want to risk capital outflow, are letting the businesses to operate in the grey area until the appropriate regulations are established.
There are several challenges they face when developing the regulations. First of all, there is no precedent or an example of another country to look at. Regulators have to come up with the appropriate framework from the scratch. Secondly, the cryptocurrencies involve a fairly advanced technology that is often obscure for people that don’t possess the understanding of programming very well. Regulators that were up to now concerned with financials might not be the best equipped to handle this issue. Because the technology is relatively new, there is a lack of professionals on the job market as well. Yet, we still see some advancements in cryptocurrency regulations around the world. This article gives a quick overview of the cryptocurrency regulation across the world in 2018.
Unites States is a little tricky when it comes to the regulations in general. Some of the decisions are made on the state level which means that certain activities might be legal in parts of the country while illegal in others. Concerning cryptocurrency, this is true for the exchanges. Some states allow virtual currency exchanges to operate while others prohibit them. Opinions on the matter differ even among different regulators. The Securities and Exchange Commission has up to now been stern with the cryptocurrencies. It recognized these digital coins as securities which translated to extremely tough regulations for Initial Coin Offerings, that virtually made it impossible to raise funds for a project with digital token issues in the country. In addition, the regulator has warned investors about the dangers of investing in these assets multiple times even setting up a fake ICO website to trick users and display a warning message in the end.
The Commodity Futures Trading Commission (CFTC), on the other hand, has been relatively more lenient with cryptocurrencies. Not only has the Commissioner of the organization, J. Christopher Giancarlo, been a big advocate of the new technology, even changing his Twitter name to @CryptoDad, but CFTC has allowed trading of cryptocurrency derivatives as well. At one point, this decision triggered a price hike in the crypto prices and was received well by the general public.
There is less enthusiasm about cryptocurrencies in the Treasury. Treasury Secretary, Steven Mnuchin has emphasized on multiple occasions the appeal of these virtual currencies for the money launderers and has pointed to the need of regulations in order to prevent such activities. Other representatives from the organization mirror these sentiments as well. Sigal Mandelkerechoed, US Treasury Deputy Director has lauded the approach of the Asian countries in regard to the cryptocurrencies, which have been very strict, and commented: “We feel very strongly that we need to have this kind of regulation all over the world”.
Another important regulatory issue with cryptocurrencies is taxation. In the United States, this is the responsibility of IRS, which declared cryptocurrencies to be a property and issued corresponding taxation guidelines. It requires the holders of these assets to calculate the gains and losses on their holdings, which is logistically very difficult when various transactions are concerned across different platforms.
China is another big economy that has been very illiberal with cryptocurrency regulations, even more so than the US. Cryptocurrency exchanges are completely outlawed in the country, which at one point forced several of the large companies involved in this business to relocate their operations to other territories. ICOs are banned as well in China. The regulators went a step farther when they prohibited access to cryptocurrency related websites and mobile applications. Nevertheless, public agencies are still interested in the new technology as The Center of Information Industry Development publishes a monthly ranking of cryptocurrencies. This gives blockchain enthusiasts a hope that the government is simply trying to stifle the speculative activity in the crypto market, but might want to foster the technology for its genuinely useful purposes. We still have to see if China will publicly declare its interest in the blockchain technology or if it gives any signs of laxer regulations to come in the future.
Japan is one of the most liberal territories in Asia when it comes to cryptocurrencies. It is one of the few countries who recognize Bitcoin as a legal tender. There is also a clearly set out registration procedures for digital currency exchanges. It needs to be noted that this approach is mostly in relation to Bitcoin only, as the country is more stringent with altcoins. In addition, the recent hack of a Japanese exchange that cost the investors over half a billion dollars forced the regulators to rethink their procedures.
While there is still a complete regulatory framework to be established in the UK, cryptocurrency related businesses are still required to meet the same standards as other participants in the financial markets.”The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities,” – Mark Carney, the Governor of the Bank of England commented. Furthermore, the cryptocurrency exchanges in the UK are subject to the same Anti-Money Laundering laws as any other financial institution. These companies have to register with the Financial Conduct Authority in order to be able to operate legally.
