After reaching a peak market value of $3 trillion in 2021, cryptocurrencies have spent most of 2022 and the first half of 2023 in a tailspin. Fueled by scandal, financial losses and a public perception crisis, the industry has been in a deep freeze.
Crypto’s lowest recent point has arguably been when crypto firm FTX’s founder Sam Bankman-Fried was indicted on a battery of fraud charges. These troubles show the industry has a long way to go in terms of maturity and evolution. Many observers agree that stronger regulation is needed to help the industry mature, reduce risk and push bad actors out of the system.
Ongoing crypto scandals have resulted in a loss of trust with consumers, regulators and governments. At this rate, mainstream crypto acceptance will take a long time to achieve. Despite this, crypto’s business case remains intact. It is alluring to consider the evolution of money as a payment form becoming faster, more efficient and effortlessly omnipresent in society.
For these reasons, regulators around the world are in a rush to lay out clear regulation. In this article, we will bring you up to speed with the latest regulatory developments around the world. Details are correct at the time of writing, but things could easily change as the industry is moving so fast.
Crypto Regulations in the EU
In 2022, the European Council approved a set of rules called Markets in Crypto Assets (MiCA), marking the final step in the legislative process within the bloc. These rules were previously endorsed by European Parliament lawmakers and are expected to be implemented in phases, starting from July 2024.
In order to issue, trade, and safeguard crypto assets, tokenized assets, and stablecoins within the 27 countries of the European Union, companies will now need to obtain a license. This move aims to combat tax evasion and the use of crypto asset transfers for money laundering by making transactions easier to trace.
Starting from January 2026, service providers seeking EU crypto regulation will be required to obtain the names of senders and beneficiaries for crypto asset transactions, regardless of their trading strategies and the transfer amount. Additionally, there is an agreement to amend rules on how member countries cooperate with each other in taxation regarding transactions involving crypto-assets. Furthermore, information on advance tax rulings for the wealthiest individuals will be exchanged.
Crypto firms are seeking regulatory certainty, putting pressure on countries to adopt EU rules and regulators to establish global standards for cross-border activities. The implementation of the MiCA regulation is expected to make the European Union the first major jurisdiction to have tailored crypto regulations.
Provisions Under MiCA
The provisions of MiCA, such as granting regulated crypto exchanges and wallet providers a license to operate across the 27-nation bloc and requiring stablecoin issuers to hold appropriate reserves, is expected to provide much-needed structure to the operations of these firms who have for so long been operating according to their own standards.
MiCA also introduces new regulations that prohibit market abuse in relation to any type of crypto-asset transaction or service. This includes unlawful disclosure of inside information, insider trading, and actions likely to disrupt or manipulate crypto assets.
MiCA was initially proposed by the European Commission in 2020 and sparked controversy when lawmakers considered including environmentally focused provisions that could have potentially banned the proof-of-work mining technology used by Bitcoin.
The final rules are primarily focused on improving transparency, combating money laundering, and regulating stablecoins, which are often tied to traditional currencies or commodities like gold, making them less volatile than other cryptocurrencies.
Under MiCA, regulated crypto exchanges and brokers will need approval to operate in the EU and will be held responsible if they fail to safeguard investors' assets. Authorities will maintain a public list of "noncompliant" companies.
The rules are designed to ensure financial stability and include measures to combat market manipulation and insider trading. Companies involved in issuing or trading crypto assets will be required to disclose information regarding the risks, costs and charges faced by consumers.
Regulations in the Future
While the industry broadly welcomed these provisions, attention is now shifting toward future EU crypto regulations, which may cover topics such as staking, non-fungible tokens (NFT), and decentralized finance (DeFi).
Under additional provisions, Crypto-Asset Service Providers (CASP) will require authorization to operate within the EU. CASPs encompass various crypto-asset services, such as operating a trading platform, custody and administration of crypto-assets on behalf of third parties, exchanging crypto-assets for funds or other crypto-assets, executing orders for crypto-assets, placing crypto-assets, providing transfer services for crypto-assets to third parties, offering advice on crypto-assets and portfolio management involving crypto-assets. In essence, CASPs providing crypto-asset services to third parties on a professional basis will be subject to new rules, including governance and liquidity requirements.
The US Releases First-Ever Comprehensive Crypto Framework
The United States has had an inconsistent approach to regulating cryptocurrencies until very recently. While some members of Congress have long pushed for a comprehensive framework that would promote the growth of the industry, financial market regulators are tightening their grip on a sector that raises concerns about money laundering, scams, and cybercrime.
