As innovative as cryptocurrencies promise to be, both the mainstream public as well as regulators alike remain skeptical of the reliability and soundness of these alternative currencies. Partially because of their ability to bypass banks, exchanges, financial firms and central clearinghouses and the regulations that they abide by, legislators across the world have begun to address the disruptive potential that these currencies bring to the marketplace.
J. Dax Hansen, legal expert on Blockchain technology at Perkins Coie law firm, said last year that “digital currencies, token sales and blockchain initiatives of all types have ignited a global phenomenon unlike anything I have ever seen,” adding that “as the technology underpinning these developments disrupts products and services in nearly every industry, lawmakers, regulators, and law enforcement are scrambling to keep up.”
As of 2018, such a statement is still as true as ever. With cryptocurrencies having operated largely outside of the conventional financial system, regulatory bodies have responded with a glut of legislation addressing concerns about the potential for money laundering, terrorist financing, tax evasion, and fraud.
Below is an overview of the current legal status of cryptocurrencies around the world.
From a global perspective, no single transnational regulator exists to address the cryptocurrency market, but the general consensus amongst the global regulatory community is that digital assets, while deserving of scrutiny and evaluation, should be permitted to grow on their own accord.
At a G-20 meeting earlier in 2018, Argentina’s central bank governor penned a summer deadline for members to provide “specific recommendations on what to do” and mentioned that task forces were gearing up to submit proposals by July 2018. Italy’s central bank head later said to reporters that cryptocurrencies pose risks that should be addressed but should not be banned, according to Reuters.
The Financial Stability Board, a watchdog group that runs financial regulation for the G-20 countries, also expressed hesitation at the prospect of cracking down on cryptocurrencies. Mark Carney, chairman of the board as well as governor of the Bank of England said that “The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time,” in a letter around the same time as the G20 meeting.
The governor would go on to add that in comparison to the entire financial system, digital assets remain only a small portion of the entire market. “Even at their recent peak, their combined global market value was less than 1 percent of global GDP,” Mr. Carney added.
On the other hand, IMF Managing Director Christine Lagarde mentioned that cryptocurrencies had the potential to act as a means of laundering money and financing terrorism, adding that policies should be in place to protect consumers similar to that of the traditional financial sector.
While the global regulatory environment remains relatively accepting of the potential digital assets promise, with the specific situation varying from country to country, with some being harsher on cryptocurrencies than others.
The United States
The U.S., like most other countries, does not regard Bitcoin as a valid form of legal tender but still allows exchanges, depending on the state. The U.S. also handles the second largest volume of bitcoin, approximately 26% of the worlds quantity.
Despite the popularity, the biggest problem facing the states is that there seems to be little consensus among various regulatory bodies in their definition of cryptocurrencies. The Securities and Exchange Commission expressed its views that digital currencyshould be classified as securities. Earlier in March, the SEC expressed interest in applying securities laws to everything from cryptocurrency exchanges to digital wallets. The agency has also focused on initial coin offerings, making a distinction between ‘equity’ tokens, which function similarly to company shares or stock, and other non-equity tokens.
On the other hand, the Commodity Futures Trading Commission said that they saw Bitcoin as a commodity, announcing that fraud and manipulation involving the major cryptocurrency is under their authority. Last year the CFTC permitted the launching of bitcoin futures, and they also approved a platform for trading cryptocurrency derivatives for Ledger X, a swap execution facility. CFTC Commissioner J. Christopher Giancarlo happens to be one of the most crypto-friendly regulators in the United States, advocating a “do-no-harm” approach before the Senate Banking Committee in February.
The Internal Revenue Agency has another position on the topic, arguing that some cryptocurrencies are not actual currencies but rather are a type of property, and issued guidance on how they should be taxed – with capital gain or loss requiring to be recorded as if it were an exchange involving property.
At the same time, while federal bodies continue to monitor digital-assets, several states are beginning to embrace blockchain technology on their own, with some of them already passing them into law. The state of Vermont has already permitted blockchain to be used as evidence while Arizona has legal recognized smart contracts – an optimistic trend for blockchain enthusiasts going forward.
Most investors already know that China, alongside Russia and a few other countries, are particularly stringent on cryptocurrencies. China specifically has banned ICO’s for new cryptocurrencies and has gone on to implement proposals to strongly discourage bitcoin mining. It also stopped Chinese companies that are listed abroad from skirting this ban on ICO’s. The New York-listed Chinese company, Renren Inc., is one example of a company that had to cancel a planned overseas ICO because of these stringent regulations.
While some coins can still be traded, they must be done only in over-the-counter markets, a much slower process. While there’s been no specific explanation, purging risk from financial markets has been a government policy for the past couple of years. One concern amongst Chinese regulators is the booming shadow banking sector, a possible source of unsecure loans to speculators for whatever the newest mania happens to be.
That’s far to say that the country is completely anti-cryptocurrency. The People’s Bank of China last year ran trials for its own prototype cryptocurrency. However, it seems that the idea is based more on maintaining full control over transactions rather than the more laissez-faire aspirations of Bitcoin.
