Since the tulip fever of Bitcoin hit in 2017, speculations around the future of blockchain technology and cryptocurrency more broadly have been part of the economic conversation. Now, in what could be the tail end of a turbulent year, demand for the original digital currency has surged to an all-time high of almost $20,000 as investors seek a shelter from the volatility of the stock market storm.
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 fact, at the start of 2020 alone, France, Germany and Australia issued decisions with three different interpretations of the nature of Bitcoin: as a currency, as a financial instrument that is applied as a means of exchange among individuals or legal entities, and as a security.
Naturally, the legal landscape in this area is constantly evolving, so keeping abreast of the attitudes towards crypto across the world is far from straightforward. To help you navigate the various legislative positions towards cryptocurrencies, we’ve put together the following guide. Read on to discover the differences in cryptocurrency regulation across each jurisdiction.
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.
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.
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.
In recent news, cryptocurrency made the headlines when the FCA decided to ban the sale of crypto-derivatives to UK retail investors from 2021, including BTCE – the world’s first central counterparty cleared Bitcoin exchange traded product. Designed to protect investors, the decision to impose the ban has been driven by the evidence the FCA gas received on retail customers suffering considerable losses from trading crypto derivatives on a significant scale.
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.
Similar to Trump, Russia’s president Vladmir Putin is openly sceptical towards Bitcoin and cryptocurrencies. On a whole, the landscape is considered to be negative towards the use of private digital financial assets. Just last year, the head of the Bank of Russia said it was against private currencies in any form as they threaten financial sovereignty, and the Russian Ministry of Finance introduced a law that criminalised the use of crypto as a money substitute. Then, in August 2020, Putin signed into law a bill that regulates digital financial asset (DFA) transactions. The law gives a definition to digital currency, stating that it “is recognised as an aggregate of electronic data capable of being accepted as the payment means, not being the monetary unit of the Russian Federation or a foreign state, and as investments.” Crucially, the law states that digital currency “cannot be used at the same time to pay for any 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 has now added new amendments to the country’s law on digital financial assets that will take effect from January. These amendments require cryptocurrency owners to report all cryptocurrency transactions and wallet balances over 600,000 ubles in a calendar year (approximately £6,000) to the tax authority.
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 have even encouraged the use and development of blockchain technology – the tech that supports cryptocurrency transactions – but has made clear that it must service 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.
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%.
However, following a series of high-profile hacks, the regulatory landscape in Japan has since tightened, now requiring cryptocurrency exchanges to register with the Financial Services Agency (FSA) as Crypto Asset Exchange Service Providers in order to provide related services to Japanese citizens. The first country to define ‘Crypto Asset’ as a legal term, Japan remains a crypto-positive environment, but growing concerns surrounding money laundering are beginning to mount in favour of stricter regulation. On that note, the FSA and Japanese exchanges recently agreed to form a self-regulatory body – the Japanese Virtual Currency Exchange Association. The purpose of this association will be to promote regulatory compliance and establish best practice guidelines and is expected to play a leading role in shaping the legal landscape of cryptocurrency in Japan to come.
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 and financial institutions from dealing with or settling virtual currencies. In the process, the trade of cryptocurrencies on domestic exchanges was prohibited – however, in 2020, a Supreme Court ruling overturned the ban as being unconstitutional.
Nevertheless, fresh legislation is looming as India plans to introduce a nationwide ban on the trade of cryptocurrencies altogether. This law may completely prohibit users from investing on the platform and could impact over 1.7 million Indians now trading in digital assets and companies setting up platforms to trade. Just as in China, the federal government will encourage blockchain but is not keen on cryptocurrency trading.
Overall, Australia has taken a more crypto-friendly approach to trading of digital currencies and exchange regulations. At present, cryptocurrencies and exchanges are legal in Australia, and Bitcoin (along with other crypto with similar properties) are considered to be 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 and has recently seen the revocation of the licences of three cryptocurrency exchange operators due to suspected criminal activity. Meanwhile, the Australian Securities and Investments Commission (ASIC) is responsible for regulating crypto assets and tokens that fall under the definition of financial products, including companies seeking to raise funds through initial coin offerings (ICOs).
On a whole, it’s clear that the current patchwork-like global regulatory climate with regard to cryptocurrency investment, tax, trading and exchange has far to go. Nevertheless, the flurry of regulations that have been rolled out in 2020 across the US, the EU and other parts of the world show promise that the industry is headed towards a more cohesive, globally connected landscape – one that would bring cryptocurrencies out from obscurity the into the mainstream once and for all.
Looking for advice on cryptocurrency regulations in your jurisdiction? Our legal experts are here to help. Get in touch with a member of our team via the contact form or our online chat service.
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