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Countries across the world are unsure about cryptocurrencies. Last September, China banned all crypto trading, completely shutting down local exchanges. Elsewhere, Bangladesh refuses even to accept crypto as a legal tender. The United States is taking a different approach, with the government slowly stepping in to regulate. That said, their regulations aren’t always clear. This post will break down some of the recent laws and regulations in place around the world, alongside the reasonings behind them.
Why Is Regulation Happening In The First Place?
Cryptocurrencies are praised for their decentralized nature. No third-party can ever come into control, nor can they change any information recorded on the blockchain ledger. Many cryptocurrency supporters believe banks and other payment providers fear this loss of power, as they rely on consumers to generate funds by paying interest on loans.
With regulation, these third-parties are doing what they can to limit the world’s exposure to the digital asset. Since regulations have increased, banks and payment providers (e.g. credit cards) have stopped allowing customers from using their services to purchase cryptocurrency on exchanges.
Digital Assets and Securities in America
The Securities and Exchange Commission (SEC) have recently recognized cryptocurrencies as securities, and state that crypto exchanges should follow the same rules as regular exchanges. To protect investors from the volatility of these platforms, the SEC issued a statement saying any platform that trades a digital asset must register with the Commission as a national securities exchange. This ruling bundles them with other “normal” exchanges under IRC Code Section 1031.
However, this could cripple some U.S based exchanges, as registering means they can only sell to brokers and accredited investors, which most of the public are not. That said, exchanges can be exempt from these laws if they list themselves as an alternative trading system. According to Investopedia, an alternative trading system is “…One that is not regulated as an exchange but is a venue for matching the buy and sell orders of its subscribers.” Most cryptocurrency exchanges fall under this definition, so they would have to be more transparent about their policies and security.
The FBI became the ones of the world’s largest Bitcoin holders with their seizure of the Silk Road back in 2013. Since then, various government sectors have shutdown and seized Bitcoin from different cryptocurrency related fraud cases.
There hasn’t been any widespread ruling on a federal level. Each state has its own rules on cryptocurrency exchanges.
The Uniform Law Commission (ULC) drafted the “Uniform Regulation of Virtual Currency Businesses Act” in July 2017, which clears up ambiguity around cryptocurrency laws and regulations. Because cryptocurrencies are legal tender with no backing from the government, this act will establish a foundation for states to go off of when drafting their legislation.
California is working to incorporate blockchain records and smart contracts into the hands of businesses. If Assembly Bill 2658 goes through, it will allow businesses to present electronic blockchain records without issue.
In March 2018, New York State Assembly legislator Ron Kim proposed the New York Cryptocurrency Exchange Act (A9899), which stands against the much-maligned “BitLicense” introduced in 2014. Essentially, Assembly Bill A9899 would award New York based cryptocurrency exchanges a license after audit by a public or third-party depository instead of requiring a monthly fee.
In a recent interview, Kim stated he wants to make it easier for crypto startups to exist by removing some of the more questionable regulation tactics, and instead keep the ones that are beneficial to exchanges:
“It would get rid of the fee and the actual license itself,” he explained. “We want to embrace the startup companies that are trying to launch exchanges.”
Current BitLicense applications cost a $5,000 non-refundable fee. One of the largest U.S. exchanges, Bitstamp, estimated around $100,000 in total costs due to the length of the application process and other fees when they applied back in 2015. Exchanges like Kraken, Bitfinex, and BitQuick have since left New York, but hopefully bill A9899 will entice them back to the state.
Wyoming recently passed HB 70, which also allows for blockchain based records, alongside exemption of cryptocurrencies from state money transmission laws.
Taxation and Cryptocurrencies
In Notice 2014-21, the IRS stated that they are treating virtual currencies as property when it comes to federal tax purposes. Essentially, consumers will see a gain or a loss whenever they use a digital coin in a transaction.
This could be a problem for daily crypto users, as they acquire a taxable transaction each time they use one to purchase something. Plus, the volatility of these coins makes it even harder to recognize a gain or a loss. Taxpayers have to track each purchase made with cryptocurrencies, which is simplified by the blockchain technology.
However, we are still unsure on how cryptocurrencies are handled when it comes to international taxes. Should they fall under other international exchanges laws? There isn’t enough information from the IRS on this, though we will likely get some answers as more research is done.
The Rest of the World
While America has their case-by-case regulations, other countries see bans on a federal level. Due to decentralization, it isn’t possible to entirely ban cryptocurrencies, just like it is impossible to “ban” torrenting. However, some countries have made it very difficult for the public to get into crypto, while others are embracing the idea:
2018 has seen India standing firmly against cryptocurrencies. In January, Finance Minister Arun Jaitley stated that “bitcoins or such cryptocurrencies are not legal tender and those indulging in such transactions are doing it at their own risk.” in an attempt to divert the public eye. However, India contributes more than 11% of the world’s cryptocurrency trading. While they seem fairly against it, the Indian government is delving more into cryptocurrencies before outright banning it.
Like India, Canada refuses to acknowledge cryptocurrencies as “legal tender.” However, the government has spent a lot of time looking into the digital asset, and plans to educate their citizens on the safe usage of exchange trading and other marketplace actions.
In 2017, South Korea banned all forms of ICO money raising, stating that this sort of transaction should be monitored at all times. While they were not elaborated on, The Financial Services Commission says there will be “stern penalties” on any financial parties that still associate with ICOs.
However, they have no intentions of banning cryptocurrency trading as a whole. Instead, as of January, South Korea now requires that traders register to exchanges with real-name bank accounts only. This defeats the anonymous aspect of crypto trading, and Bitcoin’s value dropped as a result of this ruling.
Social Media Bans
At the time of this writing, Facebook and Twitter have banned crypto ads, leading to a widespread drop in interest and faith in the digital asset. Facebook’s new policy states: “We’ve created a new policy that prohibits ads that promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency.”
However, this is more out of fear and protection for their users as companies want to protect consumers against scams and fraud. As governments look more into the benefits and advantages of blockchain technology, they may even issue their own cryptocurrencies for citizens.