With the onset of rules and policies on digital assets, we ask whether regulation can in fact help crypto adoption, rather than threaten its development. In this first of two parts, we survey a few of the notable regulatory regimes to better answer that question.
Cryptocurrencies are no longer the new kid on the block, now more than a decade since their inception. As with any other means of storing value, they are digital financial assets requiring regulation even if it means stricter rules for crypto dabblers, traders and investors.
The trend towards cryptocurrency regulation feels inevitable, as we see more and more rules and policies being implemented by various countries. The reality is that the world has never seen this spike in population growth and, with it, such a rise in financial needs. Historically, we have come a long way from swapping assets peer-to-peer to developing a sophisticated system, thanks to technology, that can track financial flows with little to no manual inputs.
That said, cryptocurrency by nature is not bad, even if some establishments choose to paint it that way. It is meant to create trust and stability while exploring the on-coming evolution of the financial system. So, rather than it being seen as a threat, can cryptocurrency regulation lead to greater adoption? Firstly, let’s look at the wide range of approaches taken by countries regulating crypto.
Who Are Some of the Key Regulators?
The regulatory landscape now is very different from what it was even just a couple of years ago. That is why it is important to assess the current regulatory approaches of some of the most influential or controversial markets, to understand the variety of laws and financial environments in which crypto exchanges and assets are being treated.
The main regulators of cryptocurrency around the world, also seen as financial authorities with wide economic influence, are in China, the US, and the EU. Additional crypto case studies have been done by Australia, Japan, Canada, and other national markets.
Although crypto is not a legal tender (except in a couple of selected countries), it is taken into consideration for financial transactions and related future policies. It resides in virtuality and moves across borders, but each country naturally persists with its own laws. We look at a few notable regulatory regimes below to shed light on varying approaches and perspectives.
The US is overall accommodating and adapting to digital assets ownership, perhaps true to its capitalist heritage and in pursuit of free market growth.
The US has a diversified legal approach to crypto and each state government can have different laws. However, most of the US is already in the works to issue a law to regulate cryptocurrencies. The Internal Revenue Service (IRS) recognizes crypto as digital property, and the US Securities and Exchange Commission (SEC) is keen to dispute if cryptos are securities.
The US is not considering cryptocurrency a legal tender, but it does see it as a way to store value, similar to properties. Crypto is subjected to taxation by the IRS.
By the end of 2021, the US Treasury Department is expected to issue a report with recommendations, set to be used as a template for crypto regulations that might be drafted next year.
The US Treasury wants to ensure that the companies and foundations behind stablecoins, such as USDC and USDT, are technically capable of handling mass transactions simultaneously. They want to avoid what recently happened to the Solana blockchain, which crashed and suffered a 17-hour outage in September.
The US Treasury will likely recommend that the supporting companies of these stablecoins always have enough liquidity to cover any redemption demands by users.
All crypto trading is illegal in China.
That probably says it all regarding China’s regulatory approach. Financial institutions are banned from handling crypto transactions, domestic crypto exchanges, and initial coin offerings (ICO). The Chinese government does not see crypto as a legal tender.
China banned crypto trading in 2017, seen as part of its bigger plan to implement its own digital currency, the digital yuan. Before that, the world’s second-largest economy accounted for 90% of Bitcoin trading. ICOs are also banned in China, as the government wants to eliminate any illegal fundraising and redirect all those investments to projects controlled by the People’s Bank of China (PBOC), its central bank.
In September 2021, China declared all cryptocurrency transactions illegal. The PBOC deemed all business activities related to virtual currencies illegal, arguing that digital assets like Bitcoin can threaten the safety of people’s assets.
China is ramping up uses for the digital yuan, backed by the state and aimed at eventually replacing fiat in the country’s economy. Despite the recent crackdown on its domestic “Big Tech” and other sectors, the PBOC has been working together with Alibaba and Tencent to develop pilot programs in major Chinese cities to implement the e-CNY as the main means of payment in the retail market.
