The word regulation can sometimes result to fear not just in the crypto industry but across all industries. Why? Regulation is somehow associated with the word control or constraint. Humans by nature hate these two things and may sometimes hatred even result in rebellion. But of course, oftentimes than not, people may raise criticisms depending on the soundness and clarity of the regulation.
Most countries in the world do not accept cryptocurrencies as legal tender hence they are not controlled or regulated. But regulators like FinCen categorize exchanges as money transmitters and they are subject to regulations. In the United States, government agencies like the Securities and Exchange Commission (SEC), Commodities and Futures Trading Commission (CFTC), Federal Trade Commission (FTC), International Revenue Service (IRS) under the Department of Treasury, Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCen) all work together to guarantee that regulations are in place.
But why is it important for a proper regulation to be in place? First, let’s take a closer at the effect of regulations on cryptocurrencies.
Regulations and Cryptos
We have seen a massive adoption of crypto in 2020. The entry of institutional investors like Paypal and Microstrategy has widely influenced other behemoths including Wallstreet giants like Guggenheim Funds and Cypherpunk to join the throng.
The adoption is happening at a faster rate especially with a bullish market this year. Poor regulations can hamper the growth of the market. It will also make it hard for crypto businesses to operate. But a good regulation can guarantee a smooth sailing crypto industry and will also encourage more investors as it will build a strong level of confidence and trust in the market.
Primarily, regulations are implemented to protect the interest of the investors. But it works two ways. With regulations in place, cryptocurrencies will no longer be viewed as investment risks. It will also eliminate the possibility of manipulation. Safer crypto will also mean a thriving crypto market.
Cryptocurrencies have long been associated with illicit activities like money laundering, hence a need for regulation. This is to combat the use of these digital assets by unscrupulous entities that operate in the dark web. But from the list of regulations by governments that are being implemented on cryptocurrencies worldwide, are there good regulations in place? Let’s discuss the different regulations that have been so far implemented and examine if they have helped the crypto industry to operate smoothly.
Government Regulations on Cryptos
Here are some regulations that have been implemented in different countries worldwide.
Although cryptocurrencies are not legal tender in the country, crypto exchanges are deemed legal depending on the state. The United States has been one of the countries that are actively on crypto regulation. Financial Crimes Enforcement Agency (FinCEN) “Travel Rule” also known as the Bank Secrecy Act has been proposed to address concerns on terrorism and money laundering by lowering the threshold of crypto transactions outside the country from $3000 to $250. One component of the regulation is the implementation of KYC. Early this year, FinCen has announced the amendment of the Travel Rule which will now require US citizens to declare offshore cryptocurrency holdings that are more than $10,000 in value. Also, before the end of 2020, the Department of Treasury through the Internal Revenue Service (IRS) has implemented taxation on cryptos.
The FinCen “Travel Rule” has been widely criticized since it violates the privacy of crypto users. While the taxation on crypto implemented by the IRS aims to increase government revenue though it does not recognize cryptocurrencies as legal. But since they are classified as property hence they are subject to taxation.
Cryptocurrencies are not legal but exchanges are. Despite this, the country has not shown hostility over cryptos. Though it does not intend to regulate digital assets, it is committed to regulate digital payments tokens (DPT) classified as a security. It has adopted existing legal frameworks to regulate exchanges. But in 2018, MAS has issued a warning to the public about the risk of cryptocurrencies. Deputy Prime Minister Tharman Shanmugaratnam also stated that cryptocurrencies are subject to the same AML and CFT measures as traditional fiat currencies. In 2019, the Payment Services Act 2019 (PAS) was passed. This has placed crypto businesses which include exchanges under the jurisdiction of MAS in 2020. Crypto businesses were also required to secure MAS operating license. Singapore has been a member of the FATF since 1992. PSA has now adopted the FATF’s recent recommendation. In 2020, MAS proposed new financial sector regulations that will affect cryptos. It seeks to implement stronger AML/CFT standards for cryptocurrency service providers and higher requirements for technology risk management in financial institutions.
Cryptocurrencies and crypto exchanges are both legal in the country and have been enforcing regulations progressively on digital assets. Cryptocurrencies were recognized as legal in 2017 and were subjected to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF 2006). Bitcoin and other virtual assets are considered as property and were subjected to Capital Gains Tax (CGT). But recently, double taxation was implemented to cryptos in the country under the goods and services tax (GST). In 2018, crypto exchanges operating in the country were required to register with the Australian Transaction Reports and Analysis Centre (AUSTRAC). Also, they need to identify and verify their users, maintain records, and comply with government AML/CTF reporting obligations. In 2019, the Australian Securities and Investments Commission (ASIC) issued updated requirements on initial coin offerings (ICOs) and exchanges. In 2020, a regulation was implemented requiring exchanges to delist privacy coins in their platforms. But despite crypto regulations, it has recorded a significant increase in crypto investors. In research conducted by Independent Reserve Cryptocurrency Index (IRCI) in 2020 revealed that 20% of Australian young adults are into cryptocurrencies.
