The word “Crypto” originates from the Greek word “kruptós” meaning hidden or secret. Cryptocurrency is a form of digital currency that exists in a digital form curated to act as a medium of exchange using cryptography. Crypto has stood distinctive from other forms of currency owing to the usage of a decentralized infrastructure to record transactions and issue new units instead of a central issuing authority or regulatory authority. This distinctive trait has made crypto be labeled as a speculative instrument. However, the growth of crypto from a speculative investment to a new asset class has led Governments across the world to explore ways to regulate it.
Here is the summary of digital currency regulatory landscapes across the world:
USA
Cryptocurrency regulation in the United States is controlled by multiple government agencies that oversee digital assets, with no formal rules in place yet. Key agencies include the SEC, CFTC, FTC, Treasury Department, IRS, OCC, and FinCEN.
Cryptocurrency sales are regulated if they qualify as securities or involve money transmission. The CFTC regulates market manipulation in crypto assets as commodities. US regulators aim to facilitate digital currency adoption by financial institutions. The Infrastructure Investment and Jobs Act, passed in 2021, introduced provisions requiring digital asset brokers to report transactions exceeding $10,000 to the IRS. It aims to enhance transparency in crypto transactions.
The SEC and CFTC assert jurisdiction over different aspects of the crypto market based on the classification of cryptocurrencies as commodities or securities. Ongoing congressional discussions aim to resolve this regulatory conflict. Future regulations in the US may apply the “Wash Sale Rule” to cryptocurrencies, impacting tax deductions. The government is also considering regulations related to crypto banking, stablecoins, and disclosure requirements.
China
The People’s Bank of China (PBOC) has outrightly banned the exchange of cryptocurrencies in the country as they facilitate public financing transactions without approval from any centralized authority. Furthermore, China has banned Bitcoin mining in 2021, forcing those engaged in the activity to close the operations and relocate to other jurisdictions. However, China recognizes cryptocurrency as an asset to determine inheritance. China officially rolled out its Central Bank digital currency (CBDC) pilot test program to develop the digital yuan subsequently.
Canada
Canada does not recognize crypto as legal tender. However, it is the first country to approve a Bitcoin-exchange traded fund (ETF) with several trading on the Toronto Stock Exchange.
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada require that the crypto trading platforms and dealers in the country register with provincial regulators. Canada also classified all crypto investment firms as money service businesses (MBS), which requires them to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Canada also treats crypto similarly to other commodities for taxation.
United Kingdom
Crypto is recognized as a property in the UK but not as a legal tender. There are no specific laws governing cryptocurrency however, crypto derivatives trading is illegal in the UK as well. Crypto exchanges must register with the UK Financial Conduct Authority (FCA) and there are cryptocurrency-specific reporting requirements relating to KYC standards as well as AML and CFT. Despite that, investors are liable to pay capital gain tax on crypto trading profits. Tax applicability depends on the nature of crypto activities and the entity conducting the transactions.
The Future Financial Assets Regulatory Regime for Crypto Assets was introduced in the year 2023 by the Government of the UK with an ambition to become the most open, well-regulated, and technologically advanced capital market in the world. The regime includes strengthening rules for crypto trading platforms, creating a world-first framework for crypto lending, and implementing new rules to protect customers from market manipulation.
Japan
Japan, the most technologically advanced society in the world, was the first and foremost to recognize the potential of a decentralized digital ecosystem. Perhaps Japan was the first country to regulate cryptocurrency and established the Japanese Virtual Currency Exchange Association (JVCAE) in 2020, a self-regulatory body consisting of all the crypto exchanges as members. The Japanese Financial Services Agency (FSA) regulates cryptocurrency along with the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA) for regulatory purposes. The JVCEA creates rules and policies for crypto exchange service providers. The JSTOA supervises token offerings and other crowdfunding events. After a period, Japanese lawmakers have tightened digital assets regulations on derivatives trading.