Instead of directly regulating cryptocurrencies themselves, the U.S. has focused on regulating the platforms and brokers that facilitate crypto transactions. In March 2023, Securities and Exchange Commission (SEC) Chair Gary Gensler made a notable statement, suggesting that if crypto platforms and lenders are not regulated like stock exchanges, they cannot serve as qualified custodians for investment advisors. A key point of contention revolves around whether cryptocurrencies should be classified as securities or not.
The push to regulate cryptocurrencies has reached the highest levels of government. In a significant development, the White House in 2023 released the first-ever comprehensive framework for the responsible development of digital assets.
The Biden administration noted that the digital assets market has experienced substantial growth in recent years, with millions of people, including 16% of adult Americans, purchasing digital assets. These digital assets hold the potential to strengthen U.S. leadership in the global financial system and keep the country at the forefront of the crypto regulatory framework.
President Biden's Executive Order on Ensuring Responsible Development of Digital Assets, issued on March 9, 2023, marked the first approach across all government agencies to address the risks associated with digital assets and leverage their potential benefits. The aim is to create a unified strategy to navigate this evolving landscape. The key tenets of the Executive Order include:
Consumer and investor protection
Promoting financial stability
Countering illicit finance
Creating U.S. leadership in the global financial system and economic competitiveness
Financial inclusion for all
The SEC and the Commodity Futures Trading Commission (CFTC) are fully committed to their mandates and have been vigorously investigating and taking enforcement actions against unlawful practices in the digital-assets space.
These independent regulators have been working diligently to protect consumers and promote fairness in crypto trading. They have been issuing guidance, ramping up enforcement resources, and actively pursuing fraudulent individuals and entities.
Now, with the say-so of the White House, and to further safeguard consumer interests, other bodies like the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) are being urged to intensify their efforts in monitoring consumer complaints and cracking down on unfair, deceptive or abusive practices.
The White House noted that as digital assets become more integrated into the mainstream financial system, there is an increasing risk of turmoil spilling over into other areas. Stablecoins, in particular, have the potential to trigger disruptive market runs if they are notsubject to appropriate regulation, as witnessed with the 2022 crash of the stablecoin TerraUSD, which led to significant insolvencies and the loss of almost $600 billion in wealth.
To mitigate these risks and protect the national interest, President Biden’s Administration is planning various steps:
First, the President will evaluate whether it is necessary to call upon Congress to amend certain laws such as the Bank Secrecy Act, anti-tip-off statutes, and laws against unlicensed money transmitting. The goal is to explicitly include digital asset service providers, including exchanges and non-fungible token (NFT) platforms, within the scope of these laws.
Second, the Administration will consider urging Congress to increase the penalties for unlicensed money transmitting to align them with penalties for similar crimes under other money-laundering statutes. Additionally, they will explore amending federal statutes to enable the Department of Justice to prosecute digital asset crimes in any jurisdiction where victims of those crimes are found.
The United States will continue to closely monitor the development of the digital assets sector and the associated risks of illicit financing. This includes conducting an illicit finance risk assessment on decentralized finance and an assessment on NFTs at some point in 2023.
Relevant government departments and agencies will persist in exposing and disrupting illicit actors involved in digital assets. These actions will hold cybercriminals and other malicious actors accountable for their illicit activities while identifying potential nodes in the ecosystem that pose national security risks.
The Treasury Department will enhance its dialogue with the private sector to ensure that firms fully understand their existing obligations and the risks of illicit financing associated with digital assets. The department will also promote information sharing and encourage the use of emerging technologies to facilitate compliance with obligations.
United Kingdom Crypto Regulations
The United Kingdom is experiencing a period of uncertainty when it comes to crypto regulations, primarily due to recent changes in national leadership. Rishi Sunak assumed the position of Prime Minister in October 2022, which caught the attention of the crypto community due to his previous stance on the matter.
When Sunak served as the Finance Minister, he presented a plan that outlined the country's strategy to become a global hub for crypto technology. One of the most noteworthy aspects of his plan was the proposal to regulate stablecoins, aiming to establish them as a recognized form of payment within the UK.
At the time, Sunak expressed his ambition, stating, "I envision the UK becoming a global hub for crypto asset technology, and the measures we have outlined today will support firms in investing, innovating, and expanding within our country."
While the UK is seeking an edge in crypto innovation, concerns still persist. Overall, the country's approach to crypto regulation is often seen as similar to that of the United States. While regulations have generally fostered innovation in the crypto space, authorities are now focusing on combating issues such as money laundering and fraudulent activities related to cryptocurrencies. The Financial Conduct Authority (FCA), the UK's regulatory body, went so far as to ban all activities by Binance, the world's largest crypto exchange, during the summer of 2021.