Cryptocurrencies and crypto trading platforms are both legal in the country. Just like Australia, the country implements a progressive regulation for virtual assets. Under the Payment Services Act (PSA), digital assets are deemed as legal properties. Exchanges are also required to register and comply with traditional AML/CFT regulations. In 2017, the National Tax Agency classified virtual assets as miscellaneous income and imposed taxation. In May 2020, an amendment on the o the PSA and to the Financial Instruments and Exchange Act (FIEA) was implemented which brought more restrictions on cryptos. With the new rule, custody service providers (that do not sell or purchase crypto assets) fall under the PSA. Cryptocurrency derivatives businesses on the other hand fall under the jurisdiction of the FIEA. The Coincheck hacking in 2018 has also brought in Financial Services Agency (FSA) in the regulatory table. With the FSA involved, cryptocurrency exchanges are now required to register with the FSA to continue to operate. In recent reports, the country has announced that it will now align its regulations with FATF’s Travel Rule. Japan has been a member of the FATF since 1990. With this, stricter regulations on crypto assets are yet to come.
In the country, bitcoin and other digital assets are not considered legal tender. Though crypto exchanges are legal in the country, they are subjected to regulations. Currently, crypto transactions are tax-free but the Ministry of Strategy and Finance plans to impose taxes on income from crypto transactions in 2022. In 2017, the government banned the use of anonymous accounts in trading platforms. It also banned the trading of Bitcoin futures. In 2018, the Financial Services Commission (FSC) implemented stricter reporting obligations on banks with accounts held by crypto exchanges. With the new rule enforce, cryptocurrency trade can only be carried out from real-name bank accounts. The exchange and bank must check the trader’s identity in compliance with traditional AML/CFT regulations and with structured transactions reporting requirements. The country has also aligned its regulations with the FATF. Recently, the country has implemented new anti-money laundering rules. Under the revised Financial Transaction Reports Act, virtual asset service providers (VASPs) require strict compliance with inspections and verify customer identities. Providers are also required to file suspicious transaction reports to the Korea Financial Intelligence Unit and are liable to the Financial Services Commission (FCS). OKEx has halted its operation in the country citing the regulation as the main reason.
Cryptocurrencies and exchanges are both illegal in the country. In 2013, authorities banned financial institutions from Bitcoin transactions. It also banned ICOs and domestic cryptocurrency exchanges in 2017. In 2020, China’s Civil Code was amended citing that state-approved cryptocurrencies had the status of a property to determine inheritances. The recent move could be highly associated with the creations of its digital yuan. Although exchanges and related services are prohibited, authorities allow crypto mining, particularly of bitcoin. According to a study, China has the biggest number of bitcoin mines with 65% of the BTC global hash rate coming from miners in the country. But due to the country’s hostility on digital assets, a crackdown on bitcoin miners was launched by the government. The miners accused the government that the harassment was meant to eliminate competitors for the digital yuan. The government has denied the accusation and claim as groundless. Concerning its digital yuan, China President Xi Jinping encourage other members of the G20 to openly support the Central Bank Digital Currencies (CBDC) during the 15th G20 Leaders Summit in 2020. In October 2020, the digital yuan was launched and a law was drafted to legalize China’s central bank digital currency (CBDC), the digital renminbi or e-CNY.
In October 2020, Iran amended its law to adopt bitcoin as payment for imports. This is a surprising move given that in 2019 a law was ratified stating that the government will not recognize any domestic activity which involves cryptos. Also, the Central Bank announced that bitcoin trading is illegal in the country. The action made by the Iranian government was to address the sanction imposed by the United States. The sanction has prevented the country from using dollars for trading goods internationally which include medicines. Iran has sought refuge on bitcoin to counter the sanction. Crypto exchanges in the country are required to secure a license from the Central Bank of Iran and follow legacy foreign currency exchange guidelines to operate. But exchanges based in other countries are allowed to operate in the Iranian market. Due to some confusing regulations, It is unclear how these regulations will be implemented.
Since cryptocurrencies, in general, are not considered legal, every government has implemented a varied approach. But regulations were imposed mainly to protect investors as claimed by authorities. But the latest case of Ripple’s XRP says otherwise. In a reply to the US SEC lawsuit, Ripple stated that investors incurred billions of dollars in losses. More, it has created havoc in the crypto market contrary to its mission to maintain orderly markets.
With cryptocurrencies going mainstream as a result of massive adoption, will their association with illegal activities like money laundering soon end? That remains to be seen.