Cryptocurrency regulation around the world

Cryptocurrency regulation is a hot topic for governments all over the world. Many are struggling to get a handle on this rapidly-evolving technology, which is designed to exist outside of centralised control. Here we explore regulation globally to reveal the difficulties facing governments, and the effects of regulation on coin prices – a key issue for cryptocurrency traders.

Cryptocurrencies
Source: Bloomberg

Cryptocurrencies have entered the mainstream. No longer the preserve of a few cryptographers, terrorists and criminals, their popularity has exploded over the last few years – with bitcoin peaking at close to $20,000 in December 2017. But, with governments only just beginning to react to this nascent industry, several key issues have emerged. Firstly, how to protect consumers who may have little understanding of these volatile financial instruments and the risks associated with investing in them. Secondly, how governments can stop – or rather, minimise – the use of cryptocurrencies for funding illegal activities. And, thirdly, how such assets should be taxed.

Regulatory changes are very important to cryptocurrency traders, as they can have a pronounced effect on coin valuations. Bitcoin and ether, for example, both dropped significantly after Chinese regulators announced they were outlawing initial coin offerings (ICOs) in September 2017. This created an opportunity to go short for those in the know – with further dips in February 2018 when the country began to clamp down on mining.

Here we take a look at the key regulatory issues that traders need to be aware of, along with some of the countries with regulations that are likely to affect cryptocurrency valuations.

Cryptocurrency regulations

Governments have taken a wide range of approaches to regulating cryptocurrencies, even going so far as to define the assets in different ways. To date, digital currency regulation has mainly focused on:

Consumer protection

Protecting consumers has been the number one challenge for governments for two main reasons. Firstly, because cryptocurrencies have proven to be extremely volatile and, secondly, because they are designed to exist outside any form of centralised control, meaning regulation can easily be ignored by anyone with an internet connection.

To date, the uneasy solution for most governments has been to simply warn consumers about the risks of cryptocurrencies, exchanges and ICOs, rather than attempting to impose a difficult-to-enforce ban. However, a few countries – including Bangladesh, Qatar and Bahrain – have legislated to make it illegal to use cryptocurrencies within their borders, though practically this may be unenforceable.

Prevention of crime

The second major challenge for governments has been how to minimise the use of cryptocurrencies for illegal activities. This is a thorny issue, given that payments can often be made anonymously via cryptocurrency networks, making it difficult to identify people buying or selling goods or services over the web.

While many governments have yet to tackle this problem head-on, a number have expanded money laundering and anti-terrorism laws to ensure that banks and other financial institutions carry out enhanced checks on those trying to access cryptocurrencies via established exchanges, or cash out any takings.

Taxation

A final challenge has been taxation, with governments keen to ensure that they are able to collect additional revenues from the income they are generating for individuals and businesses. This has led to a divergence in the way cryptocurrencies are categorised for the purposes of taxation, with some governments defining them as foreign currencies, and others as financial assets, to give just two examples.

This means that, depending on the jurisdiction and entity benefitting from any gain in value, cryptocurrencies can be subject to VAT, income tax, capital gains tax or corporation tax, with a minority of jurisdictions even allowing the deduction of losses.

World map showing differences in cryptocurrency regulation

World map: cryptocurrency regulation
Absolute cryptocurrency ban
Implicit cryptocurrency ban*
Tax regulations
Anti-money laundering/terrorism financing regulations
Both tax and anti-money laundering/terrorism financing regulations
Algeria
Bahrain
Argentina
Cayman Islands
Australia
Bolivia
Bangladesh
Austria
Costa Rica
Australia
Egypt
China
Bulgaria
Czech Republic
Denmark
Iraq
Colombia
Finland
Estonia
Japan
Morocco
Dominican Republic
Iceland
Gibraltar
Switzerland
Nepal
Indonesia
Israel
Hong Kong
Pakistan
Iran
Italy
Isle of Man
United Arab Emirates
Kuwait
Norway
Jersey
Lesotho
Poland
Latvia
Lithuania
Romania
Liechtenstein
Macau
Russia
Luxembourg
Oman
Slovakia
Singapore
Qatar
South Africa
Saudi Arabia
Spain
Taiwan
Sweden
United Kingdom


*Where legislation makes it difficult to access cryptocurrency markets.

Countries to watch

Cryptocurrency transactions are anonymous and can transcend borders, which can make it difficult to identify the original source of funds flowing into cryptocurrency networks or which country’s regulations – if changed – would have the biggest effect on prices.

Illustrative of this problem is the fact that research by JPMorgan has shown that the majority of transactions are routed through exchanges registered in countries such as Malta, Belize and the Seychelles, which have few digital currency regulations but seem unlikely to be responsible for high transaction volumes themselves. These exchanges could easily be moved if the regulatory landscape changed in these countries, suggesting such changes would have little effect. Binance, for example, moved from Hong Kong to Malta in response to regulatory changes.

