India’s impending regulations on cryptocurrencies, which in all likelihood will not be favourable, have spurred a comparison with laws in other countries. Sure, bitcoin and cryptocurrencies are a Western phenomenon (which the Chinese caught onto) and it is understandable that friendly regulations have been behind their organic growth.
An overview reveals that in most major countries and blocs, regulators treat cryptocurrencies as assets and gains in these are taxed like financial transactions. Moreover, crypto-related business entities are often licensed by local financial regulators in line with defined conditions.
Recently, bitcoin was back in the limelight after it’s price zoomed 4x to $60,000, mostly because it received extraordinary interest during the Coronavirus (Covid-19) pandemic, when regular investment asset classes (debt and equity) slumped. Also during the Covid-19 pandemic, several major firms like Sqaure and Tesla revealed treasury holdings in bitcoin, in what was a huge backing. Growing also, in the background, are initial coin offerings (ICOs) and things like Facebook’s Libra and China’s digital Yuan.
The world of cryptocurrencies is far bigger than just bitcoin. It includes tokens backed against fiat, tokens meant for cross-border payments by banks, tokens to raise funds similar to equity financing, and a growing trove of businesses around lending and financial services in crypto.
Market participants, dead against the blanket ban, say that this nuance is missing in India’s stance, and also argue that in most countries regulators are approaching laws from the point of view of “safeguarding the customer”, as against a blanket ban.
“2020 was the year most of the governments listened to industry experts and citizens and came out with positive regulatory outcomes” said Darshan Bathija, founder of Vauld, a Singapore-based crypto-lending and trading platform. “With a blanket ban (proposed in India), what it will do is hurt those who are trying to legitimately bring innovation,” he said.
Below is a brief over-view of how crypto-currencies are regulated in major nations:
United Kingdom: The United Kingdom does not have an overarching law for dealing with cryptocurrencies. As such, all cryptocurrency-related businesses, including the exchanges, have to secure a license from Financial Conduct Authority (FCA), UK’s financial markets regulator. There are stringent rules for at least those entities that are involved involved in crypto-related futures and options trading.
The UK treats cryptocurrency as money, and gains are taxed. Corporate tax rules apply to businesses for the profits or losses in currency exchanges, which includes cryptocurrencies. For unincorporated businesses, income tax is chargeable to the profits and losses that can be attributed to cryptocurrency transactions. Individuals pay income tax.
That said, FCA has spelled warnings for crypto in the past. In 2017, it came out strongly against initial coin offerings (ICOs) and online trading scams involving cryptocurrencies. Early this year, too, it warned retail users saying that they “should be prepared to lose all their money” if they invest in cryptocurrencies, explaining its stance. In 2018, Bank of England said that country-wide regulation maybe on the horizon.
US: Like other laws, regulations pertaining to cryptocurrencies vary across states in the US, but broadly, the outlook and regulations are friendly. New York stands out as an example.
As early as 2016, and the first to do so, New York launched “BitLicense” scheme—a comprehensive framework to license crypto-exchanges and related businesses. Entities engaged in transmission, holding, buying and selling of cryptocurrencies as a customer business, providing exchange services, and issuing cryptocurrency, operating in New York, must secure a license from the New York State Department of Financial Services (NYDFS). The licensees are tightly regulated at par with financial services firms.
Wyoming is another widely quoted example for favourable regulation. In 2018, the state deemed some crypto-currencies as a “utility tokens” and exempted their “developers or sellers” from securities laws under the caveat that they meet certain conditions.
The favourable climate has led to creation of big crypto-firms including Coinbase, an IPO-bound firm valued at $68 billion. Also, big US firms, like JP Morgan and Facebook are planning to issue their own digital tokens.
European Union: For long, European countries exercised their own soft-touch regulatory frameworks on crypto-currencies independently. Now, the European Union (EU) has sought to create a bloc-wide framework. In September 2020, the European Commission, the executive arm of the EU, put out a draft titled, “Markets in Crypto-Assets Regulation” (MiCA). Like the General Data Protection Regulation (GDPR), MiCA is meant to set a global standard.
Under MiCA, cryptocurrencies will be deemed regulated financial instruments. Any firm engaged in custody, brokerage, trading, or investment advice related to crypto-currency will require prior approval from national supervisory authorities under MiCA.
A welcome feature is that the bill recognises different kinds of tokens (bundles as crypto-assets, utility tokens, asset-referenced token, and E-money token) and proposes unique treatment. For instance, if an entity floats a new token, it must publish a white paper and send it in advance for notification to the respective national financial supervisory authority (for example, BaFin in Germany). This has implications for Facebook’s Libra (now Diem) proposal.
MiCA, which will be applicable to all 27 member states, may not kick in till next year.
China: China, home to the world’s biggest Bitcoin mining operations, does not recognise cryptocurrencies and does not allow for their use as means of payment. In fact, Beijing has showed little tolerance in the past. Initial coin offerings (ICOs) were banned in China in 2017. Exchange platforms were also ordered to close following the crackdown on ICO. At the time, most exchanges moved to friendlier jurisdictions like Japan, Hong Kong, or Korea.
For China, the beef was against ICOs and as far crypto-currencies are concerned, it is not illegal to hold or trade in Bitcoin and other cryptos. Moreover, China has consistently shown great enthusiasm towards the application of blockchain for modernising China’s financial systems and becoming a world leader in this new technology. In recent years, various guidelines and papers issued have endorsed blockchain, leading to spurred activity in blockchain start-ups.
China now wants to create a digital Yuan, as part of its push to be the leader in emerging technologies including blockchain. The People’s Bank of China has been developing the sovereign digital currency for local transactions on the internet, as well as cross border transfers. It has already started real-world trials for the digital currency in a number of cities.
The digital Yuan is not decentralised like Bitcoin and will have completely different features and attributes.
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