One of the fundamental principles of cryptocurrencies is their decentralized nature. Yet, governments around the world repeatedly try to implement regulations and restrict new coins’ use and release.
In fact, such regulatory measures might become extremely radical, as in the case of China that has recently declared all cryptocurrency transactions illegal.
The US Security and Exchange Commission (SEC) has also repeatedly expressed concerns regarding the crypto world, especially in terms of transaction security and investor safety. But despite multiple statements on this matter, they haven’t developed a clear regulatory framework yet.
Are regulations a necessity or a burden? Today, we’ll uncover all the pros and cons of crypto regulations and share the details of corresponding restrictions around the world.
Though regulations might seem like an obstacle rather than protection, in fact, they are extremely beneficial for the whole industry in the long run.
The effective regulation of cryptocurrencies will provide stability to the market, lead to investor safety and confidence. Thus, it will make digital assets more appealing to investors and increase the credibility of the whole industry, bringing more long-term investments and even more interest in decentralized finance. Besides, in the long run, it will bring more investment from incumbent institutional investors like banks and pension funds.
Here’s how crypto regulations can benefit the industry.
Regulations are meant to create binary cryptocurrency ownership, meaning that all virtual assets become either regulated or unregulated.
Compliant Virtual Asset Service Providers (VASPs), including major centralized exchanges and wallets like Facebook’s Novi, have already implemented special procedures that help them operate with necessary money transmitter licenses jurisdictions and tie the real-world identities of crypto owners to digital assets. The most well-known ones are Know Your Customer (KYC) and Anti-Money Laundering (AML).
By identifying cryptocurrency owners and tracking the origins of the assets, regulators and VASPs can significantly decrease fraudulent activity and money laundering that are still a common practice in the industry. For instance, in the US alone, 82,135 crimes involving cryptocurrencies got reported in 2020, altough only less than 1% of transactions are used for illegal activities.
Regulations will help fight malicious activity and create a safer and more trustworthy space for crypto trading.
At the moment, crypto assets are pretty hard to categorize, which leads to unclear jurisdiction by regulators and frequent misunderstandings in the industry. This doesn’t allow the emergence of new crypto-friendly financial institutions and banks.
Clear regulatory guidance will help classify virtual assets according to their legal status and, thus, understand them better. Besides, it will allow financial institutions to promote and invest in cryptocurrencies since they will meet transparent rules and comply with the corresponding regulatory framework.
As bigger financial institutions can clearly determine the origins of virtual assets and understand their long-term legality, they will take more part in the market development. Eventually, this will benefit all market players, including smaller individual investors.
As bigger players enter the market, the world of decentralized finance will receive more support in terms of research and development.
Global financial institutions frequently obtain the most skilled human resource in the fields of traditional banking, FinTech, and digital security, which DeFi lacks for now. The input of those professionals, as well as enterprise solutions and infrastructure, will significantly boost the whole industry.
On top of the aforementioned benefits, the implementation of regulations will make virtual asset ownership more secure and improve the overall efficiency of cryptocurrency trading.
According to the Financial Action Task Force (FATF) guidelines, countries have to understand all the risks they are facing, license and register all operating VASPs, and supervide the sector in the same way they supervise other financial institutions.
VASPs, on their part, need to implement the same preventive measures as financial institutions, as well as obtain, hold and securely transmit originator and beneficiary information when making transfers.
However, due to the diverse legislation around the world, it is impossible to introduce one regulatory framework for cryptocurrencies in all countries right now. That’s why, currently, the governments and regulating authorities are taking different approaches to regulating virtual assets.
The lack of a consistent classification of digital assets makes it even harder to reach an agreement. That’s why cryptocurrencies are subject to different laws and tax treatments around the world.
As of now, there is no clear regulatory framework for virtual assets in the US, even though over 24 million of its citizens own cryptocurrencies.
There are several regulatory authorities that classify cryptocurrency in a different way. For instance, the Securities and Exchange Commission (SEC) views it as a security, while the Commodity Futures Trading Commission (CFTC) calls it a commodity, the Treasury calls it a currency, and the Internal Revenue Service (IRS) sees it as a property for tax purposes.
