How Cryptocurrency Is Regulated Globally

Cryptocurrency presents a challenge to the world’s governments and regulators. By design, they are difficult for authorities to control, and their decentralized nature gives power to individuals, not states.

But that hasn’t stopped politicians and government bodies from making attempts. As this new asset class continues to grow in popularity, nations want to monitor crypto to protect consumers and their tax base.

The United States: Battle Of The Three Letter Agencies

In the U.S., crypto regulation is a complex patchwork of federal and state-level rules. The Securities and Exchange Commission (SEC) has taken the lead at the federal level, asserting that many cryptocurrencies qualify as securities under the Howey Test. This has led to high-profile enforcement actions against projects like Ripple.

On May 23, the US House of Representatives voted to pass its FIT21 bill after it received bipartisan support. The bill would bring crypto assets that are sufficiently decentralized, like Bitcoin and Ethereum, under the purview of the Commodity Futures Trading Commission (CFTC) rather than the SEC.

SEC vs CFTC

The turf war between these two agencies seems to have been concluded. The SEC will be responsible for regulating more centralized coins and CFTC ones that are decentralized. The bill classifies a blockchain as decentralized if, “among other requirements, no individual has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person controls 20% or more of the digital asset or its voting power.”

The CFTC will now regulate cryptocurrency under its purview as a commodity “if the blockchain, or digital ledger, on which it runs is functional and decentralized, states the Congressional Research Service.

However, the SEC would regulate a digital asset as a security “if its associated blockchain is functional but not decentralized.”

States have also gotten involved, with New York’s BitLicense setting an early precedent for local oversight. The regulatory landscape remains dynamic, with ongoing court battles and an election in November.

United Kingdom: Derivatives Banned

The U.K. has been active in developing regulations around cryptocurrency in the last year. The country’s financial watchdog body, the Financial Conduct Authority (FCA), outlined in March its intention to introduce a market abuse policy for 2024.

Anyone trying to engage in abusive practices in the crypto space on UK exchanges will be pursued regardless of location.

We’ve issued nearly 150 alerts on the first day of our new #crypto promotions rules coming into force

— Financial Conduct Authority (@TheFCA) October 9, 2023

The FCA is not to be trifled with in the UK. The nation has long been a financial powerhouse, with around 7.5% of the population working in financial services in 2022. The FCA has sweeping powers and requires all crypto businesses to register fully with them and comply with anti-money laundering rules.

Furthermore, at the FCA’s recommendation, since 2020, cryptocurrency derivatives have been banned for British retail investors.

The FCA also plans to support innovation while minimizing industry costs and expanding consumer awareness campaigns about crypto-related scams.

Canada: CBDC plans stall

The country’s cryptocurrency sector in Canada is regulated by the Canada Revenue Agency (CRA), a body similar to the USA’s Internal Revenue Service (IRS) in that it enforces tax laws.

The CRA treats cryptocurrency like a commodity, so any income from token transactions is treated as business income or capital gain. Conversely, if you sell your coins for a loss, you can write it off as a business loss or capital loss on tax returns.

Canada has been flirting with introducing a Central Bank Digital Currency (CBDC), but recent consultations with the public suggests Canadians aren’t interested in the project just yet.

Australia: Increasing Cryptocurrency Scrutiny

In May 2024, with interest in cryptocurrency surging and concerns about potential tax evasion, the Australian Taxation Office (ATO) increased its scrutiny of user accounts.

Australia has declared crypto to be legal property and is updating its regulations. Exchanges must register with AUSTRAC and comply with AML/CTF obligations. The country has also taken a tough line on privacy coins, banning exchanges from offering them.

India: Pushing More Regulation

In 2024, concerns are rising within the Indian crypto community over the impact of high taxes on transactions.

Narendra Modi’s government imposed a 30% tax on cryptocurrency profits and a 1% tax on all transactions in 2022.

While the Supreme Court overturned a central bank ban on crypto in 2020, the regulatory status remains murky. Nevertheless, the world’s most populous nation is well positioned to be a leading voice in crypto and has been pushing for greater global regulation in the sector.

China: Crypto Clampdown

The Chinese Communist Party (CCP) is not a crypto fan. They operate a very restrictive approach and have completely banned crypto since 2021, which makes crypto illegal, and mining is banned.

Countries where crypto has a general ban.
Countries with a general ban on crypto. Source: Atlantic Council

Its hardline stance is not surprising given China’s infamous surveillance state. It aligns with the Beijing government’s push for its own CBDC – a digital yuan – which would further increase the administration’s economic control.

But the Chinese people are a resourceful, tech-savvy bunch. In the face of restrictions, the Asian superpower continued to record substantial underground crypto trading among its citizens in 2024.

Brazil: Embracing Crypto

Brazil has taken a more welcoming approach to cryptocurrency regulation than other countries. The adoption of Tether (USDT) has skyrocketed, accounting for 80% of all cryptocurrency dealings within the nation.

In 2023, the country passed a comprehensive regulatory framework legalizing crypto as payment and investment.

In May  2024, Brazil’s central bank announced it will divide the process of regulating crypto-assets and virtual asset service providers into phases. The staggered rollout slows the Latin American country’s plans to regulate its digital assets industry.

The Impact of Regulation On Crypto Markets

With cryptocurrency continuing to break into the mainstream consciousness and becoming a credible asset class in its own right, increased government regulation is perhaps inevitable.

This scrutiny forces projects to grapple with complex legal questions. This isn’t necessarily a bad thing. Scams and pump-and-dump schemes are endemic in the space, and some may welcome a bit more consumer protection.

However, there is a legitimate concern among cryptocurrency purists over the effect heavy-handed regulation might have on innovation. Regulatory crackdowns can also cause capital and individuals to exit the market.

How to Regulate Cryptocurrency: Key Considerations

As policymakers continue to grapple with crypto rules, we can expect to see the following considerations underpinning any regulatory moves:

  • Defining crypto assets is a simple step but a necessary one for regulators: Governments must decide whether cryptocurrencies should be treated as securities, commodities, property, or a different asset class entirely.
  • Consumer protection: Laws around ownership and market manipulation are critical to safeguard consumers from financial fraud.
  • Financial stability: Where DeFi and traditional finance mix, regulators will try to reduce risk to financial systems. Governments are concerned about the lack of oversight and inconsistent reserve backing of some stablecoins.
  • Anti-money laundering and combating the financing of terrorism (AML/CFT): Robust AML and CFT controls are one of the main aims of governments when they introduce regulation.

Achieving this balance is no easy feat. Crypto’s decentralized, borderless nature makes it a nightmare for governments to regulate. But rest assured, they are certainly going to try.

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