Crypto began – and thrived – in an unregulated market. That lack of regulation spawned an explosion of crypto applications and steadily-increasing adoption.
But as we’ve seen recently, crypto’s rampant growth fuelled both technological innovation and numerous instances of fraud. Meteoric growth brought an increasingly sharp eye to the crypto market from regulators and government agencies.
Market turmoil has continued into 2023, and regulators and industry leaders continue to look for some kind of framework for crypto.
One problem? No two frameworks are the same. Some authorities are seeking to ban crypto activities completely, while others welcome and support them. Even classifying “crypto” has proven to be a challenge.
One thing is becoming increasingly clear, both to regulators and the crypto industry itself. Simply applying existing financial laws to the crypto market hasn’t worked. The new market requires a new regulatory framework.
That said, let’s take a dive into the current and upcoming crypto regulations in the US, EU, and beyond.
What are the crypto regulations in the US?
A crackdown, but how far?
The current US regulatory framework – whatever it is – began in 2022. That’s when the White House released the first-ever framework for digital asset regulation, aimed at preventing insolvencies resulting from coin crashes and fraud, and reinforcing the US leadership in the global financial system. But what’s in it, exactly?
- The framework suggests that authorities might amend the Bank Secrecy Act to raise penalties against unlicensed money transmission. This change would allow the DOJ to prosecute digital asset crimes wherever they occur.
- The US government continues to show interest in a CBDC or a digital form of the US dollar. While electronic dollars already exist in some commercial bank accounts, a CBDC could, in theory, provide many of the same use cases as crypto.
- Regulators would certainly prefer a central-bank-controlled CBDC over independent stablecoins. But numerous issues remain, since CBDCs lack the trading opportunities and diverse applications of crypto.
- The overall tone of the framework was aggressive, calling on existing regulators (the SEC, CFTC, and FTC, among others) to take a tougher stance on crypto bad actors.
In short, the Biden administration clearly wanted to bring the crypto market under the auspices of the US-led financial system. In the long run, that means applying many of the same rules to crypto that currently hold for other aspects of finance, including the stock market.
One example? Existing rules that require US-based crypto exchanges to verify user IDs before allowing them to trade. US citizens must also pay property tax on cryptocurrency transactions. Some crypto assets are considered a security if they pass the Howey test, and US regulators look like they’ll apply that standard more stringently in the future (notice the language about securities in the SEC filings against Sam Bankman-Fried).
The key player in US crypto regulations is the Security and Exchanges Commission (SEC). The SEC has made it clear that part of its job is to bring even major crypto exchanges like Binance to heel. Gary Gensler, SEC Chairman, hinted at future actions back in April, when he appeared in front of Congress to argue for tighter enforcement.
But everything became much clearer in June 2023, when the SEC formally announced charges against Binance for trading unregistered securities.
Those charges, which will take some time to play out in the courts, hold the potential to clarify exactly where US regulations stand. In the meantime, arguments continue to swirl over the SEC’s uneven approach.
How will the crackdown impact the growth of crypto in the US? It’s still impossible to say. Some analysts think that ultimately even tighter restrictions won’t drive the market away, although investors looking for more favourable regulatory climates might be better served in the UK.
An overview of the regulations in Europe
The EU hasn’t yet found a middle ground in the crypto regulation debate. Since 2015, the exchange of fiat currencies for cryptocurrencies are exempt from VAT under the Court of Justice of the European Union directive. In 2020, crypto exchanges came under the EU anti-money laundering legislation, requiring them to perform KYC on users. Cybercrime (which includes crypto) is now on the list of money laundering offenses. Member states have different regulations for exchange registration and liability.
Current EU crypto laws aren’t too strict, but what’s in the works? In 2022, the EU introduced MiCA – the new Market in Crypto-Assets Regulation. Unlike the Biden-proposed framework covering all digital assets, MiCA focuses specifically on cryptocurrencies. Europe accounts for roughly a quarter of the world’s crypto activity, which explains the need for a comprehensive regulatory regime. And crypto adoption, at least in Europe, has seen a publicity boost with high-profile uses like donations to Ukraine.