Singapore
Singapore has stood as the nation that has created an impeccable framework by adopting a balanced regulatory and legal framework for cryptocurrencies and various other entities dealing with them. The Monetary Authority of Singapore (MAS) is the financial regulatory body that licenses and monitors the crypto exchanges as per the Payment Services Act (PAS). Singapore treats cryptocurrency as property and not as a legal tender. Additionally, Singapore imposes taxes on businesses that conduct consistent cryptocurrency trading activities.
European Union
Cryptocurrencies are broadly legal across Europe; however, crypto exchanges are regulated independently in each state of the union; they adopted the Markets in Crypto-assets Regulation (MiCA) legislation. MiCA presents a harmonized and holistic framework governing the conduct of European crypto asset markets that deals with various issues like consumer protection and the introduction of new license requirements etc. The legislative framework also intends to check the usage of crypto instruments for illegitimate purposes. As for taxation crypto, the percentage varies from 0 to 50 % within the states of the European Union.
India
India has an ambivalent approach towards cryptocurrency; it has neither legalized nor penalized cryptocurrency. However, India levies 30% taxation on all crypto investments and 1% TDS (Tax Deducted at Source) on crypto trades. The Reserve Bank of India (RBI) Central Bank Digital Currency (CBDC) issued the digital Rupee, a tokenized digital version of the Indian Rupee.
The governments of many countries have been working on regulating and governing cryptocurrencies, while some other countries are exercising partial regulation, others are in pursuit of absolute regulation. The objectives behind regulation are to protect consumers from fraudulent activities and prevent the usage of crypto for illicit activities.
Dubai
While the rest of the world began the pursuit of regularizing cryptocurrency, Dubai has emerged as the best market for the crypto business. The majority of the crypto industry has been moving to Dubai since March 2022, after the announcement of the world’s first independent crypto regulator VARA by the UAE. VARA (Virtual Assets Regulatory Authority) regulates and oversees the usage and exchange of virtual assets in Dubai.
The Full Market Product (FMP) Regulations of VARA, the world’s first custom-built virtual asset regime, are intended especially to support the offering of authorized services and activities to clients and investors from the Emirate of Dubai. In an innovation-centric environment that is truly borderless, technology-agnostic, and future-focused, VARA aims to develop a model framework for global economic sustainability with the aid of appropriate rules and guidelines intended to assure clarity, assure certainty, and mitigate market risks. The goal of VARA is to position Dubai as a hub for digital assets.
Moreover, Dubai imposes 0% tax on personal income tax for gains acquired through cryptocurrency transactions including holding and trading. Dubai is a heaven for crypto and blockchain businesses and continues to draw crypto enthusiasts and entrepreneurs from various parts of the world.
Hong Kong
Hong Kong introduced an independent non-governmental statutory body responsible for regulating Hong Kong’s securities and futures markets and it has guidance related to crypto-assets stating that if a crypto-asset has characteristics of a security as defined under the Securities and Futures Ordinance (SFO) then it will be regulated by the SFC as a security by the SFO and other relevant laws and regulations. Further, the regime governing the offering/marketing of financial products in Hong Kong will be applicable if a crypto-asset qualifies as a security. Crypto assets that are securities may also be subject to laws concerning regulated activities (which attract licensing and authorization requirements).
Coming to taxation, Hong Kong has no capital gains tax and only frequent cryptocurrency trading is treated as income which shall be subject to a profit tax capped at 16.5%.
El Salvador
El Salvador was perhaps the first country to recognize Bitcoin as legal tender in 2021. Digital Asset Issuance Securities law of the country established a legal framework for issuance of digital assets and a broader crypto token classification which includes all kinds of crypto instruments. A definitive framework is established through this law for all the tokenized securities.
A Bitcoin Fund Management Agency would also be established under the new regulatory framework for digital assets. This agency would be in charge of managing and supervising public offerings of digital assets that the state of El Salvador and its institutions issue.
