Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. They have attracted a lot of attention in recent years, both from investors and regulators, due to their potential to transform the global financial system and challenge the status quo.
However, cryptocurrencies also pose significant risks, such as volatility, fraud, cyberattacks, money laundering and tax evasion. These risks have prompted many countries to adopt different approaches to regulate cryptocurrencies, ranging from outright bans to supportive frameworks.
The European Union (EU) has been one of the most proactive regions in developing a comprehensive regulatory framework for crypto assets. In September 2020, the European Commission proposed a regulation on Markets in Crypto-Assets (MiCA), which aims to provide legal clarity and consumer protection for crypto-asset issuers and service providers, as well as to foster innovation and competition in the crypto-asset market.
MiCA defines different types of crypto-assets, such as utility tokens, asset-referenced tokens and e-money tokens, and sets out specific rules and requirements for each category. For example, MiCA requires crypto-asset issuers to publish a white paper with detailed information about their project, their governance arrangements, their risk factors and their rights and obligations. MiCA also imposes prudential, organisational and conduct of business standards on crypto-asset service providers, such as custodians, exchanges and trading platforms.
MiCA is still under negotiation by the European Parliament and the Council of the EU and is expected to enter into force by 2024. Once adopted, MiCA will create a harmonized regulatory regime for crypto-assets across the EU, which will enhance legal certainty and facilitate cross-border activities.
The United States
USA has a complex and fragmented regulatory landscape for crypto assets, involving multiple federal and state agencies with different mandates and jurisdictions. Some of the key regulators include:
The Securities and Exchange Commission (SEC), which oversees securities laws and determines whether certain crypto assets are securities subject to its regulation.
The Commodity Futures Trading Commission (CFTC), which regulates derivatives markets and considers certain crypto assets as commodities under its jurisdiction.
The Financial Crimes Enforcement Network (FinCEN), which enforces anti-money laundering and counter-terrorism financing rules for money transmitters dealing with crypto-assets.
The Internal Revenue Service (IRS), which treats crypto assets as property for tax purposes and requires taxpayers to report their gains and losses from crypto transactions.
The Office of the Comptroller of the Currency (OCC), which regulates national banks and federal savings associations and has issued guidance on how they can provide custody services for crypto assets.
The Federal Reserve Board (FRB), which oversees monetary policy and payment systems and has expressed interest in developing a central bank digital currency (CBDC).
State regulators, such as the New York Department of Financial Services (NYDFS), which require crypto-asset service providers to obtain a license (known as BitLicense) to operate in their jurisdictions.
The lack of a clear and consistent regulatory framework for crypto assets in the US has created uncertainty and confusion for market participants, as well as regulatory arbitrage opportunities. However, there have been some recent developments that indicate a more coordinated approach among regulators. For example:
In March 2021, President Biden signed an executive order on ensuring responsible development of digital assets, which mandates interagency collaboration on research and policy development on crypto assets. In July 2021, the SEC announced that it would work with other regulators to establish a joint working group on digital assets.
In August 2021, the Senate passed an infrastructure bill that includes a provision to expand the definition of broker for tax reporting purposes to include any person who provides services related to crypto transactions.
In September 2021, the CFTC issued an advisory on digital asset futures contracts, which clarifies its expectations for market participants engaging in these products.
These initiatives suggest that the US is moving towards a more comprehensive and coherent regulatory framework for crypto assets, which could enhance investor protection, market integrity and financial stability.
Besides the EU and the US, there are many other jurisdictions that have adopted or are developing regulatory frameworks for crypto assets. Some examples include:
China has taken a restrictive stance towards crypto assets, banning initial coin offerings (ICOs) in 2017, cracking down on crypto mining activities in 2021, and prohibiting financial institutions and payment companies from providing services related to crypto transactions in 2021. However, China is also leading the development of its own CBDC, known as digital yuan or e-CNY, which is currently being tested in several pilot projects across the country.
India has had a volatile relationship with crypto-assets, with its central bank imposing a ban on banks from dealing with crypto-related businesses in 2018, which was later overturned by its supreme court in 2020. India is currently considering a bill that would prohibit all private cryptocurrencies except those issued by its central bank or approved by its government.
Japan has been one of the most supportive jurisdictions for crypto assets due to its clear and adjusted reforms in crypto, while the Nigerian government is navigating on creating fair regulations and adoption policies for crypto in the country.