An Overview of Cryptocurrency Regulations in Australia
More than 1 million Australians, which accounts for about 5% of the country's population, are cryptocurrency owners. The number of people involved in the crypto industry continues to rise. However, some surveys have revealed concerning trends that only around 20% of cryptocurrency owners appear to be aware of the risks associated with investing in digital assets.
In response to continued turmoil in the crypto industry, Australia has long considered tighter measures in this regard. Bitcoin and other cryptocurrencies are legal in Australia and are treated as property. It is permissible to trade, spend, receive and store cryptocurrencies, and they are accepted as a form of payment for personal and business transactions, although merchants are not obligated to accept them.
Australia has always fostered a neutral and stable market environment for blockchain and cryptocurrency, encouraging technological innovation in areas such as payments, crypto assets, lending, investments and custodial services.
A Brief History
Cryptocurrencies and cryptocurrency exchanges obtained full legal recognition in 2017. Since then, Australian laws have been relatively hands-off in the industry, embracing the innovative potential of this technology.
However, in 2018, Australia introduced Anti-Money Laundering (AML) and counter-terrorism financing (CTF) measures that apply to digital currencies. The Financing Act 2006 brought digital currencies under the AML and CTF regime due to the potential facilitation of illicit activities through digital currency transfers.
Historically, the Australian government has taken a relatively lenient approach to regulating crypto assets. However, given recent dramatic events in the crypto space, there have been calls to develop more effective regulations focused on consumer protection and market integrity.
Although cryptocurrencies are not governed by specific legislation, they can still fall within the scope of existing regulatory frameworks under Australian law. Cryptocurrencies are generally scrutinized from a transactional relationship perspective, such as the issuance and exchange processes. The focus of Australian legislation is on activities involving cryptocurrencies rather than the assets themselves.
Cryptocurrency exchanges in Australia are required to register with AUSTRAC, verify users' identities, maintain records, and comply with government AML/CTF reporting obligations. AUSTRAC manages and safeguards a Digital Currency Exchange Register, and unregistered exchanges may face criminal charges and financial penalties for non-compliance.
Currently, there is no specific legislation governing blockchain or distributed ledger technologies (DLT) in Australia. However, the Australian Securities and Investments Commission (ASIC) provides publicly available guidelines addressing potential issues that could arise with the implementation of these technologies.
The sale or exchange of cryptocurrencies and other digital assets falls under Australia's existing financial services regulatory regime. If such activities are part of a holder's ordinary trading activity, the digital assets are treated similarly to trading stock. Gains from the sale of cryptocurrencies are taxable, while losses are deductible.
Cryptocurrency miners are required to register for Goods and Services Tax (GST) if their annual business turnover reaches $75,000 AUD or more. Even if miners fall below the GST threshold, they may still choose to register to claim full input tax credits for business acquisitions.
The Australian Taxation Office (ATO) has established a specialized task force to combat cryptocurrency tax evasion. They require cryptocurrency exchanges and service providers to maintain customer records to conduct data matching and ensure proper tax compliance by traders and investors.
Further Measures Planned
In August 2022, the Australian government announced its intention to initiate consultations with industry players, investors, and stakeholders to develop a regulatory framework for the cryptocurrency sector. The aim is to strike a balance between regulating the industry, understanding its nuances and promoting innovation.
The regulatory authorities will focus on several areas, including conducting a token-mapping exercise to identify the characteristics and regulatory status of crypto assets. They will also address gaps in the regulatory framework, assess progress on licensing requirements, and establish additional consumer protection guidelines.
The Australian government is committed to implementing exchange regulations and custody arrangements as early as mid-2023 to safeguard customer funds. Registered exchanges will be required to follow Know Your Customer (KYC) processes for customer identification and verification, fulfill annual reporting obligations and monitor and report any suspicious large transactions.
Crypto Regulation in Canada
Canadian authorities are aiming to provide more clarity and establish regulatory oversight for the crypto industry. In August 2022, the Office of the Superintendent of Financial Institutions (OSFI), which oversees banking and insurance in Canada, introduced its first federal regulations for cryptocurrencies.
The focus in Canada is primarily on tax regulations, treating cryptocurrencies as commodities for income tax purposes. This means that taxpayers are required to report their cryptocurrency transactions, no matter their trading approach or strategy.
Since 2019, cryptocurrency exchanges in Canada have been regulated in a manner similar to traditional money services businesses. However, compared to their American counterparts, the regulatory environment in Canada is often considered more stringent. In fact, in 2021, both FTX and Binance decided to completely withdraw from the province of Ontario due to the demanding regulatory requirements imposed on them.
China Has Banned Crypto
The outright ban on cryptocurrencies in China has had a major impact on the global crypto ecosystem, as China was one of the largest markets for digital currencies. This ban has effectively closed off access to the Chinese market for many businesses involved in cryptocurrencies. As a result, Chinese investors are now seeking alternative ways to engage with cryptocurrencies, often turning to offshore exchanges or decentralized finance platforms.