This also laid the foundation for the issue of the Volcano token, a digital token issued by the state of El Salvador to raise capital to pay down its sovereign debt, direct the funds towards bitcoin mining infrastructure creation, and fund the construction of Bitcoin City.
Portugal
There are no specific laws that govern crypto in Portugal however, there are various laws and regulations that govern cryptocurrency. The Bank of Portugal, in its capacity as both a central bank and a competent national authority for the supervision of credit and payment institutions, is bestowed with the task of overseeing and regulating cryptocurrency exchanges and wallet providers. It also involves creating and enforcing registration and licensing requirements for entities operating within the cryptocurrency ecosystem by the implementation of the EU Directive into Portuguese law. Portuguese Securities Market Commission’s mandate extends to the oversight of the issuance and trading of digital assets classified as securities, such as specific types of tokens originating from initial coin offerings (ICOs) and security token offerings (STOs). Crypto transactions remain nontaxable for individual investors in Portugal.
Crypto Conflicts
SEC vs. Binance
The Securities and Exchange Commission, USA has filed a lawsuit against Binance, (the largest crypto asset trading platform in the world), alleging a variety of securities laws violations.
SEC has filed a voluminous complaint against Binance which included the following:
- Running an unregistered crypto exchange
- Allowing US investors to buy, sell, and trade crypto contrary to the claim made by Zhao (Founder of Binance) and Binance that US customers were restricted from transacting on binance.com
- Obscuring efforts made to ensure high-value US customers continued trading on Binance.
- Unregistered offers and sales of BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault”.
- Misrepresentation of implementation of investor protection controls on the Binance US platform.
- Diverting billions of dollars of customer assets to third-party entities (owned and controlled by Zhao).
- Manipulative trading that artificially inflated the trading value of the platform.
Binance has replied to the lawsuit stating that “it will put up a vigorous fight against the allegations made by the SEC”. Binance has also questioned the SEC’s refusal to engage with the crypto industry in providing clarity and guidance to the digital asset industry. Subsequently, Binance entered an agreement with the SEC to ensure that US customer assets would never leave the country. Binance has filed a protective order against the SEC to restrain the regulator from excessive deposition.
SEC vs. Coinbase
SEC has filed a lawsuit against Coinbase just a day after its lawsuit against Binance. As per the complaint filed by the SEC, Coinbase is operating as an unregistered securities exchange, broker, and clearing agency and has made billions of dollars unlawfully by facilitating the buying and selling of crypto assets. As per the SEC, Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having any of those functions registered with the Commission as per law, thus depriving its investors of crucial protection.
In response to the lawsuit filed by the SEC, Coinbase has agreed to register some portion of its business with the regulator and requested the SEC to specify the instruments that the SEC recognized as securities. However, the SEC has refused to budge on any of those attempts.
Coinbase has also the court to dismiss the suit filed by SEC on the ground that “the transactions carried out on Coinbase does not involve any contractual undertakings to deliver any future value reflecting incomes and profits and that they are mere commodity sales with obligations immediately discharged entirely at the moment the digital token is delivered in exchange for payment”. However, the dismissal request was declined by the Court.
The SEC’s approach appears to be to regulate the cryptocurrencies and crypto companies, exchanges, brokers, and dealers in the same fashion as the stock market and its participants are regulated. The SEC also appears to be hell-bent on treating cryptocurrencies like securities. However, cryptocurrencies have become prominent owing to their unique decentralized nature and the motive of SEC shall go against the nature of origin of cryptocurrencies.
Conclusion
Cryptocurrency regulation varies widely across the globe, reflecting the complex nature of digital currencies. Some nations embrace cryptocurrencies, while others take restrictive approaches. Ongoing legal conflicts, such as the SEC’s lawsuits against Binance and Coinbase, highlight the challenges of fitting crypto into traditional regulatory frameworks.
As the crypto space evolves, regulatory strategies will adapt to protect consumers and prevent illicit activities. The future of crypto regulation will balance innovation with financial security and it will be intriguing to watch how countries navigate this complex landscape.
