Since the launch of Bitcoin in 2008, the cryptocurrency industry has steadily grown and now calmly sits at roughly $140 billion in market cap. Since the sector has long lacked the backing of any central authority, it wasn’t much of a surprise when regulators started making strategic moves towards the industry. Recently, the market has been awash with a flurry of new cryptocurrency regulations as different countries try to devise their own regulatory frameworks based on their specific needs and requirements. Moreover, the continued rise of crypto-related scams, lawsuits, and investment options have hastened the need for regulations to remedy the situation.
How Digital Currencies are Regulated
The rise of crypto-trading has garnered a mixed response from many global governments and regulatory bodies. While some countries have taken the time to examine and understand the market and come up with appropriate regulations, others still lack clear regulatory guidelines that would allow crypto investors to operate in a grey area of the law. A number of note-worthy ways cryptocurrencies have been regulated are outlined below.
When it comes to taxation, the central issue lies in how to categorize cryptocurrencies and other activities that involve them for tax purposes. The challenge is determining whether the gains made from either mining or trading are to be considered capital gains or income. Therefore, different countries have categorized cryptocurrencies differently for the purpose of taxation and determining the appropriate tax bracket. A few examples include:
- Switzerland classifies cryptocurrency as a foreign currency.
- Israel and Bulgaria both classify and tax digital currencies as an asset.
- In Spain, Denmark, Argentina, and the United Kingdom, cryptocurrencies are subject to income tax.
- Digital currencies are subject to corporate tax as well in the United Kingdom.
- In both the United States and the United Kingdom, individuals pay capital gains taxes on cryptocurrencies.
Mining and Trading
Mining, which is the science of validating transactions and creating new coins, is a robust process that consumes an immense amount of electricity, especially for PoW (Proof-of Work) coins. The high consumption of electricity caused concern in many governments such as China which have outright banned the trade and use of digital currencies, including their mining. Trading has created a raging debate in several countries as to whether digital currencies should be classified as securities or commodities. This is because how they are classified determines their regulatory status. For instance, in Austria, cryptocurrencies are classified as commodities and therefore, are considered business assets for taxation purposes.
Initial Coin Offerings (ICOs)
ICOs provided a way for startup companies to raise funds through the issuance of tokens in exchange for crypto tokens. However, the process became controversial once it became used as a loophole for scammers to defraud people out of their money by creating fake companies and running off with their funds. Due to this, a number of countries, including Russia, decided to regulate ICOs. Japan, on the other hand, intends to control the market in a more direct way and to clamp down on illegal trade and money laundering activities in a more official capacity.
Cryptocurrency Regulation Updates
Below we take a look at several critical regulatory updates and developments that have taken place recently in the crypto space.
Indian Government Confirms Final Stages of Cryptocurrency Regulation
The Supreme Court of India received news that the country’s committee tasked with drafting cryptocurrency regulation was in its final stages of submitting its report. Reacting to the news, the court said that it would give the committee only four more weeks to finish its initial draft of the proposed regulations. This court clarified that it would be willing to listen to petitions against the central bank’s ban on cryptocurrencies only after rules for cryptos had been developed. The ban was issued in April last year and came into effect in July when all local crypto-exchanges denied customers the ability to withdraw fiat currency from their crypto holdings to domestic bank accounts.
Bahrain’s Central Bank Issues New Cryptocurrency Regulations
On February 25, the Bahrain Central Bank issued new regulations on digital currencies. The new regulatory updates reportedly cover a multitude of services such as governance, risk management, counter licensing, cybersecurity, anti-money laundering, and counter-terrorist financing measures. The update also specifies that all crypto-exchanges licensed by the central bank will need to conduct due diligence whenever they onboard new clients. They would need to ensure that their clients’ encrypted wallets will always be retrievable. They would also need to respect the bank’s guidelines on order matching, pre and post-trade transparency, market manipulation, and market abuse avoidance.
New Cryptocurrency Margin Trading Regulations in Japan
On March 18, Japanese local news agency Nikkei reported that financial regulators in the country had introduced new regulations for crypto-margin trading. The Japanese cabinet has approved a draft amendment that limits the leverage in crypto-margin trading at two to four times the initial deposit. These new rules, expected to come into force in April 2020, will also require crypto-exchanges to register to allow the Financial Services Agency (FSA) to introduce relevant measures. Regulators are hoping that this move will help secure investors from getting caught-up in Ponzi schemes and simultaneously bar unregistered firms from operating in a grey area.
Venezuela’s Crypto-Regulations Come into Effect
A decree establishing a regulatory framework for digital currencies in Venezuela has come into effect. The decree contains 63 articles which include rules on the purchase, sale, use, distribution, and exchange of crypto and crypto-related products. The decree also establishes a registration system, audit procedures, penalties for non-compliance, and rules for how mining equipment can be confiscated. The decree, named ‘Constituent Decree on the Integral System of Crypto Assets,’ has already been published in the country’s official gazette. Its publication in the Venezuelan gazette means that the legal framework is now in force.
Many cryptocurrency regulations are being enacted in various places all over the world, albeit slowly. However, these regulations are necessary for the crypto landscape, given the myriad scams and fraud cases that we’ve seen in the space over the past few years. It’s a good time for crypto investors and enthusiasts alike to familiarize themselves with these regulations early to ensure that they know the different risks involved with investing or trading in different economies or markets. Armed with a better understanding of what is happening and when, investing in the cryptocurrency industry will hopefully be that much more rewarding.