OCC has provided interpretive letters and guidance allowing banks to custody cryptocurrency and stablecoins, as well as engage in stablecoin activity.
Even though currently, there is no consistent regulation, the US government is weighing an executive order on cryptocurrencies trying to set up a country-wide approach to the white-hot asset class. At the same time, the Treasury Department is working on an oversight framework for digital currencies, and other authoritative institutions are getting ready to start a regularoty race in the US.
Canada has gone a long way in crypto regulations and classification.
In February 2020, the Canadian government introduced the Virtual Currency Travel Rule, which requires all financial institutions and money services businesses (including decentralized exchanges) to keep a record of all cross-border digital asset transactions.
At the moment, cryptocurrency is regulated primarily under securities laws, and, in terms of taxes, it is treated as a commodity.
The United Kingdom considers cryptocurrency as property but not legal tender. All virtual asset traders need to pass a KYC, AML, or CFT procedure in order to trade safely on decentralized exchanges.
Exchanges, on their part, must register with the UK Financial Conduct Authority (FCA) and cannot offer crypto derivatives trading.
In terms of taxability, investors must pay capital gains tax on crypto trading profit, but it also depends on the performed activities and engaged parties.
Japanese authorities classify cryptocurrencies as legal property under the Payment Services Act (PSA). Decentralized exchanges must register with the Financial Services Agency (FSA) and comply with AML/CFT obligations.
When it comes to taxes, Japan treats cryptocurrency trading profit as a “miscellaneous income”.
Australia also views cryptocurrencies as legal property, which makes them subject to capital gains tax. Decentralized exchanges must register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations.
Singapore classifies cryptocurrency as property but not legal tender. The Monetary Authority of Singapore (MAS) licenses and regulates exchanges according to the Payment Services Act (PSA).
The cryptocurrency profit of individual investors is viewed as long-term capital gains and, thus, is not taxed. Yet, companies that regularly transact in cryptocurrency are subject to taxes because the country classifies gains as income.
In South Korea, cryptocurrencies are not considered legal tender or financial assets, so they are not taxed yet. However, a 20% tax on crypto gains will take effect in 2022, impacting all the profit over $2,125.
Crypto exchange regulation is overseen by the South Korean Financial Supervisory Service (FSS) that has implemented strict AML/CFT obligations. Besides, exchanges and other VASPs must register with the Korea Financial Intelligence Unit (KFIU), a division of the Financial Services Commission (FSC).
Chinese authorities view cryptocurrency as property for the purposes of determining inheritances.
However, as we have mentioned at the beginning of the article, the People’s Bank of China (PBOC) has banned crypto exchanges from operating in the country, stating that virtual currency-related business activities are illegal financial activities that facilitate public financing without approval.
Another thing about China is that it has no cryptocurrency miners at the moment due to the implemented ban, while other countries are pretty invested in crypto-mining. For instance, the US had around 35.40% average monthly hashrate share in August 2021.
Yet, the study assumes that 30% of Chinese miners are already using VPN to avoid regulations and escape the IP tracking and gathering local data.
Cryptocurrency was designed to be decentralized and distributed, which means that there cannot be any centralized entity controlling the network. The responsibility is shared among multiple independent machines worldwide, securing the blockchain and making it almost impossible to manipulate the information. However, to gain full security and encourage more players to join the market, cryptocurrency has to be regulated.
The future of virtual assets lies in regulation, but what is the future of crypto regulations?
In March 2021, FATF introduced a draft of their updated “Guidance for a risk-based approach to virtual assets and virtual assets service providers.” It will significantly influence the regulations of all virtual assets and VASPs in the countries that follow FATF guildelines.
The FATF new draft helps regulators define “virtual assets” and “virtual assets service providers” more clearly and expands the list of businesses that fall under AML regulations to any service related to virtual assets. If the final changes are adopted, many decentralized exchanges and other crypto-related businesses will have to implement KYC/AML procedures even if they promised to remain anonymous.
It’s safe to say that in the future, cryptocurrencies will be classified, and more regulations will be introduced worldwide. Yet, it’s hard to say when exactly the industry will reach the expected level of compliance.