One possible proxy measure that could be used to identify important nations in terms of regulation is bitcoin transaction volumes by currency, which is tracked by CryptoCompare. As bitcoin is still the biggest coin by market cap, this is likely to give a rough indication of the volume of transactions originating in each economic region and, in turn, the areas where changes in regulation would be likely to have the biggest effect on prices. Some of the countries and regions near the top of the list by this measure are:

The United States (US)

The US has yet to pass any federal laws to regulate cryptocurrencies. However, several bodies have issued guidance on how existing laws should be interpreted to apply to them. This has led to a rather confusing state of affairs, where cryptocurrencies are defined as either securities or currencies by the Securities and Exchange Commission (SEC), commodities by the Commodity Futures Trading Commission (CFTC), and as property for the purposes of taxation by the Inland Revenue Service (IRS).

What this means in practice is that the SEC regulates ICOs where the newly issued coin will fall under its definition of a security, while the CFTC remains oversight over activities related to futures, options and derivatives contracts involving cryptocurrencies. For tax purposes, capital gains tax is charged by the IRS – with both gains and losses taken into account when calculating the sums owed.

Cryptocurrency-related activities also fall under anti-money laundering and anti-terrorism legislation, as the Financial Crimes Enforcement Network – a department of the treasury – has stated that the Bank Secrecy Act applies to money services businesses involved in cryptocurrency activities, including exchanges. This means that all businesses involved in providing cryptocurrency services must collect information about their customers and confirm their identities.

The United Kingdom (UK)

Like the US, the UK has no specific laws relating to cryptocurrencies. The Financial Conduct Authority (FCA) currently only regulates cryptocurrency activity that falls under existing legislation – for example, trading on cryptocurrencies via contracts for difference (CFDs). However, it is currently considering whether any further regulation of cryptocurrency-related activities, such as ICOs, is required following a consultation on distributed ledger technology (DLT) which ended in December 2017.

In terms of tax, Her Majesty's Revenue and Customs (HMRC) guidance indicates that capital gains tax should be paid by individuals, corporate tax by incorporated businesses, and income tax by unincorporated businesses for profits generated from buying and selling cryptocurrencies. However, it is worth noting that trading on cryptocurrency markets via spread betting is exempt from capital gains tax and stamp duty, while CFD trading enables you to offset losses against profits for tax purposes and is also exempt from stamp duty.1

Learn more about the advantages of spread betting and CFDs

Japan

Japan’s Payment Services Act was amended in 2016 to give powers to the Financial Services Agency (FSA) to oversee exchanges, issue orders improve business practices and revoke or suspend licences. It also requires exchanges to protect clients’ money or cryptocurrency tokens, by storing such funds in accounts or wallets separate to their own.

Exchanges are also required to check customers' identities, keep transaction records and report suspicious activity under the Act on Prevention of Criminal Proceeds, while the Income Tax Act requires profits from cryptocurrency transactions to be treated as ordinary income by the National Tax Agency (NTA).

Europe

The European Union has been proactive about legislating on cryptocurrencies, but is yet to agree regulations in all areas that will apply to the EU28. It recently published its fifth amendment to the Anti-Money Laundering Directive (AMLD), which now requires exchanges to conduct due diligence on their customers and report any activity that could be indicative of money laundering or terrorism. The European Court of Justice (ECJ) has also ruled that any exchange of a cryptocurrency for a traditional currency or other cryptocurrency is exempt from VAT.

While these are currently the only rules which must be applied by all member states, the European Banking Authority and European Central Bank (ECB) have recommended that further legislation is introduced in the near future to ensure the EU properly mitigates the risks associated with cryptocurrencies.

South Korea

South Korea has some of the most robust cryptocurrency law in the world. Cryptocurrency trades are only allowed from real-name bank accounts, so exchanges must have contracts in place with banks to facilitate information sharing. Banks, in turn, must conduct extensive due diligence on exchanges before signing these agreements.

Additionally, under the Act on Reporting and Using Specified Financial Transaction Information, banks must report any suspicious financial activity, while banks and exchanges must check the identities of cryptocurrency traders.

Interestingly, cryptocurrency transactions are currently tax free in South Korea. However, in July 2018, the government announced it would be removing tax breaks for cryptocurrency exchanges, which are normally available to small and medium-sized enterprises, and that it would consider making traders’ profits liable to capital gains tax in the near future.

China

China has an implicit ban on cryptocurrencies, as it has legislated to prevent financial institutions from engaging in any cryptocurrency-related activities, including clearing funds associated with cryptocurrency trading.

In September 2017, seven regulators issued a statement called the Announcement on Preventing Financial Risks from Initial Coin Offerings, which outlawed ICOs. These are now deemed to fall under existing Chinese law, which prohibits public financing without approval.

How to trade cryptocurrency regulation

Because regulation has affected cryptocurrency valuations in the past, changes in legislation can be opportunities for traders to profit. A loosening of regulation in countries which have an absolute or implicit ban on cryptocurrencies, for example, could lead to an increase in cryptocurrency prices as buyers who were previously unable or unwilling to purchase cryptocurrencies enter the markets. A tightening of regulation in any country, on the other hand, could lead to a fall in prices if buyers become less willing or able to purchase cryptocurrencies.

Traders looking to take advantage of such price movements should pay attention to the news for information about regulatory changes. You can find out more about the current regulatory landscape in other major territories through a recent report by the Law Library of Congress, 'Regulation of Cryptocurrency Around the World'.

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1Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

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