Crypto Regulations Around the World
The crypto market is one of the most volatile markets in the world. That’s why it’s crucial to understand how regulations vary from country to country. Find out which countries are friendly to crypto and which are not.
Regional Analysis: US, LATAM, EMEA, and APAC regions
The cryptocurrency market is still in its infancy and it is difficult to predict the future of this market. However, governments are already taking steps to regulate the nascent industry.
Some countries have banned Bitcoin and other cryptocurrencies while others have taken steps to regulate them. While some countries have taken a wait-and-see approach, there are many regulatory bodies that are beginning to take notice of this new technology and exploring ways to regulate it.
Read on as we shed light on the regulation and taxation of cryptocurrencies around the world.
The United States is one of the most important countries in the world due to the status of the US Dollar. It is also a country that has been historically slow to regulate cryptocurrency due to overlapping jurisdictions and bureaucracies at the state and federal levels.
The Securities and Exchange Commission (SEC) has been working on cryptocurrency regulations since 2017. During the ICO days, cryptocurrencies were analyzed using the Howey Test to determine whether certain tokens qualify as an investment contract, which could classify them as securities subject to the Securities Act of 1933.
The latest policy being pushed to address crypto is the Responsible Financial Innovation Act. Under the Lummis-Gillibrand bill, digital assets will be classified further into three types: Commodities, Securities, and Ancillary assets.
Central and commercial banks can issue fully-backed stablecoins like Central Bank Digital Currencies (CBDC). At the same time, non-bank issuers like Tether and Circle can also issue stablecoins but has to maintain sufficient liquidity and dollar reserves.
In the bill, algorithmic stablecoins, coins that rely on code to stabilize their value, will be outlawed in the country.
Non-Fungible Tokens (NFT) like digital art, music, and other forms are still being studied to provide taxation and regulatory clarity on these assets.
As of this writing, Bitcoin and Ether, the two most prominent cryptocurrencies, are considered commodities regulated by the US Commodity Futures Trading Commission. The tax regime for crypto covers Property Gains Tax and treats most cryptocurrencies as property.
Latin America Region (LATAM)
In Argentina, “even though there is no regulation of cryptocurrencies or a central supervisory body, fiscal control has begun to be exercised. As of 2021, companies that carry out transactions with cryptocurrencies are taxed with the tax on bank credits and debits”. In this way, it does not fall directly on the final buyer but on the collection accounts of the wallets that carry out the operation. At the same time, local exchanges, like Payment Service Providers, must submit monthly information of transactions.
On the other hand, the Income Tax covers cryptocurrency activities since the law considers the result of the purchase-sale of digital currencies as profit.
In Brazil, four existing bills for regulating cryptocurrencies are up for review to comply with the Anti-Money Laundering Law (AML) and the Consumer Protection Code.
Project No. 3825 was proposed in 2022 to unify all previous projects and aims to give transparency to operations and prevent tax evasion and money laundering. In addition, a zero (0%) tax rate would be imposed on the energy expenditure of mining if the source is clean and renewable.
The country will become the most prominent cryptocurrency regulator in Latin America if the proposal is approved.
In September 2021, El Salvador became the first country in the world to accept bitcoin as a legal tender.
The Bitcoin Law (Legislative Decree №57) regulates Bitcoin as an official currency without transaction limits. In addition, it was established that the market would freely establish the exchange rate between Bitcoin and the US dollar. Tax contributions may be paid with Bitcoin, and economic agents like merchants and consumers must accept Bitcoin as a form of payment.
Europe, Middle East, and Africa Region (EMEA)
The European Commission, the lawmaking body of the European Union, has agreed with key institutions further to regulate the use of cryptocurrencies in their member states.
To date, the Markets in Crypto-Assets (MiCA) law is the most comprehensive policy on the use and sale of cryptocurrencies at a state or regional level.
Due to the recent events of LUNA and its algorithmic coin UST, stablecoins will be strictly monitored with a cap of 200M euros per day. They must maintain ample reserves for the redemption of tokens and claims to protect the users and the protocol from insolvency.
The European Securities and Markets Authority is now designated and given powers to intervene in the region and prohibit the use and sale of cryptocurrencies by Crypto-Asset Service Providers (CASP) that are not registered and operates outside of the EU. CASPs must abide by existing and new AML regulations and establish a local office with a resident director.
While the proposal to ban Proof-of-Work and the use of PoW coins in the EU has been scrapped, crypto firms and decentralized protocols are likewise ordered to report their environmental footprint and energy use.
Transfer between centralized exchanges and non-custodial wallets will need to be reported after hitting a threshold of 1000 euros.
While specific rules have been set for coins and tokens, NFT like artwork are still unregulated and are under a discovery phase for two years by the commission.