MiCA defines cryptocurrencies and categorizes them into three groups: exchange, utility, security and e-money tokens, and provides for three interconnected regulatory frameworks. Regimes were developed for offering stablecoins and non-stablecoins to the public and carrying out crypto-asset services. MiCA’s final text hasn’t yet been published, but the EU Parliament, Council, and Commission have reached a provisional agreement. Interestingly, NFTs are only mentioned once in the proposal, and they don’t fall under MiCA regulations. Moreover, the proposal doesn’t cover crypto lending and borrowing.
Note that the EU Parliament voted against the PoW ban – good news for Bitcoin miners.
What are the current UK crypto regulations?
At the beginning of the month, the His Majesty’s government published a consultation and call for feedback on a new proposed crypto framework – the lovingly-titled “Future Financial Services Regulatory Regime for Cryptoassets.” Eighty pages long, the document makes for fairly dry reading.
But what stands out is the UK’s apparently liberal approach to crypto. The UK government clearly believes crypto will be a major part of finance in the future, and is interested in controlling, rather than curtailing, any crypto evolution.
That attitude was born out by the recent passing of the Financial Service and Markets Bill, which operates similar to the EU’s MiCA proposals. The bill lays out some basic regulations for exchanges and stablecoins, among other crypto-related items, and establishes regulatory authority for those assets. Now that the bill has passed, it could come into force as soon as autumn 2023.
Regulation in Australia – Finally, a Crypto Classification System!
Australia – not necessarily the biggest crypto player – made big news last year with their own regulatory proposal. Interestingly, Australia’s document, which comes in at a solid 60 pages, spends a considerable amount of time defining key terms.
Crypto networks, crypto tokens, and smart contracts form three layers of crypto. Any financial services built on those layers take one of four forms:
- Crypto asset services
- Intermediated crypto assets
- Network tokens
- Smart contracts
The paper, titled simply “Token Mapping,” provides what few others do: a detailed potential definition for crypto assets and crypto financial services.
Crypto regulations across the rest of the world?
The rest of the world doesn’t seem as concerned with setting crypto regulations in stone as the above regions. Still, each region has differing laws regarding crypto. For instance:
- Canadian crypto exchanges fall under the same regulation as traditional money services. Crypto issuers must follow disclosure procedures outlined by the Canadian Securities Administrators. Cryptocurrencies are not legal tender, but crypto transactions are taxed as property.
- Singapore taxes crypto as goods and legally allows crypto trading and exchange under the Payment Services Act 2019. However, in 2022, the Monetary Authority of Singapore prohibited the advertisement of crypto services.
- Hong Kong is arguing against China’s recent outright crypto ban.
- Japan, too, treats cryptocurrency as property under the Payment Services Act and taxes it as miscellaneous income. Recent amendments to the Financial Instruments and Exchange Act distinguished between virtual currency and cryptocurrency and eased restrictions on trading. At the same time, Japan has extremely strict laws for exchange registration – the process can take over six months.
Shifting opinions about crypto regulations
WEF explains the need for stricter regulation with financial stability, innovation, and sustainability. Here are a few highlights:
- Cryptocurrency service providers will be forced to disclose energy consumption and the impact of their assets on the environment.
- The development of regulations signals a widespread adoption of virtual assets.
- Cryptocurrency issuers will have to publish white papers outlining the technical aspects of their tokens or services.
- Alignment with traditional financial institutions may soften the market volatility.
Regulations undoubtedly benefit the authorities. But do they benefit the public? Decentralization and anonymity were the main drivers of the crypto market in the early days, but while governmental control might seem contradictory to distributed ledger technology, there are potential advantages.
Love it or hate it, we’re in an arms race. Success will be defined as a country with enough rules to limit damage and potentially provide encouragement to the crypto market.