[PolkaStarter] State of Crypto Regulation Around The World
Since going from Internet myth and obscurity to one of the most innovative and promising technologies of our lifetime, crypto has had one constant challenge – regulation.
With decentralization being one of the technology’s pillars, trying to tame it is a direct contradiction to its very nature. How do you regulate crypto without interfering with its core proposition? What’s the right approach for commercializing it, aiding its mass adoption?
In this blog post, we will try to answer as many questions as possible, examine the current state of crypto regulation and foresee what the future holds going forward. According to the World Economic Forum’s Global Future Council on Cryptocurrencies, there has been no internationally coordinated regulation of cryptocurrencies which is why we will analyze things, one country at a time.
Let’s dive right in.
Crypto regulation: United States of America
Early in March, President Biden signed off on the much-anticipated Executive Order on Ensuring Responsible Development of Digital Assets. The Executive Order is set to become the cornerstone of US policy trying to regulate the digital asset industry. To quote the document this is a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”
According to the World Economic Forum’s Digital Currency Governance Consortium’s Steering Committee Member, Jeremy Alliare, “the Executive Order sets out initiatives to explore and engage in constructive problem solving around known risks that exist with the legacy financial system, and the new Web 3 world.”
The country has been in dire need of this framework to put an end to the conflict of interest between different government agencies. Here’s a snapshot of how these bodies saw and addressed crypto regulation prior to the Executive Order.
- Securities and Exchange Commission (SEC) – The SEC published a security alert, warning investors about the unique risks presented by digital assets. This alert aimed to give different stakeholders ammunition to enhance their compliance practices.
- Treasury’s FinCEN – Back in 2020, The Financial Crimes Enforcement Network (FinCEN), requested that banks and money services businesses (MSBs) would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution.
- Federal Reserve Board (FRB) – With a publication identifying the terms "tokens" and "accounts" and an explanation of how they work, the FRB wanted to “help identify areas where misalignment could create issues for legal frameworks and oversight regimes for digital currencies and so-called tokenized financial markets.”
- Commodity Futures Trading Commission (CFTC) – The CFTC issued an advisory that provided guidance to futures commission merchants (FCMs) on how to hold and report virtual currency from customers in connection with physically-delivered futures contracts or swaps.
- Internal Revenue Service (IRS) – The IRS issued guidance for use by taxpayers and their return preparers that address transactions in virtual currency, also known as a digital currency. In 2018, they published a press release, reminding taxpayers to report virtual currency transactions.
Closely analyzing and dissecting the publications by the different US bodies, we can identify one glaring similarity: the need for central government-led regulation. From identifying the industry terminology to tax reporting and risk management, the need for a transparent piece of regulation is evident.
Crypto regulation: United Kingdom
Much like the US, the United Kingdom has several bodies that are involved in the production and development of the country’s regulations:
- Financial Conduct Authority (FCA) – Back in 2019, the FCA published a Final Guidance to clarify the crypto asset activities it regulates. The goal was to cover all areas around KYC, AML and CFT relating to crypto-assets without suppressing innovation. It’s important to note that the FCA has banned the trading of cryptocurrency derivatives.
- HM Treasury – In a recent press release, the Chancellor of the Exchequer, Rishi Sunak stated that “It’s my ambition to make the UK a global hub for crypto asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.” To achieve that, the government launched a consultation on crypto assets and stablecoins in 2021 and published its response earlier this year, outlining the next steps.
- Bank of England – In March of 2022, the Bank of England published a report on financial stability relating to crypto assets and decentralized finance (DeFi).
What’s currently missing from the developing UK regulatory landscape is specific regulation as it pertains to crypto miners and tax. Crypto is currently viewed and treated in its FIAT form where receiving crypto as a means of payment by an employer is treated as “money’s worth” and is taxed as normal income based on the value of the assets at that specific point in time. In the case where cryptos are used as personal investments, capital gains tax is applicable. When the scenario changes to trading the assets, then the treatment shifts to income tax.
The future path of crypto regulation in the UK is already being carved out, with the short-term goal of mitigating risks to the country’s financial stability.
Crypto regulation: Germany
Germany was one of the first countries to establish some semblance of crypto regulation through the Federal Financial Supervisory Authority (BaFin) and recognize Bitcoins as “units of value” meaning they could be classified as a “financial instrument.” The German authority published guidelines on applications for authorization for crypto custody business. The publication states stat citizens and legal entities can buy or trade crypto assets as long as they fall within the list of licensed exchanges.
Fast-forward to May 2022 and what we have is a published document marking the first time Germany has issued nationwide tax guidance on cryptocurrency. Shared by Germany’s Federal Ministry of Finance, the 24-page document formally defines blockchain concepts such as mining, staking, airdrops and masternodes within the context of the country’s tax system and states that crypto investors won’t pay tax on sales of digital assets such as bitcoin and ether as long as they don’t hold the assets for more than a year.
When it comes to questions related to whether lending or staking cryptocurrency extends the tax-free period on digital asset sales to 10 years, this is what State Secretary Katja Hessel had to say in a statement: “The deadline is not extended to 10 years if, for example, bitcoin was previously used for lending or the taxpayer provided ether as a stake for someone else to create their block,” State Secretary Katja Hessel said in a statement.”
In KuCoin’s report, titled “Into The Cryptoverse 2022, Germany edition” results show that due to the ongoing development of legal regulation for the decentralized industry in the country:
- 16% of the German population aged between 18 to 60 are crypto investors who own cryptocurrencies or have traded cryptocurrencies in the past six months
- 41% of those same crypto investors intend to increase the share of their investments in cryptocurrencies over the next six months.
Germany is one of the most proactive countries worldwide when it comes to evolving regulation around crypto assets and is seen by many as the golden standard, the blueprint to follow and draw inspiration from.
Crypto regulation: China
From one of the countries driving the conversation on crypto regulation, let’s jump to a country that has a very clear line of regulation regarding crypto – China. In late September 2021, the People’s Bank of China (PBOC) banned all cryptocurrency transactions.
The reason behind the ban, as stated in the official release, was to avoid the disruption of economic and financial order and more specifically “money laundering, illegal fund-raising, fraud, pyramid schemes, and other illegal and criminal activities.”
Apart from risks associated with digital assets circulating in the market, many believe that the ban is closely related to the energy needed to mine cryptocurrency. We’ve talked to great lengths about the crypto’s energy consumption and whether crypto can go green. With China being in the midst of an energy crisis, this seems like an obvious solution.
While the ban seems final and strict, Chinese cryptocurrency traders look for ways around the ban. China is an interesting case study to keep an eye out for as it’s one of the most extreme crypto regulation examples we have in the world.
What does the future hold for crypto regulation around the world?
We’re still in the early stages of the crypto regulation saga and while each country is carving their own path, one thing is for sure – crypto needs to be regulated in one way, shape or form. In an ideal world, once countries establish their own individual rulings and decrees, the next chapter will see the birth international governing body to streamline global crypto regulation.
This is not something we haven’t done before. The introduction of Euro in 1999 was seen, at the time, as a mission impossible. 23 years on, the currency is as alive and healthy as ever. Regulating crypto will go through its growing pains period but the technology is too important, diverse and promising to simply give up on.
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