Financial market regulators around the world hardly know what to make of cryptocurrency. This asset class doesn’t fit neatly into existing categories, while the collapse of FTX in 2022 made the need for smarter regulations painfully obvious.
National governments want to assert their regulatory oversight of crypto because controlling currencies is how they manage their economies, says David Sacco, a practitioner in residence of finance from the Pompea College of Business at the University of New Haven.
But how do you regulate something whose primary appeal for some investors is that it can operate beyond government control? Let’s review how the biggest countries for cryptocurrency are building up their regulatory frameworks. These nations are taking different approaches to the task, and that’s only adding to lack of clarity surrounding crypto regulation.
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Crypto Regulation in the United States
So far, the U.S. has taken a hot-and-cold approach to regulating crypto. Some in Congress would like to see a comprehensive new framework put in place that would allow the industry to thrive, while financial market regulators are cracking down on a space that’s awash with concerns over money laundering, scams and cybercrime.
The Biden administration signed an executive order in March 2022 that called on federal regulators to assess the broad risks and benefits offered by cryptocurrencies.
In January 2023, it released a roadmap to mitigate crypto risks, which encouraged regulators to “ramp up enforcement” and for Congress to “expand regulators’ powers.” Shortly thereafter, the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency (OCC) released a joint statement highlighting the risks posed by crypto assets to banks.
While the statement does not prohibit banks from providing crypto services, it does state that “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public and/or decentralized network or similar, is highly likely to be inconsistent with safe and sound banking practices.”
U.S. Regulators Treat Crypto as a Security
Instead of regulating cryptocurrencies themselves, the U.S. has attempted to regulate crypto platforms, says Sacco.
“The government wants to treat cryptocurrencies as traditional securities while also working to restrict their ability to be treated and function within financial markets like traditional securities,” says Christopher Mitchell, founder and principal of Keala Advisors, a registered investment advisor specializing in investments within the digital assets and emerging technology spaces.
SEC Chair Gary Gensler notably said in March that if crypto platforms and lenders aren’t regulated as stock exchanges, they can’t be used as qualified custodians by investment advisors.
A lot of the issues come down to whether crypto is classed as a security or not. This debate precedes the recent collapse of FTX and CEO Sam Bankman-Fried being charged by the SEC for defrauding investors of more than $1.8 billion.
United Kingdom Crypto Regulations
The U.K. is another country where crypto regulations are in flux thanks to broader changes in national leadership. Rishi Sunak became prime minister in October 2022, which is notable in crypto circles due to his stance earlier that year.
When he was the chancellor of the exchequer—the U.K. equivalent of finance minister—Sunak issued a surprising plan that set out a strategy to make the U.K. a global crypto technology hub.
The most notable part was his proposal to regulate stablecoins, paving the way for them to be accepted as a recognized form of payment.
“It’s my ambition to make the U.K. a global hub for crypto asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country,” Sunak said upon announcing the plan.
The U.K Wants Crypto Innovation, But Concerns Linger
Overall, the U.K. is viewed as not dissimilar to the U.S. regarding crypto regulation. Rules in general have facilitated crypto innovation but the authorities are beginning to clamp down on crypto-related money laundering and fraud concerns.
The U.K. regulator, the Financial Conduct Authority (FCA), even banned all activity by the world’s biggest crypto exchange, Binance, in the summer of 2021.
Crypto Regulation in Canada
Canadian authorities want to offer more clarity to the crypto industry and bring the nascent asset class within the regulatory framework. In August 2022, the Canadian banking and insurance regulator OSFI issued its first federal rules for crypto.
“Canada is focusing on taxability,” Sacco says, treating cryptocurrency as a commodity for income tax purposes, forcing taxpayers to report transactions.
Since 2019, in Canada, exchanges have essentially been regulated similarly to conventional money services businesses.
However, overall, the regulatory landscape in Canada is often viewed as stricter than their American cousins. FTX and Binance, for example, both pulled out of the Canadian province of Ontario entirely in 2021 due to onerous regulatory demands.
Brazil’s Crypto Regulations
“Brazil has been a frontrunner in crypto policy,” says Bruno Sousa, head of U.S. and New Markets at Hashdex. Brazil’s central bank launched a pilot project to create a digital real with public use expected at the end of 2024.
“The Real Digital project, led by the Brazilian Central Bank, is a very interesting project in terms of regulation because it is flexible in terms of adopting the new technology but maintaining current regulation for deposits… and making the large banks the ones who issue the stablecoins instead of bypassing the banks,” Sousa says.
According to Sousa, the project takes into consideration important aspects of the existing financial system, such as data privacy, security, know your customer practices and counter terrorism financing practices.
This may be just the first of more attempts at creating national digital currencies. Many big countries are testing out their own digital currencies. Whether they become widely adopted and gain the trust of citizens, only time will tell.
Crypto Regulation in Germany
The German regulatory environment has drawn praise for providing more clarity than a lot of regulators around the globe.
The regulator, BaFin, has published a set of medium-term goals which run out to 2025, including bringing increased regulation to DeFi and protecting consumers against unknown risks.
The European state also has favorable tax regulations regarding crypto. In May 2022, Germany’s parliament made the sale of purchased bitcoin and ether tax-free after one year for private individuals.
India Cryptocurrency Regulations
India previously refused to regulate cryptocurrency, becoming one of the countries that preferred to ban it entirely. While the ban has been overturned, regulators take a dim view of crypto.
The Reserve Bank of India (RBI) prohibited banks from offering services to any crypto-related firms in 2018. The ban was overturned by the Supreme Court in 2020.
While this regulatory u-turn offered a rosier picture for crypto, authorities in India retained a dismissive attitude toward crypto. The government and central bank has repeatedly warned the public off crypto, with a government panel even recommending jail terms of up to 10 years for those dealing in digital currencies.
Cryptocurrency Regulation in South Korea
In the 2022 South Korean Presidential election, Yoon Suk-yeol addressed the need for crypto regulation in his winning campaign.
Today, South Korea’s Financial Services Commission (FSC) is working on the Digital Asset Basic Act, expected to be introduced later in 2023, an all-encompassing effort to reduce crypto crime and bring more clarity to the legitimate players in the space.
The National Assembly is currently considering 17 different proposals that could help shape the act.
Terra and Do Kwon
South Korea is home to Terra, the company behind the failed cryptocurrencies Luna and TerrraUSD, the $60 billion ecosystem that caused heavy losses for investors when it imploded in May 2022.
The chaos accelerated the desire for increased regulation, and even led to arrest warrants for Terra founder Do Kwon, a native of South Korea, for violating South Korea’s financial laws.
Kwon was eventually arrested while attempting to travel from Montenegro to Dubai in March 2023.
One thing is undoubtedly certain around the world: there is more clarity needed in the area of cryptocurrency regulation.
“Strong regulations are not only important, but necessary to foster the industry’s growth,” Sousa says. “From the investor’s standpoint, having access to this new asset class through regulated entities and investment funds helps mitigate the risks.”