Cryptocurrency regulation: which countries are doing what?

August 03, 2018
Chris Wheal

Technology and the law are like the hare and the tortoise. While innovation races ahead, legislation often trails behind, taking its time to navigate new technology developments. At some point, though, it catches up and has a big effect on how technology firms can do business.

Cryptocurrency is a case in point. It took several years for regulators to understand what it was, let alone how it worked. By the time many of them began exploring regulation around bitcoin, the technology had already moved on, spawning new, more functional blockchains that did far more than simply handle money.

Different jurisdictions move at varying speeds, meaning that today they are all at different points in their regulatory journey. That makes things difficult for stakeholders in the cryptocurrency industry. In mid-2018, entrepreneurs, developers, traders and users who simply want another way to transfer value now face a complex, balkanised regulatory framework. This article takes stock of regulation in some key regions of the world.

North America

Canada

Canada began taxing cryptocurrencies in 2013 but does not consider them legal tender. The following year, it passed legislation to regulate organisations providing services around them.

Bill C-31 said that companies dealing in virtual currencies would be regulated as money services businesses (MSBs), which are companies that handle money other than official chartered banks. That means registering with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and having a full compliance program with AML and KYC procedures.

In Canada, passing legislation doesn’t always mean it is enacted. These regulations have remained dormant, but in June 2018, it proposed a set of regulatory changes that would bring these into force. Expect to see them implemented within 12 months of approval.

Canada has also made noises about regulating ICO tokens as securities. The Canadian Securities Administration (CSA) published a staff notice in August 2017 arguing that in many cases, ICO tokens would qualify as securities and come under the appropriate rules. However, it also maintains a regulatory ‘sandbox’ agreement that allows innovative startups to operate with exemptions for a while.

USA

US regulation is complex, because both the federal and state governments play a part. This makes the regulatory landscape uneven. At the federal level, the Internal Revenue Service (IRS) has taxed cryptocurrency since issuing its guidance in 2014.

USA Flag

USA Flag

The Securities and Exchange Commission (SEC) has been clear that it will view many ICO tokens as securities, placing them under existing regulations.

In May, the North American Securities Administrators Association (NASAA) launched Operation Crypto Sweep, a joint action between state and provincial securities regulators in the US and Canada to target fraudulent ICOs. They have targeted around 70 cryptocurrencies.

At a state level, New York has taken the lead. Its Department of Financial Services regulates virtual currency issuers, transmitters and exchanges under its BitLicense regulation, which it introduced in 2015. Other states, ranging from California to Texas, are at various stages of developing and formalising policies to regulate cryptocurrency.

Middle/South America

Argentina

Argentina taxes cryptocurrencies as it does profits from securities and bonds. It doesn’t currently regulate cryptocurrency in other ways.

Brazil

The Brazilian central bank (Banco Central do Brasil, BACEN) has not regulated cryptocurrency and does not consider it legal tender. However, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, CVM) said in January 2018 that hedge funds are not allowed to invest in virtual currencies.

Mexico

Mexico has not yet decided rules to tax cryptocurrency, but it approved a law in March 2018 to regulate virtual assets.  The country will treat them as commodities rather than legal tender. From September 2019, providers of services related to virtual assets must report relevant transactions exceeding a certain threshold and must identify clients and record transactions.

Asia-Pacific

Australia

The Australian Tax Office (ATO)’s guidance on cryptocurrency taxation shows that it treats transactions as barter agreements, but will tax profits from cryptocurrencies as capital gains if they exceed $10,000. It also taxes mining income.

Australia is concerned about terrorist money laundering, though. In December 2017, it passed a bill requiring exchanges to comply with anti-money laundering regulations. They must register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and verify customer identities.

The country seems as unconcerned about consumer protection as it is concerned about counter-terrorism. The Australian Securities and Investments Commission (ASIC) doesn’t consider cryptocurrencies to be financial products and doesn’t regulate them. It has stated that investors are on their own, with no financial recourse, if they get burned by an ICO.

China

China has become increasingly unfriendly towards cryptocurrencies, taking more draconian measures to prevent their use. In September 2017, central government regulators banned initial coin offerings altogether and prevented exchanges from converting cryptocurrencies into fiat currency.

China

China

China has also discouraged bitcoin mining by requiring local governments to remove any preferential policies for miners and report on mining activities in their area.

At the same time, like many other countries, China is reportedly considering its own state-run digital currency.

India

In January 2018, India asked people dealing in cryptocurrencies to pay capital gains tax on their profits. After warning the public several times about the dangers of cryptocurrency trading, India banned regulated financial institutions from dealing in cryptocurrencies in April 2018. Courts upheld the ban in early July after cryptocurrency exchanges appealed.

