Digital Asstes were founded on the principles of decentralization, which means they aren’t backed by any central authority. Each country has different standards when it comes to regulating the digital currency. As cryptocurrency and blockchain – the technology that underpins these currencies – remain in their early stages of evolution, authorities are still trying to grapple with the technology before trying to devise a plan about how to deal with it.
Currently, there is no uniform global approach to cryptocurrencies, and thus its legality will depend on the regulations in the part of the world that you reside. However, as knowledge about cryptocurrencies is increasing, authorities are trying to come up with at least certain regulations in most parts of the world.
Since the boom in the crypto industry in 2017, many people have made huge gains, which is why the urgency to regulate this sector is almost palpable.
The concerns and need for regulations:
The feeling for urgency in regulating the crypto industry can be understood keeping in mind the potential use of digital currencies in money laundering and illegal trade. Not long after its inception, digital assets gained the attention of vendors and customers on the Dark Web – the part of the internet rife with illegal activities. These activities include illegal trade in items such as weaponry and illegal drugs.
One such example is the infamous Silk Road marketplace which dealt only in Bitcoin to ensure anonymity of customers. Bitcoin’s usage on such platforms has hastened the authorities to come up with at least the minimum required regulations. The authorities also feared that digital assets could also be used in money laundering due to its decentralized and semi-anonymous nature. The FBI had indicated as early as April 2012, that due to lack of regulations and availability of offshore exchanges, the Bitcoin could be used in illegal activities by criminals.
With the rise in Bitcoin’s value, its usefulness in making transactions has fallen which has instilled a fear that it would be used more and more to store a value which will lead to a bubble. The volatility associated with cryptocurrency and its unpredictable nature is making cryptocurrency unsuitable for everyday transactions.
Terminology for Digital Assets:
An interesting aspect of the cryptocurrency market is the variety of terms used for it in different jurisdictions. While the underlying technology is similar for all types of assets, the terminology used by countries to reference varies greatly. Below is a list of terms used for digital assets in different parts of the world.
- Argentina, Australia, and Thailand: Digital currency
- China, Taiwan, and Canada: Virtual commodity
- Italy and Lebanon: Cyber currency
- Switzerland: Payment token
- Mexico and Honduras: Virtual asset
- Colombia: Electronic currency
Current Approach to Regulation:
As there is no uniform international framework for cryptocurrencies, different countries have taken different routes to regulate the crypto industry. A number of countries have restricted or banned the use of digital currencies; others have put regulations in place regarding the use of cryptocurrencies. Even in the countries that have banned cryptocurrencies, its decentralized nature has made it difficult for the authorities to restrict it. Below, we take a look at different jurisdictions and where cryptocurrencies stand with regulators around the globe.
Most of the governments have issued warnings largely designed to educate the public about the difference between cryptocurrencies and fiat currency. These warnings also highlighted the risk associated with cryptocurrencies due to high volatility. They also note the ability of digital currencies to be used for illegal activities including money laundering and terrorism.
Some of the countries went beyond the warnings and expanded their laws on counterterrorism, money laundering, and other crimes and instructed the financial institutions to conduct due diligence requirements under such laws. These governments include Australia and Canada which recently enacted laws that bring cryptocurrency transactions and the financial institutions under the ambit of money laundering and terrorism financing laws.
Countries which banned cryptocurrency investments:
Some countries ban their citizens from investing in cryptocurrencies. Countries including Algeria, Vietnam, Pakistan, Nepal, Bolivia, and Morocco, ban any activities that involve cryptocurrencies. Jurisdictions in Bahrain and Qatar are slightly different as the two countries ban any investment in cryptocurrencies locally; however, they allow their citizens to engage in activities involving cryptocurrencies outside their borders.
Countries with indirect restrictions:
Some countries including China, Colombia, Iran, Thailand, Bangladesh, Lithuania, and Lesotho do not ban their citizens from cryptocurrency investments. However, there are indirect restrictions put in place that bar banks and other financial institutions in the country from facilitating transactions that involve cryptocurrencies.
Cryptocurrency-friendly regulatory regimes:
While many countries see the advent of blockchain digital currencies as a threat, there are others that recognize cryptocurrencies as legal tender. Some jurisdictions see potential in the blockchain technology and are working on regulations that facilitate investments in this sector. Countries like Spain, Luxemburg, Belarus, and the Cayman Islands are developing cryptocurrency friendly regimes that would attract investments in technology companies that excel in the blockchain.
Countries that seek to develop their own system of cryptocurrencies:
Some countries have gone even further and seek to develop their own system of cryptocurrencies. These countries include Venezuela, Lithuania, the Marshall Islands, and the Eastern Caribbean Central Bank member states.
There are some countries (South Africa and Belgium) that feel that the size of the crypto industry is currently too small to be regulated. These countries, however, have issued warnings about the pitfalls of cryptocurrency investments.
Of the jurisdictions that regulate initial coin offerings (ICOs), some countries including China, Pakistan, and Macau ban them altogether. Initial coin offerings (ICOs) use digital currencies as a mechanism to raise funds. Other countries, however, tend to focus on regulating them. These regulations differ depending on how the ICO is categorized. In New Zealand, for example, look if a token is categorized as equity security, debt security, managed investment product, or derivate and apply obligations accordingly.
Taxation is another issue that arises from allowing investments in cryptocurrencies. Categorizing cryptocurrencies and the specific activities that involve digital currency for taxation is an issue yet to be solved. It has long been the subject of debate within the crypto community. Despite numerous international forums and meetings, there is still no unified approach and a common policy about cryptocurrency taxation. It is partly due to the anonymity of users and partly because of the ambition of the virtual currency to avoid traditional financial institutions. Currently, different countries categorize cryptocurrencies in their own way for tax purposes. The list below shows the approaches that different countries have followed regarding cryptocurrency taxation.
- Bulgaria: Taxed as a financial asset
- Spain and Argentina: Subject to income tax
- Denmark: Subject to income tax; losses are deductible
- Israel: Taxed as an asset
- Switzerland: Taxed as foreign currency
- UK: Individuals pay capital gains tax; corporations pay corporate tax and unincorporated business pay income tax
Mining of cryptocurrency is exempt from taxation in most of the countries. However, in Russia mining is taxable if it exceeds a certain energy consumption threshold.