How Are Cryptocurrencies Regulated?

The third installment of a Global Finance FAQ web series on cryptocurrencies.

As cryptocurrencies are not legal tender in most jurisdictions, they may not be regulated at all. However, in many countries, they are subject to taxation as well as anti-money laundering, know-your-customer (KYC), and anti-terrorism financing regulations. In addition, cryptocurrency investments typically are not protected or covered by compensation schemes.

What regulations do apply to cryptocurrencies depend on how regulators classify them. For example, one tax authority may view cryptocurrencies as a digital asset or commodity and tax them accordingly, while another may class them like a foreign currency.

The US Department of Treasury defines Bitcoin as a currency. Canada’s tax authorities treat Bitcoin as a commodity and cryptocurrency exchanges as money services businesses. Meanwhile, the Australian tax authorities consider Bitcoin an asset that is subject to capital gains tax. 

European Union member states have adopted different approaches. However, the EU has proposed a single regulation for all crypto-assets not falling under existing regulations, such as Markets in Financial Instruments Directive II (MiFID II).

The EU’s Markets in Crypto-Assets Regulation (MiCAR), which will come into force in 2022, will impact not only EU-based crypto-asset service providers and issuers but also those outside the EU that look to do business within the single market. The drafters of MiCAR designed it to replace existing regulations within the individual member states. They will propose rules regarding the trading, marketing and supervision of digital assets as well as rules to protect consumers and ensure market integrity.

In the US, the US Securities and Exchange Commission has issued regulatory guidance on numerous occasions since early 2019 such as when it published its Framework for Digital Assets. In July 2019, the UK’s Financial Conduct Authority (FCA) released its Guidance on Cryptoassets, which aims to give market participants greater clarity on the types of crypto-assets that fall within the regulator’s remit. On January 6, 2021, the FCA banned the sale, marketing and distribution of certain crypto-based products such as derivative contracts and exchange-traded notes “that reference unregulated transferable crypto-assets” to retail investors.

The UK government is also conducting a consultation on proposals to bring certain crypto-assets into the scope of financial regulations. Japan’s regulatory activities related to crypto-assets are mainly focused on the inclusion of these assets into payment services, as well as financial services and exchanges.

Some countries have banned cryptocurrencies

In 2018, the Reserve Bank of India prohibited banks, lenders and other regulated financial institutions from “dealing with virtual currencies.” The country’s Supreme Court overturned the ban in March 2020. The use of cryptocurrencies in India remains challenging with some local banks, payment providers and non-financial providers continuing to apply the original ban. However, the Reserve Bank of India issued further clarification in May 2021 advising firms against this practice.

In China, peaks in Bitcoin investment in 2017 saw the government clampdown on cryptocurrencies. The Chinese authorities targeted Bitcoin miners and threatened to “block access to all domestic and foreign cryptocurrency exchanges.” Chinese financial institutions are also forbidden from dealing and funding cryptocurrencies.

In May 2021, the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China imposed further restrictions barring companies from using or supporting crypto trading or transactions. As a result, banks and online payment providers in China cannot offer cryptocurrencies.

Other countries have implemented piecemeal bans on specific activities. Turkey has banned crypto payments. In Nigeria—home to Africa’s largest crypto community—the central bank prohibited local banks from dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges. Bolivia and Ecuador also have banned investing in cryptocurrencies.

One country has Made crypto legal tender

At the other extreme, El Salvador became the first country in the world to make Bitcoin legal tender with the passing of a Bitcoin Law in June 2021, which permits tax payments using Bitcoin. Wholesalers and retailers also can quote their prices in Bitcoin while “economic agents”—defined as individuals, businesses, and firms, and governmental agencies—must accept Bitcoin as payment for goods and services. 

Argentina, Brazil, Mexico, Panama and Paraguay are said to be interested in passing similar lawa. Many believe El Salvador’s historic decision could see financial regulators and tax authorities redefine how they perceive Bitcoin given that there is now a strong argument for classifying it as a foreign currency rather than as an asset, commodity or security.

The regulation of cryptocurrencies remains a fluid space, so it is essential to check before investing or trading in them.