Although there have been appeals for the Chinese government to reconsider its ban, it remains uncertain whether it will reverse its position. Instead, the Chinese government has been focusing on developing its own Central Bank Digital Currency (CBDC). It views the CBDC as a means to strengthen control over the financial system and reduce reliance on existing payment systems.
However, there is a slim chance that the Chinese government could adopt a more targeted approach to regulating cryptocurrencies. This could involve allowing trading on licensed exchanges or implementing stricter KYC controls. Such measures could help address some of the risks associated with cryptocurrencies while still enabling Chinese investors to participate in the market.
The future of cryptocurrencies in China remains uncertain, and any changes to the government's stance would have a significant impact on the broader crypto ecosystem. Given the size of the Chinese market, any increase in demand for cryptocurrencies from Chinese investors could potentially lead to a substantial upheaval in prices.
India Cryptocurrency Regulations
India previously refused to regulate cryptocurrency, becoming one of the countries that preferred to ban it entirely. While the ban has been overturned, regulators take a dim view of cryptocurrencies.
The Reserve Bank of India (RBI) in 2018 prohibited banks from offering services to any crypto-related firms. The ban was overturned by the Supreme Court in 2020.
While this regulatory about turn offered a more encouraging picture for crypto, authorities in India retained a dismissive attitude toward crypto. The government and central bank has repeatedly warned the public of crypto, with a government panel once even recommending jail terms of up to 10 years for those dealing in digital currencies.
Cryptocurrency Regulation in South Korea
In the 2022 South Korean Presidential election, eventual winner Yoon Suk-Yeol recognized the importance of regulating cryptocurrencies in his victorious campaign. Currently, the Financial Services Commission (FSC) in South Korea is actively working on the Digital Asset Basic Act, a comprehensive initiative aimed at reducing crypto-related crime and providing clearer guidelines for legitimate players in the industry. This act is expected to be introduced later in 2023. The National Assembly is also reviewing 17 different proposals that could shape the final version of the act.
One notable incident that fueled the push for increased regulation in South Korea was the collapse of Terra, the company behind the failed cryptocurrencies Luna and TerrraUSD. This ecosystem, valued at $60 billion, caused significant losses for investors when it fell apart in May 2022. The aftermath of this chaos intensified the need for stronger regulations and even led to the issuance of arrest warrants for Do Kwon, the founder of Terra and a South Korean native, for violating the country's financial laws.
The Bottom Line
It is evident that clearer regulations are necessary worldwide, particularly in the realm of cryptocurrency. Robust regulations are not only important, but crucial for fostering the growth of the industry. From an investor's perspective, having access to this new asset class through regulated entities and investment funds helps mitigate risks and provides a sense of security.
Why is there a need for cryptocurrency regulation?
Cryptocurrency regulation is necessary to protect investors, prevent fraud and money laundering, ensure market stability and provide clarity and legal frameworks for businesses operating in the crypto space.
How will cryptocurrency regulation affect me as a retail investor?
Cryptocurrency regulation can bring such benefits as increased investor protection, improved market transparency and reduced risks of scams and fraudulent activities.
Will regulation stifle innovation in the cryptocurrency industry?
The aim of regulation is not to stifle innovation, but to create a balance between fostering innovation and safeguarding the interests of investors and the overall financial system. Properly designed regulations can help establish a stable and sustainable ecosystem for cryptocurrencies to thrive.
What are the potential risks associated with unregulated cryptocurrencies?
Unregulated cryptocurrencies can pose such risks as scams, price manipulation, lack of investor protection, security vulnerabilities and potential for fraudulent schemes. Regulation helps address these risks and provides a safer environment for investors.
How will governments and regulators approach cryptocurrency regulation?
Governments and regulators have varied approaches to cryptocurrency regulation. Some may implement comprehensive frameworks to oversee the entire industry, while others may focus on specific aspects such as anti-money laundering measures, consumer protection or investor education. Some countries are already more advanced than others in terms of regulation.
Will cryptocurrency regulation be consistent across different countries?
Cryptocurrency regulation already differs from country to country due to varying legal systems, economic considerations and cultural factors. However, there may be international discussions to establish common standards and cooperation to address cross-border challenges associated with cryptocurrencies.
How can I stay informed about cryptocurrency regulations?
To stay informed about cryptocurrency regulations, you can follow updates from Arincen.com, government agencies, financial regulators, and industry news sources.
Adrian Ashley is a seasoned business and finance writer. With a corporate career spanning over 20years, he has developed deep experience in such diverse areas as investing, business, finance,technology and macroeconomics. He is passionate about captu...