All other cryptocurrency trading is treated as an illegal financial activity, and the government has stated it will prosecute all those engaging in it. The use of foreign exchanges providing crypto trading services to Chinese citizens is also illegal.
The EU is pushing for a comprehensive regulatory framework. Until then each country is allowed to develop its own regulation, but they must all follow the guidelines for anti-money laundering (AML).
Cryptocurrency is legal in the European Union and crypto-related profits are taxed anywhere between 0% and 50% because they are seen as capital gains.
Each EU country can have its distinct regulations towards cryptocurrency exchanges, just as long as they comply with the relevant policies and rules implemented by the European financial authorities.
Importantly, the legality of cryptocurrency is treated by the Fifth Anti-money Laundering Directive. The EU has also included in its Action Plan for combating money laundering and terrorist financing the conditions for using cryptocurrency.
The EU officially recognizes the importance of blockchain technology and aims to develop the European Blockchain Services Infrastructure (EBSI). The EBSI is a distributed ledger project that will spread across all EU countries and support services in the public sector.
The European Central Bank is also developing a Central Bank Digital Currency (CBDC) that will be backed by the euro. The digital euro would serve as a future alternative to the traditional fiat paper bill and support the payments infrastructure.
Singapore takes a pragmatic approach to crypto, offering a clear and reasonable legal environment for digital assets.
Singapore’s heritage as a strategic trading port since the 19th century provided ample foundation for it to develop into one of Asia’s largest and most important financial hubs. The Monetary Authority of Singapore (MAS) is an active promoter of the fintech industry, allowing companies of all sizes to access fundraising and asset digitalization.
Although cryptocurrency is not a legal tender in Singapore, crypto exchanges are legal once they register and are approved locally. Furthermore, crypto is seen as a means to store value and is taxed like any other good.
The MAS generally maintains a neutral position regarding crypto regulations, but it does recognize and regulate digital payment tokens which are classified as securities. Singapore’s DBS Bank recently saw its brokerage arm, DBS Vickers, receive in-principle approval from MAS to provide digital payment token services, joining the Australian cryptocurrency exchange Independent Reserve as the first financial institution to receive the green light.
Further approvals are still required for full payment services licenses, but current progress offers firm signals of MAS’s accommodating and even progressive stance towards digital assets. On the whole, cryptocurrency exchanges can operate in Singapore following the same regulations as other traditional financial institutions, but additional standards are expected to be applied to cryptocurrency service providers.
El Salvador is the first country in the world to recognize crypto as a legal tender.
One of the tiniest countries in Latin America did what other more established economies perhaps feared most in a financial sense. El Salvador decided to adopt Bitcoin as an official currency in September, with the hope of attracting new international investments and boosting the local economy.
The draft legislation received support from the majority of its Congress, stating that all merchants must accept Bitcoin alongside the US dollar as a means of payment.
While the underlying technology needed to perform such transactions may be lacking in some areas, the unregulated transitions of crypto can lead to international sanctions, a key issue still to be addressed by the government. Still, there are no signs that El Salvador will give up on using the US dollar as its primary currency.
Acknowledging an Arrival
The future of digital assets will be shaped in part by how the most powerful economies in the world perceive and treat this fast-emerging industry. So far, regulatory regimes vary widely around the globe, and some make for a better home to crypto investors and blockchain businesses than others. All of which likely paves a bumpy road ahead, particularly for the less vetted, less compliant projects and coins.
Some countries approach crypto regulation with extra care while focusing largely on AML measures, while others are determined to ban crypto completely. Who is right, and who is wrong? What’s clear is that the evolving regulatory developments have already served one purpose — that is, recognizing the arrival of digital assets as a viable, if yet unrefined, financial medium.
How they will stunt the continuing development of cryptocurrencies or bring about wider adoption, only time will tell. Meanwhile, economies will not stop and wait for crypto regulations to find their balance, and the markets will go on.
The second article in this two-part series will look at whether and how regulation can offer a framework that ultimately leads to wider adoption of digital assets.
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