British regulators don’t recognize cryptocurrencies as a legal tender. A reason cited for this decision is the absence of the traditional characteristics of money in these assets. “It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange,” – Mr. Carney commented. The authorities also see preventing money laundering through these channels as a priority. Representatives from the Treasury of the United Kingdom said that they are “working to address concerns about the use of cryptocurrencies by negotiating to bring virtual currency exchange platforms and some wallet providers within anti-money laundering and counter-terrorist financing regulation”.
Various members of the European Union, as well as the leaders of the European Commission, have expressed the need for cryptocurrency regulations on multiple occasions. Valdis Dombrovskis, the vice president of the European Commission commented: “There are clear risks for investors and consumers associated to price volatility, including the risk of complete loss of investment, operational and security failures, market manipulation and liability gaps”. Bruno Le Maire who is the French Minister of Economy announced that a working group would be created with a specific target of creating a regulatory framework for the cryptocurrencies.
The regulation of cryptocurrency related activities in Europe is still lacking while the authorities are working on the framework. Unlike China, which chose to avoid risk and ban all activities altogether until a better option is evident, Europe took a less strict approach allowing exchanges to operate in some areas. The laws regarding the ICOs are much more lenient as well.
Much like the UK, Canada doesn’t recognize cryptocurrencies as a legal tender. Stephen Poloz, the head of the Central Bank of Canada commented: “I object to the term cryptocurrencies because they are crypto but they aren’t currencies … they aren’t assets for the most part … I suppose they are securities technically … There is no intrinsic value for something like bitcoin so it’s not really an asset one can analyze. It’s just essentially speculative or gambling”. Nevertheless, it has seen quite an advancement in the regulations as Canada is the first country to offer a national law on digital currencies. The bill was approved by the Canadian government as far back as 2014.
Canada has also been active in adopting the blockchain technology. It’s project – Jasper, is being studied by various other countries. The Central Bank of Canada wants to use blockchain for the wholesale payment system. If successful, the project will be one of the first public efforts to utilize the Distributed Ledger Technology on this scale.
South Korea has also seen a lot of activity related to cryptocurrencies. It is home to some of the major virtual currency exchanges. At one point, reports were circulating that the government was planning to cease the activities of these exchanges, but they haven’t, as of yet, resorted to these measures. One reason for this could be the popularity of cryptocurrencies in the country and the pressure exerted by the public. A petition, that urged the government to restrain from extreme regulatory measures was signed by more than 280,000 people. One regulation, that has been implemented is prohibiting trading with virtual coins from anonymous bank accounts. This is one way to counter the money laundering through these channels. Unlike China, South Korea isn’t rushing to make any hasty decisions. Hong Nam-ki, minister of office for government policy coordination commented on the issue, saying: “The government hasn’t made any conclusion yet. Sufficient consultations should come first”.
Venezuela’s efforts with the blockchain technology have been one of the most avidly discussed because of the obvious political implications. The country’s government wants to circumvent some of the sanctions by introducing its own oil-backed cryptocurrency – ‘petro’. Even though the exact form of the regulations are still to be established, one thing already done by the authorities is the establishment of a detailed registry of the miners in the country, which was announced by Carlos Vargas, the superintendent of cryptocurrencies. It is yet unclear in what direction the country’s approach towards the new technology will develop.
Switzerland is actively trying to establish itself as the haven for cryptocurrency related projects. The economic minister of the country, Johann Schneider-Amann, even went so far as to call Switzerland “the crypto-nation”. The country has become a hub for ICOs and the regulations are following suit. There is an ICO working group, the purpose of which is to “increase legal certainty, maintain the integrity of the financial center and ensure technology-neutral regulation”. Naturally, being this open towards these activities comes at a risk, but Switzerland has never been the one to shy away from things that other countries might consider too liberal.