The crypto market in Africa resembles the early days of cryptocurrencies. South African Reserve Bank now regards cryptocurrencies as financial assets but has yet to follow the industry’s best practices from the Global North.
In the United Kingdom, cryptocurrencies are treated as property regulated by the Financial Conduct Authority to monitor compliance with AML laws and track illicit finance. Companies registered with the FCA and with strict Know Your Customer (KYC) policies are only allowed to offer crypto services to their citizens. Selling and partaking in trading crypto derivatives are also prohibited for retail users in the country.
The tax regime in the UK is also specific and classified under capital gains and income tax, according to Her Majesty’s Revenue and Customs. Activities like trading and investing crypto fall under the former, while work and subcontracting to DAOs and web3 protocols or companies fall under the latter classification.
Asia-Pacific Region (APAC)
If you were part of the crypto class of 2013 or 2017, you probably heard about China banning cryptocurrencies for the nth time. The People’s Bank of China and the Chinese government have lauded the blockchain technology underpinning cryptocurrencies. They have publicly denounced cryptocurrencies due to their perceived risk of bypassing the Renminbi’s capital controls.
The energy crisis in China in 2021 marked the exodus of PoW miners with the most significant share of hash power in top protocols like the bitcoin and ethereum networks.
Perhaps East Asia is one of the strictest regions to regulate cryptocurrencies due to its large user base since the early days of ICOs and the so-called Kimchi Premium.
Arbitrageurs exploited the lack of governing laws by buying discounted assets overseas and selling them in South Korea with a premium, gaining profits in the spread.
This event has influenced stricter AML and KYC laws introduced in 2018, which were mandated just last year. The use, transfer, custody, and trading of cryptocurrencies within wallets and service providers are monitored by the Financial Services Commission (FSC) and limited the trading activity to citizens with a real identity and local bank account.
An amendment of the Special Payment Act in 2021 has prompted local exchanges in the country to prohibit listing and trading privacy coins, coins that add a privacy layer or anonymize transactions, such as Monero and Zcash.
Further to the East, Japan was at the center of attention for almost a decade after the largest hack of the bitcoin exchange Mt. Gox back in 2014.
Currently, the Bank of Japan and the Financial Services Agency classify the crypto-assets as legal and treated as property, just like in the US. The tax regime for these assets falls under ‘miscellaneous income’ and is applied to both coins and income from derivatives trading.
With the passing of the Financial Instruments and Exchange Act back in 2020, exchanges and custodian services located both locally and foreign-based must be registered with FSA to operate in Japan.
The revised Payments Services Law has also put stablecoins under closer scrutiny. Locally, they can only be issued by licensed commercial banks, money transfer agents, and trust companies.
India, the second most populous country in the world, banned trading crypto in 2018 but has rescinded it to accommodate the growing need for payment services.
At present, cryptocurrencies, NFTs, and other digital assets collectively called Virtual Digital Assets (VDA) in the country are unregulated but taxed under the amended Income Tax Act of 2022 at a rate of 30%, with a further 1% levy on tax deducted at source.
VDAs are taxable when the fair market value of the holdings exceeds INR 50,000. Mining cryptocurrencies has a more specific guideline in which expenditure for acquiring mining hardware is considered a capital expenditure (CAPEX) and cannot be deducted from income from the transfer of cryptocurrencies.
If losses are incurred during trading cryptocurrencies, citizens won’t be able to offset them and are liable to be taxed on the entire holdings.
Believed to be the birthplace of the #PlayToEarn movement, the Philippines is one of the most progressive countries in adopting and regulating cryptocurrencies. At this time, the regulation of virtual currencies by the Bangko Sentral ng Pilipinas is limited to monitoring custodial wallets and local exchanges called Virtual Asset Service Providers (VASP) to ensure strict compliance with existing AML and KYC laws. Classification and guidelines on the taxation of income from cryptocurrencies are still being discussed by the central bank and the local tax authorities.
Conclusion and Future Trends — Cryptocurrency Regulation at a Crossroads
To date, there’s no all-encompassing crypto regulation that overarches economies worldwide and varies from different countries and jurisdictions. One major event that may challenge this lack of regulatory conviction among nations is the upcoming meeting of the G20 countries in October.
The Financial Stability Board (FSB), composed of the finance ministers and heads of the central bank from the G20 countries, which in the past has only focused on monitoring the market, is currently working towards global cryptocurrency regulation.
“The failure of a market player, in addition to imposing potentially large losses on investors and threatening market confidence arising from crystallization of conduct risks, can also quickly transmit risks to other parts of the crypto-asset ecosystem,” the FSB said.
Will more countries innovate and embrace crypto, or will they regulate them out of existence?
One thing is clear: crypto is here to stay.
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Disclaimer: This article is for educational purposes only and must not be treated as financial or legal advice.
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