.Since Bitcoin’s tulip fever hit in 2017, cryptocurrency exchanges and the future of blockchain technology have become major topics of economic conversation. Now, as the year draws to a close, demand for Bitcoin has surged to an all-time high of almost $20,000 as investors seek shelter from the volatile stock market.
Nevertheless, in the decade that has passed since the creation of Bitcoin, the legal status of this and other cryptocurrencies continues to be uncertain. By its very nature, cryptocurrency operates on a decentralised ledger – and so, questions around its classification and regulation remain largely unanswered. In the absence of such an answer, governments across the globe have sought to build frameworks to govern the trade of cryptocurrencies – but such frameworks are far from uniform.
In early 2020, France, Germany, and Australia issued differing interpretations of Bitcoin: as a currency, a financial instrument, and a security.
The legal landscape for crypto is constantly evolving, making it hard to keep up. This guide outlines global cryptocurrency regulations. Read on to discover the differences in each jurisdiction.
United Kingdom
While the UK continues to operate under EU law until the end of the transition period, that date is fast-approaching. So far, no regulations have specifically been set out with regard to cryptocurrencies. On a very basic level, we know that crypto is not considered to be legal tender, although crypto exchanges are permitted by law. As of January 2020, the Financial Conduct Authority have the power to supervise business dealings in crypto to prevent money laundering and terrorist financing.
Aside from this, the United Kingdom’s approach to cryptocurrency regulations has been measured; with regard to taxation, HMRC has issued a brief on the tax treatment of cryptocurrencies, stating that their “unique identity” means they can’t be compared to conventional investments or payments. However, according to their brief, gains or losses on cryptocurrency are subject to capital gains tax. How these laws develop post-Brexit will be interesting to see, and an area we will be keeping a close eye on.
The EU
Rules differ between member states, and the EU itself has yet to pass specific legislation regarding cryptocurrencies. Although crypto is broadly considered legal across the bloc, individual countries have their own regulations with regard to exchange and taxation, with rates ranging anywhere between 0% and 50%. Most member states charge capital gains tax on wins and losses from cryptocurrency. Further, as of January 2020, cryptocurrency exchanges must now follow the regulations set out in the EU 5th Anti Money Laundering Directive.
United States
At present, laws vary greatly between states, since federal law has yet to reach a conclusion as to what cryptocurrency is by definition. For example, according to the IRS, cryptocurrencies are considered property, while the Financial Crimes Enforcement Network regards them to be money transmitters. Meanwhile, the Securities and Exchange Commission (SEC) has indicated that it defines cryptocurrencies as securities: in March 2018, it stated that it was looking to apply securities laws comprehensively for digital wallets and exchanges.
The FCA banned the sale of crypto-derivatives to UK retail investors from 2021. This includes BTCE, the first cleared Bitcoin exchange-traded product. The ban aims to protect investors after evidence of significant retail losses from trading crypto derivatives.
While the incumbent president has made his dislike for cryptocurrencies well known (“their value is based on nothing but thin air”,) there isn’t a consistent framework that governs the exchange and taxation of digital currencies. What’s more, Joe Biden’s picks to head key regulatory agencies could redefine cryptocurrency policy in the coming years, and speculations that cryptocurrency’s political poster boy Andrew Yang will be appointed to Biden’s team as trade secretary only suggest positive developments in this field.
Russia
Russia’s President Vladimir Putin, like Trump, is openly skeptical of Bitcoin and cryptocurrencies. The landscape is negative towards private digital financial assets. The head of the Bank of Russia opposes private currencies, citing threats to financial sovereignty. The Russian Ministry of Finance criminalized crypto as a money substitute. In August 2020, Putin signed a bill regulating digital financial asset (DFA) transactions. The law defines digital currency as electronic data used for payments or investments. It states digital currency cannot pay for goods and services
Meanwhile, the Ministry of Internal Affairs plans to implement measures that will allow it to confiscate digital currencies in the case of criminal activity.
How it plans to enact this law is unclear, as currencies such as Bitcoin are anonymous and decentralised by nature. To seize cryptocurrency, Russia must recognise it as having value. Considering the Bank of Russia’s view that states they do not support digital currencies, it’s unlikely they will be willing to do so.
Russia’s Ministry of Finance added new amendments to the law on digital financial assets. These take effect in January. Cryptocurrency owners must report all transactions and wallet balances over 600,000 rubles (approximately £6,000) annually to the tax authority.
China
Perhaps the clearest of all in their approach to cryptocurrency is China, where digital currencies are completely illegal. In 2013, the People’s Bank of China banned financial institutions from handling Bitcoin transactions, and as of 2017, ICOs and domestic crypto exchanges are also banned. Yet, interestingly, it is not illegal to hold Bitcoins and other cryptocurrencies or even buy and sell them in China. The Chinese government encourages the use and development of blockchain technology. However, they insist it must serve the “real” economy.
In July 2019, a property dispute involving Bitcoin took place in China that set a new precedent by declaring for the first time that Bitcoin is virtual property with monetary value. In the historic case, Bitcoin was recognised as scarce, valuable and disposable which, under Chinese law, are attributes of property with protection. The ruling concluded that owning crypto in China is virtual property, but it is not fiat money. In late 2019, the government closed several crypto exchanges as part of a country-wide crackdown.
Japan
Perhaps the world’s most progressive legal climate towards cryptocurrencies is Japan. Since 2017, Japan recognises Bitcoin and other cryptocurrencies as legal property. Currently the world’s biggest market for Bitcoin, the tax laws surrounding cryptocurrencies in Japan categorise digital currencies as ‘miscellaneous income’, taxing investors at rates of between 15-55%.
After a series of high-profile hacks, Japan tightened regulations. Cryptocurrency exchanges must now register with the Financial Services Agency (FSA). Japan, the first country to define “Crypto Asset” legally, remains crypto-positive. However, concerns about money laundering are pushing for stricter regulation.
The FSA and Japanese exchanges formed the Japanese Virtual Currency Exchange Association. This association promotes regulatory compliance and establishes best practice guidelines. It will play a leading role in shaping Japan’s cryptocurrency legal landscape.
India
In India, the regulatory climate does not recognise cryptocurrencies as legal tender. Although exchanges are not illegal, the rules in India have made it incredibly tough for exchanges to operate at all.In 2018, the Reserve Bank of India banned banks from dealing with virtual currencies. This prohibited cryptocurrency trade on domestic exchanges. A 2020 Supreme Court ruling overturned the ban as unconstitutional.
Nevertheless, fresh legislation is looming as India plans to introduce a nationwide ban on the trade of cryptocurrencies altogether. This law may ban users from investing and affect over 1.7 million Indians trading digital assets and companies setting up trading platforms. Just as in China, the federal government will encourage blockchain but is not keen on cryptocurrency trading.
Australia
Overall, Australia has taken a more crypto-friendly approach to trading of digital currencies and exchange regulations. Currently, Australia considers cryptocurrencies and exchanges legal. It treats Bitcoin and similar cryptocurrencies as public property subject to capital gains tax. In a move to prevent money laundering and terrorist financing, AUSTRAC has outlined more stringent rules for crypto exchanges.
The law allows the agency to monitor local exchanges. It recently revoked three exchange licenses for suspected criminal activity. The Australian Securities and Investments Commission (ASIC) regulates crypto assets and tokens as financial products, including ICOs.
Overall, the global regulatory climate for cryptocurrency investment, tax, trading, and exchange remains fragmented. However, 2020 regulations in the US, EU, and other regions promise a more cohesive and mainstream future for cryptocurrencies.
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