Singapore has been very open regarding the new technology. In fact, it has a project very similar to the Canadian Jasper, that aims to put the interbank settlement process on the blockchain. The country does not do this at the expense of increased risk. The regulators have warned the people several times about the dangers that these cryptocurrencies could bring. Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore, emphasized the need to treat the transactions made with cryptocurrencies just like any other form of monetary transaction, which even though not formalized as a law, demonstrates the approach of the authorities regarding the issue. “The country’s laws do not make any distinction between transactions conducted using fiat currency, cryptocurrency or other novel ways of transmitting value,” – Mr. Shanmugaratnma commented.
The Russian government is wavering to decide how strictly it wants to regulate the cryptocurrencies. Earlier on, the authorities made it clear that they don’t intend to treat these digital coins like a currency. This decision was vocalized by Elvira Nabiullina, the chief of Russian Federation Central Bank. The Deputy Finance Minister Alexei Moiseev, on the other hand, was not so decisive and pointed out the lack of a regulatory framework for the new technology, which makes it impossible to clearly say if the payments made with cryptocurrencies are legal. Mr. Moiseev commented: Obviously, now there is a legal vacuum, and accordingly it’s hard for me to say if these actions are legal or not”.
As recently as late 2017, there were signs that the Russian government was preparing for a crackdown on cryptocurrency related activities. The Finance Ministry started to actively discuss the taxation of profits made by mining the virtual coins. Even President Putin got involved in the discussion to point out the dangers the new technology poses for the economy and the financial world and emphasize the need to establish a regulatory framework for the new market. “This is the prerogative of the Central Bank at present and the Central Bank has sufficient authority so far. However, in broad terms, legislative regulation will be definitely required in the future,” – President Putin commented.
In 2018 the Finance Ministry proposed a draft titled ‘On Digital Financial Assets’, which established some regulatory guidelines for cryptocurrency related activities such as mining, trading, and ICOs. The proposal found many critics among the general public as well as politicians who found the rules to be too restricting and would bring harm to the Russian markets. “The Finance Ministry’s proposals present a much tougher regulation than in Japan, Switzerland, Belarus, Armenia; that is, in all countries that have adopted some form of legislation. It would be better not to adopt anything than to adopt such legislation,” – commented Boris Titov, a presidential candidate, criticizing the draft.
Much like Russia, India has exhibited a varying approach towards cryptocurrencies. At first, it was one of the largest economies to be open to the new technology. It was home to several exchanges that attracted over 100,000 new users a day and the demand for the digital coins among the population seemed to be high as well. Only a three months ago, the Reserve Bank of India took a surprising turn to ban all cryptocurrency related activities following the example of countries like China. This decision shocked the markets and caused an uproar among the crypto enthusiast in the country. A lawsuit was filed against RBI which reached the Supreme Court. The final outcome of the process is still unclear. A final hearing on the issue is scheduled for September 11, when it should become clear whether the ban on cryptocurrencies will be lifted and replaced by appropriate regulations or not. Currently, even the representatives of RBI agree that there is a need for regulation and that a ban is not the best solution to the problem.
Currently, there are no clear guidelines for people involved with cryptocurrencies in Australia. The one authority that seems to have issued a statement that clearly identifies its position is the Australian Taxation Office. Much like most other countries, Australia does not recognize cryptocurrencies as a currency for taxation purposes and treats the profits made by trading like capital gains. “Transacting with bitcoin is akin to a barter arrangement, with similar tax consequences. Our view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes,” – reads a statement issued by the organization.
Australia is also very decisive when it comes to the anti-money laundering issues. Recently, the country’s financial intelligence agency and anti-money laundering and counter-terrorism financing regulator, AUSTRAC issued laws for the digital currency exchange providers.“It’s recognised that this reform will help protect their business operations from money laundering and terrorism financing, while regulation will also help strengthen public and consumer confidence in the sector,” – commented Nicole Rose, AUSTRAC CEO. “AUSTRAC now has increased opportunities to facilitate the sharing of financial intelligence and information relating to the use of digital currencies, such as bitcoin and other cryptocurrencies, with its industry and government partners. The information that these businesses will collect and report to AUSTRAC will have immediate benefit in the fight against serious crime and terrorism financing” – she added.