A closer look at the future of regulating digital currencies and crypto assets

As the use of crypto assets and digital currencies increases, new regulations are falling into place to govern them. The landscape is constantly evolving. Keeping up with the global regulation of digital currencies and crypto assets is not easy.  

In this blog post, we explore cryptocurrency regulations around the world, legislative measures, and associated activities.  

The nature of digital currencies and crypto assets 

Cryptocurrencies are a form of digital money shared over distributed ledgers called blockchain. Typically, transactions are publicly recorded and verified to prevent tampering. But those making the transactions can remain anonymous, fuelling fears of illegality. 

Most popular digital currencies, such as Bitcoin, Ripple and Ethereum, are not subject to central bank or government regulation. Some cryptocurrencies, known as stablecoins, are backed by other assets, usually US dollars, which allows them to be converted into national currencies at a guaranteed exchange rate. But the lack of regulation is a concern. A number of countries, including China, are moving to implement their own digital cash in response, known as central bank digital currency (CBDC). 

The most well-known cryptocurrency is Bitcoin, but it has failed to gain widespread adoption because of its volatility and relatively high transaction fees. It is also limited by its inability to process large transaction volumes quickly. 

NFTs function like cryptocurrencies but they are connected to unique digital files, so they are not interchangeable (fungible). Purchasing an NFT does not necessarily confer copyright or intellectual property rights to the digital asset. 

Cryptocurrency and digital asset regulation in Europe 

Cryptocurrencies are broadly legal in Europe, but exchange regulations depend on individual member states.  

EU regulators have warned that crypto assets are not suited for most retail consumers as an investment or as a means of payment or exchange, describing them as “highly risky and speculative”. 

At present, crypto-assets and related products and services fall outside existing protection under current EU financial services rules. In March 2022, the EU agreed draft rules on the supervision, consumer protection and environmental sustainability of crypto-assets aimed at providing a uniform legal framework for crypto-assets in the EU. In a “speech in April 2022", Fabio Panetta, Member of the Executive Board of the ECB, argued crypto assets were “bringing about instability and insecurity” and “creating a new Wild West”. He said it was necessary to ensure “crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society”.  

Cryptocurrency and digital asset regulation in North America 

Cryptocurrencies are not considered legal tender in the US. Regulations vary state by state so there is no consistent legal approach to cryptocurrency. Some states, such as Wyoming, have passed legislation that help to promote its use. Colorado became the first state to accept cryptocurrency as payment for state taxes and fees in February 2022. Other states are considering similar moves. 

In response to the rise in cryptocurrencies, the US Treasury called for stricter cryptocurrency compliance in 2021. In March 2022, US president Joe Biden signed an executive order outlining a whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. It covers a number of areas, including consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion and responsible innovation. It also called for urgent research and development into a potential US CBDC, should it be deemed in the national interest. 

Over the border in Canada, cryptocurrencies are allowed but not considered legal tender. Canada regulates cryptocurrency as it would other tradeable financial assets and it is covered by anti-money laundering regulation. Cryptocurrencies are taxed as capital gains or business income. 

Cryptocurrency and digital asset regulation in Latin America 

Governments across Latin America have adopted differing approaches to cryptocurrencies. The vast majority have introduced or are planning to implement regulatory frameworks, but Bolivia has banned cryptocurrencies completely. Cryptocurrencies are often treated as assets and subject to capital gains tax across the region. 

El Salvador became the first country to make Bitcoin legal tender in 2021. Price volatility in cryptocurrency has forced the country to delay the issuing of $1bn of Bitcoin bonds which was to be used to build Bitcoin City and meet its debt obligations. Fears it could default on an $800m bond due in January 2023 led Moody’s to downgrade the country’s credit rating due to the “lack of a credible financing plan”. 

Cryptocurrency and digital asset regulation in the APAC region 

Cryptocurrency adoption and regulation varies in the APAC region. According to the Gemini 2022 State of Crypto Report, Indonesia has the joint highest global adoption rate of cryptocurrency at 41% and a significant majority of people (61%) described cryptocurrency as the future of money.  

Cryptocurrencies are legal in Japan and cryptocurrency exchanges must register with the Financial Services Agency. In 2017, the National Tax Agency said that cryptocurrency assets must be categorised as miscellaneous income. The two main drivers for the growth in cryptocurrencies in Japan are retail and gaming. The agency which oversees digital coin listings, JVCEA, has discussed allowing local exchanges to list cryptocurrencies without going through its screening process. 

South Korea amended financial reporting legislation to restrict trading of cryptocurrencies from March 2021, requiring all cryptocurrency exchanges to register with the Financial Services Commission and meet anti-money laundering standards. The changes are said to favour the big four crypto exchanges: Upbit, Bithumb, Coinone and Korbit. 

In China, cryptocurrencies are not legal tender and exchanges are illegal. China was the first country to introduce its own CBDC, known as the e-CNY. By December 2021, total transactions using the e-CNY reached around 87bn Yuan, or $11.238bn. 

Where will the regulation of cryptocurrencies go next?  

Consumers and businesses are showing increasing interest in digital currencies and solutions. The Gemini Report described 2021 as the “breakout year” for cryptocurrency after 41% of crypto owners surveyed globally revealed they had purchased crypto for the first time. It warned, however, that regulation was the biggest issue holding back those surveyed. A number also had concerns over the volatility and security of cryptocurrencies.  

While there is a consensus in favour of regulation of cryptocurrencies and digital assets, how that regulation is applied varies from region to region, differs from country to country and, in the case of the US, state by state. As we have seen, regions and countries have already contemplated and/or adopted the regulation of crypto to varying degrees.