Over the past few months, we have written about how the regulatory approach to cryptocurrencies and crypto assets in the UK and around the world is beginning to mature. Until recently, the regulation of this sector has been disorganized and highly ineffective, but things are beginning to change for the better, albeit slowly and differently in each country. Here we will look at how crypto regulation is evolving in three geographies of the world, including the United States, Asia/Pacific, and the EU.
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Cryptocurrency regulations in the United States
Cryptocurrency regulation still varies considerably between US states, however, at the federal government level, progress is being made. Under the current regulatory structure in the US, companies that trade cryptocurrencies must be registered with the Financial Crimes Enforcement Network (FinCEN) in order to trade. They must also have Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) measures and submit mandatory reports to supervisory authorities.
Showing the importance of crypto regulation at the federal level, in March 2022, US President Joe Biden announced a “whole of government” approach to regulating crypto assets across a wide executive order. This will force all federal agencies and departments to consider how they protect consumers and ensure financial stability and national security while addressing climate risks. Why was this announcement so pivotal? The president’s statement includes the following words, “The United States must maintain technological leadership in this fast-growing space, supporting innovation and mitigating risks to consumers, businesses, the broader financial system and the climate. And it must play a leadership role in international engagement and global governance of digital assets consistent with America’s democratic values and global competitiveness.” As such, this statement warns the world that the US is preparing to become a world leader in crypto.
Cryptocurrency regulations in the Asia/Pacific region
It is well established that China has a worldwide reputation for its strict regulation of cryptocurrencies. How hard? Consider that in 2021, 10 government authorities, including the People’s Bank of China (PBOC), jointly issued a statement to clarify that:
- virtual currency (cryptocurrency) is not legal tender
- cryptocurrency trading activities are illegal
- Overseas cryptocurrency exchanges that provide services to Chinese residents over the Internet are considered illegal financial activities.
Given the extremely harsh regulatory environment for cryptocurrency trading in China, this position is not expected to change in the near to medium future. However, this does not mean that the Chinese government will not adopt cryptocurrencies. China is expected to soon introduce its own Central Bank Digital Currency (CBDC) (the so-called digital RMB or e-CNY), which is undergoing extensive testing. e-CNY was even used by foreign attendees of the 2022 Winter Olympics in Beijing.
Compared to many other countries, crypto regulation is quite advanced in Australia. Cryptocurrencies and exchanges are legal in the country. Cryptocurrency exchanges wishing to trade in Australia must register with and obtain approval from the Australian Transaction Reporting and Analysis Center (AUSTRAC). AUSTRAC, like the FCA in the UK, is tasked with preventing, detecting and responding to criminal abuse of the financial system, including crypto markets. Therefore, exchanges are required to adhere to strict AML and CFT regulations and reporting obligations. the Australian Tax Office (OTA) has also made it clear that the disposal of cryptocurrencies (i.e. selling, gifting, exchanging, converting or using) can attract capital gains tax (CGT).
The Australian Securities and Investments Commission (ASIC) has also provided extensive regulatory guidance for companies that handle crypto assets. This provides regulatory guidance on:
- What to consider when offering crypto assets
- What is considered misleading or misleading conduct in connection with a crypto asset or an initial coin offering (ICO)
- When a crypto asset or an ICO is considered a financial product
- When a crypto asset trading platform becomes a financial market
We expect the Australian authorities to continue the fast pace they have set when it comes to crypto asset regulation, further tightening the rules for cryptocurrency exchanges and potentially becoming a world leader in this space.
Cryptocurrency Regulations in the European Union
As a bloc of nations overseen by Brussels, EU countries cannot establish their own individual cryptocurrencies the way many other countries do. The use of cryptocurrencies is legal throughout the EU, but there is no consistent image when it comes to cryptocurrency exchanges. Cryptocurrency exchanges must register and get approval from state file-level regulators before they can operate. Usefully, when an exchange gains authorization in one EU country, the trading rights are effectively transferred, allowing them to operate across the EU. Cryptocurrency exchanges must adhere to the strict requirements of 6AMLD (the EU Anti-Money Laundering Directive).
The EU is now working on a new set of crypto regulations to harness the potential gains while mitigating the risks it poses. The Crypto Asset Markets Regulation (MiCA) was introduced in 2020 to provide a regulatory foundation allowing crypto asset markets to develop within the EU where existing financial regulatory models could not be used. Negotiations are now underway on the final form of these crypto regulations with individual EU nations. This includes a new regulatory approach to licensing issuers of crypto assets, rules of conduct for those who trade in crypto, and updated consumer protections.
This article only covers the ‘tip of the iceberg’ of crypto regulation around the world. What is notable is the difference in approach and the degree to which crypto is viewed as both a strategic priority and a threat to be controlled in many countries. It will be interesting to see how individual countries and blocs adapt their thinking as other countries refine their positions.