For most of blockchain technologies existence, Russia has traditionally veered on the side of caution, having previously made trading digital currencies illegal.
However, the Russian Ministry of Finance presented a bill on January 25th regarding cryptocurrency legislation that would make trading and ICO’s legal as long as they are in compliance with counter-terrorism financing laws. However, the bill also seeks to put thresholds on the amount unregistered, retail investors can contribute. According to the legislation, these investors will not be permitted to invest more than 50,000 rubles – or $900 US – into any particular ICO.
This position is strongly opposed by Russia’s central bank. Anatoly Aksakov, chair of the State Duma Committee for the Financial Market, said that “the Central Bank is against the legalization of this type of digital currency (that can be exchanged), since in this case, citizens can start actively investing in cryptocurrencies, not taking into account possible risks.”
Russian President Vladimir Putin has mentioned that he expects the legislation to pass favorably by July of this year.
Even within the relatively crypto friendly European Union, the level of openness towards digital assets varies from country to country. Nations such as Germany, Switzerland, Sweden, and Ireland are all quite supportive, with the former officially recognizing Bitcoin as legal tender in March. The German government also announced that individuals using cryptocurrencies for payment will not be taxed on their transactions.
Sweden’s Financial Supervisory Authority publicly declared last November that cryptocurrencies are formally recognized as a means of payment, and even Sweden’s central bank announced plans to launch its own cryptocurrency called e-krona. They were beaten to the punch, however, by Ireland back in 2014, which created its own token called the Irishcoin in an effort to promote tourism. Ireland is particularly striving to attract blockchain projects and foreign investment into the country.
Perhaps among the most crypto-friendly region in Europe are the Baltic nations, with many ICO projects continuing largely unregulated by the three Baltic countries of Latvia, Estonia, and Lithuania. Some of the largest ICO’s so far in 2018 have been successful in these countries, and many businesses across the Baltics accept cryptocurrency as payment for everyday goods and services.
Other countries, such as the United Kingdom, Italy, and France are adopting more cautious outlooks on digital currencies, with the later having proposed a ban on trading crypto assets until proper regulations are enacted. Europe is far from unified on the topic, but even the most skeptical governments still permit digital assets to function in some form or another.
The small country has become an emerging hub for Asian-based ICO’s. Two of the 15 largest coin offerings have occurred in Singapore, and the government is positioning itself to be friendlier to digital-currencies than other regions.
Like most central banks, the Monetary Authority of Singapore warned the public “to act with extreme caution and understand the significant risks they take on if they choose to invest in cryptocurrencies.” Regardless, the city-state remains one of the more ICO-friendly locations in the east.
Those hoping to see a cryptocurrency boom in India should look elsewhere. Earlier in February, Finance Minister Arun Jaitley stated to the Indian parliament that “the government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system,” according to Bloomberg.
However, the minister added that the government would be exploring the use of blockchain technology on its own terms. Although the use of bitcoin and other currencies isn’t illegal per say, the ministry has repeatedly likened cryptocurrency investment to Ponzi schemes.
The legal situation on the Korean peninsula is a little bit more complicated. South Korea is a major market for cryptocurrency investment, with trading in the country amounting to 4 percent of bitcoins daily volume. However, regulatory bodies in the country are more cautious than most. South Korea’s justice minister said earlier in the year that the government was contemplating a shutdown of cryptocurrency exchanges, with a recent petition of 280,000 signatures calling to curtail crypto-trading has encouraged the government even further.
South Korean regulators announced that they would only allow trading in cryptocurrencies with real-name bank accounts, scrapping any anonymity in order to comply with their anti-money laundering obligations. Even last year, the Financial Services Commission banned local firms from trading bitcoin futures when they were released. Although not illegal, the government has still to decide what long-term steps it should take to regulate the market.
The Crypto No-Go Zones
As of May 2018, there are 11 countries globally that ban cryptocurrencies outright. Bolivia and Ecuador are the only two in South America, while Morocco and Algeria are the only ones in Africa.
The sole European nation that outlaws cryptocurrencies is the Republic of Macedonia. “In Macedonia, the legal means for payment in cash and non-cash payment operations in the dinar,” said National Bank of Macedonia Governor Dimitar Bogov.
Other nations include Afghanistan, Pakistan, Qatar, Vanuatu, and Bangladesh. Despite the illegality of trading cryptocurrencies in these countries, that doesn’t necessarily deter the populace from doing so. More often than not, the status of digital currencies in these countries is more of a formality than anything else, with Bangladesh being perhaps the only known country where police will actively hunt down individual Bitcoin users.
The overall trend across the planet in 2018 is one of increasing regulation as ICO’s continue to grow in both media popularity as well as a portion of the global financial markets. ‘Eastern’ countries such as Russia, China, India, and others are typically more conservative regarding their regulations, while what most would consider the ‘western’, developed world has a more laissez-fair attitude towards cryptocurrencies. Only 11 of the countries of the world outright ban cryptocurrencies, an effort that isn’t necessarily proving effective.
Also published on Medium.