Indonesia

Indonesia’s central bank does not consider cryptocurrencies to be legal tender and has warned against trading in them because of their high risk. In November 2017, it issued regulation 19/12/PBI/2017, which banned financial technology companies from using cryptocurrency as a payment mechanism.

Japan

Japan taxes profits from cryptocurrency sales as miscellaneous income. The country has a unique history with cryptocurrency because it hosted Mt Gox, the early bitcoin exchange that failed spectacularly in 2014.

In 2017, it passed amendments to its Payment Services Act to define cryptocurrency and demand that exchanges register with a local Finance Bureau. They must demonstrate adequate cybersecurity and have their fiscal management audited by an appropriate contractor. They must also submit annual reports to Japan’s financial regulator, the Financial Services Agency (FSA).

The FSA has teeth. In January 2018, after cryptocurrency exchange Coincheck lost $530m in cryptocurrencies tokens, the Agency mounted improvements and made all exchanges in the country report their system risk management plans. It subsequently ordered two exchanges to suspend business.

The Japanese government requires cryptocurrency exchanges to comply with anti-money laundering regulations by checking customer identities and keeping transaction records. It is currently mulling regulations for ICOs.

South Korea

Korea initially benefitted from China’s clampdown on cryptocurrencies as its share of cryptocurrency trades grew. However, the government has taken regulatory measures to protect its economy and cool the cryptocurrency market. Korea took an aggressive anti-ICO stance in 2017, following China’s lead by vowing to ban raising money through all forms of virtual currencies in September that year.

South Korea

South Korea

The government issued its Virtual Currency Anti-Money Laundering Guidelines in January 2018, preventing the use of cryptocurrencies for money laundering by banning anonymous trading. It also reportedly levied a 22% corporate tax and a 2.2% local income tax on exchanges that month.

Then, in May 2018, the Financial Services Commission (FSC) announced that it would be probing cryptocurrency exchanges’ corporate accounts following a raid on the country’s top cryptocurrency exchange, UPbit.

This led it to update the guidelines in June to more closely monitor non-trading accounts. They must also now share a list of overseas cryptocurrency exchanges with which they conduct business.

These measures may seem increasingly aggressive, but South Korea is also trying to balance its interest in blockchain technology and cryptocurrency with the need for economic stability and security.

In May, its National Assembly officially proposed to once again allow ICOs, while reports in early July suggested that the government was set to recognize cryptocurrency exchanges as unique entities in their own right for the first time.

Europe

Estonia

Estonia relies on its existing anti-money laundering laws for regulating the conversion of digital currency to fiat, and its securities laws for determining whether an ICO should be regulated as a security. However, it has drawn fire for ruling in favour of restrictions on Bitcoin trading, effectively requiring that trades over a certain value require face-to-face meetings with customers.

Some officials in the country has been mulling its own state-based cryptocurrency, called Estcoin, which would be offered to people gaining a digital identity under its e-residency program. It would use the coin to help fund digital technology projects.

This has created tensions with the EU, which considers Estonia to be bound by its use of the Euro as a sole means of raising money since the company adopted the currency in 2011.

France

France has been relatively late to the game in cryptocurrency regulation. The country Introduced an ordinance in 2016 allowing the use of blockchain technology for a narrowly-defined financial instrument called ‘mini-bonds’, which served mainly to help define blockchain technology from a regulatory perspective.

In January 2018, the French finance minister, Bruno La Maire, called for a new regulatory framework to overcome tax evasion and terrorist funding. In February, its Financial Market Authority (Autorité des marchés financiers, AMF), said that companies offering cryptocurrencies derivatives must abide by existing legal rules and must not advertise them electronically. It defines a cash-settled cryptocurrency contract as a derivative.

The following month, it warned the public about the dangers of investing in cryptocurrency assets. Still, cryptocurrency advocates shouldn’t necessarily see this as a crackdown. In late 2017, France allowed financial institutions to set up blockchain platforms to trade unlisted securities. In March, La Maire also called for a regulatory framework to help attract ICOs.

Germany

Germany has been even less aggressive than France in regulating cryptocurrency, even though the German central bank has called for stiffer rules.

Like many other countries, Germany has used its financial regulator to warn the public about the dangers of buying ICO tokens. It has also thus far mirrored the US and Canadian approach in not carving out specific legislation for the regulation of ICOs, but instead announcing that it will judge each ICO on its own merits under existing securities law.

Germany now follows the EU’s lead on not taxing profits from cryptocurrency-based payments.

Italy

In mid-2017, Italy proposed a specific registry for virtual currency exchanges as part of a modification to existing anti-money laundering laws. The law, AML4, is awaiting approval by the European Parliament. February 2018 saw it issue another decree, tightening the reporting requirements for virtual currency service providers.

Malta

Malta has been aggressively pursuing the cryptocurrency exchange business, going so far as to call itself the “blockchain island”. As such, it issued a consultation in November 2017 for a specific kind of collective investment fund that could invest in cryptocurrencies, called a professional investor fund.

In April 2018, Malta’s regulator announced the Virtual Financial Assets Act (VFAA), which regulates exchanges trading in “virtual financial assets”. By closely defining the nature of these assets, it creates an opportunity to regulate a subset of digital assets itself, rather than relying on the EU. It published a consultation paper on a ‘financial instrument test’ to evaluate digital assets against this framework.

Russia

Russia published a draft law, “On Digital Financial Assets”, to regulate cryptocurrencies in January 2018. Russians can trade cryptocurrencies, but exchanges must be established under existing federal securities and trading laws.

Under the law, ICOs must be accompanied by appropriate documents, and non-qualified investors can only make token purchases up to 50,000 rubles in value. While focusing heavily on ICOs, the law drew criticism for weak definitions of cryptocurrencies and smart contracts.

Saudi Arabia

Saudi Arabia has taken its time addressing cryptocurrency. Regulatory sources have said that the country is working on an official policy, but an outright ban is unlikely. As in Canada and the UK, regulators there have launched a sandbox program that gives fintech startups some space to experiment without being overburdened by rules.

Switzerland

Switzerland treats cryptocurrency as a means of payment rather than as a good or service, meaning that it doesn’t charge VAT on the sale of bitcoin.

Switzerland was a haven for ICOs in the early years. Ethereum’s ICO was organized under its jurisdiction, for example. As the number of coin offerings mounted, though, its regulators began taking an interest.

In September 2017, the country’s Financial Market Supervisory Authority (FINMA) issued guidance on ICOs, announcing that they may come under existing regulatory legislation. It followed this up in February 2018 with ICO guidelines explaining how it would handle enquiries from ICO organizers using a three-tier system for classifying tokens.

South Africa

South Africa’s Reserve Bank reportedly doesn’t feel that cryptocurrencies fall within its purview. Instead, it is setting up a new unit, codenamed Project Khoka, to publish his own rules that will help cryptocurrencies flourish while preventing systemic risk. It is still early days for cryptocurrency regulation in that country.

UK

The UK announced plans to regulate bitcoin exchanges under anti-money laundering rules in 2015, reiterating those plans the following year. It is now relying on the EU’s AML4 regulations for this. The first regulations appeared in Jersey, requiring exchanges with an annual turnover of more than £150,000 to register with its financial regulator.

In November 2017, the UK Financial Conduct Authority warned consumers about investing in cryptocurrency contract-for-differences (CFDs), a kind of derivative that allows investors to speculate on cryptocurrency values. The FCA regulates CFDs, it added.

In April 2018, the FCA followed up on this advice, warning that companies offering cryptocurrency derivatives such as futures and options would need its authorization as these would fall under the EU’s rules.

However, these announcements do little other than articulate existing regulations. The FCA is working on specific cryptocurrency guidelines with the Bank of England and the UK Treasury, which it will announce later in 2018.

Global regulation

Historically, there has been next to no international coordination on regulating cryptocurrencies bar some movement from the EU. In 2015, the European Court of Justice ruled bitcoin transactions exempt from value-added tax, effectively confirming its status as a currency rather than a property. Nevertheless, member states could still impose other kinds of taxes on their own.

More recently, things are changing. On the taxation side, the US announced that it will target cryptocurrency tax fraud as part of a multinational effort with Australia, Canada, the UK and the Netherlands.

In April 2018 the European Parliament also voted in favour of a fifth update to its anti-money laundering regulation. Among many other measures affecting the financial sector, the rules will require cryptocurrency exchanges to do more due diligence on customers, including verifying their identities. Exchanges must also register with the appropriate authorities.

In the same month, the G20 met in Argentina with cryptocurrencies near the top of its agenda, spurred on by calls for a global approach by countries including France and Germany. While it didn’t conclude any regulations at that session, it agreed that cryptocurrencies needed further investigating and advanced a firm deadline in July to create a set of recommendations for regulating them.

In the meantime, it has agreed to implement standards created by the Financial Action Task Force (FATF), an international group that develops anti-money laundering policies. It will develop binding rules for the world’s cryptocurrency exchanges.

“We commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation,” said the G20 in a statement. “We call on international standard-setting bodies (SSBs) to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed.”

The Organization for Economic Co-operation and Development (OECD) also submitted a report to the G20, vowing to look more closely at cryptocurrency taxation and to reach a consensus on the issue by 2020.

These moves show that as cryptocurrency gains traction, regulators are becoming more interested. This needn’t be cause for alarm, though. In fact, cryptocurrency advocates may end up welcoming the certainty that a robust regulatory framework provides.

Post written by Chris Wheal
Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.

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