In this note, we have discussed three categories of countries on the basis of their approach to regulating cryptocurrency- (a) countries that have legalized cryptocurrency by regulating it; (b) countries that have proposed to regulate it, and (c) countries that have banned cryptocurrency. We have discussed a few examples of countries for each category to demonstrate that most progressive jurisdictions fall in the first two categories. The countries that have banned cryptocurrency are generally discussed for their regressive economic and social policies, and India may not want to be a part of that club. In tables A and B to this blogpost, we have discussed many other jurisdictions across the abovementioned three categories.
a. Countries that have regulated cryptocurrency:
United Kingdom: All the businesses engaged in crypto-asset related activities in the UK have to register with the UK’s Financial Conduct Authority. Crypto-businesses are allowed to apply for the ‘Authorized Payment Institutions’ license. BCB Payments Limited became the first crypto asset entity to get this license in the UK. All the regulated crypto-asset businesses have to comply with anti-money laundering (AML)/combating the financing of terrorism (CFT) measures under UK law. The UK High Court recently recognised crypto-assets such as Bitcoin as property under UK common law.
Singapore: Trading in cryptocurrencies is legal and is regulated by the Monetary Authority of Singapore under Singapore’s Payment Services Act, 2020. Cryptocurrency businesses have to obtain a license to operate a cryptocurrency exchange. Public offerings or issues of digital coins are also regulated under Singapore’s Securities and Futures Act, 2001. Several Indian cryptocurrency and blockchain startups have migrated to Singapore in recent years. One of India’s largest cryptocurrency exchange, CoinDCX, migrated their holding company to Singapore. The startup has since raised over INR 100 crores from global investors. Unocoin is another Indian cryptocurrency exchange which has followed suit.
Indonesia: This is a unique example of a country which initially banned cryptocurrency, and then legalized it. Initially in January 2018, Indonesia banned all payment system and financial technology operators from processing virtual currency transactions. However, in 2019, the Indonesian government published regulations to regulate trading of crypto assets as commodities under the supervision of its Commodity Futures Trading Regulatory Agency. Any entity dealing in crypto assets as commodity futures must comply with AML/CFT norms. The entities are also required to report to Indonesian Financial Transaction Reports and Analysis Center.
Canada: In 2018, the Canadian Securities Administrators (CSA) issued a notice clarifying that securities law requirements will apply to crypto-businesses offering coins or tokens. In January 2020, another notice clarified the situations where securities law would apply to platforms facilitating trading of crypto-assets. From 01 June 2020, Canada’s money laundering law requires all entities dealing in virtual currency to registerwith the Financial Transactions and Reports Analysis Centre of Canada (‘FINTRAC’) and implement the applicable AML/CFT measures.
Thus, all these countries have introduced laws to regulate cryptocurrency trading. To take care of financial fraud and money laundering activities, they have subjected cryptocurrency businesses to their respective AML/CFT norms. India can also follow a similar approach.
Other countries which have regulated cryptocurrency instead of banning it include Philippines, Switzerland, Germany, Australia, Netherlands, Thailand and South Korea (see Table-A to this note).
b. Countries that have proposed to regulate cryptocurrency:
United States of America: Some states in USA have regulated cryptocurrencies while others are considering laws to regulate. New York has proposed a conditional licensing framework to make it easier for start-ups dealing in virtual currencies to operate. Wyoming has already passed a bill allowing the creation of a bank which is specially meant to allow business to hold digital assets safely and legally. Oklahoma has introduced a bill authorizing the use, sale and exchange of cryptocurrencies within government agencies. The Financial Crimes Enforcement Network of the US Treasury Department has issued a draft law requiring virtual currency operators to maintain records, and verify the customer’s identity in transactions involving virtual currencies or digital assets. The US Department of Justice has also suggested future strategies to combat illicit uses of cryptocurrencies including promoting law enforcement awareness and expertise in cryptocurrency technology to efficiently conduct investigations.
Pakistan: In 2018, the State Bank of Pakistan issued an official circular advising the public that virtual currencies are not recognised as legal tender. It also advised banks and payment system operators to not facilitate virtual currency transactions. However, the State Bank of Pakistan reportedly stated in a court proceeding that its circular was not to ban crypto-currency, but only to caution citizens against its unregulated use. In November 2020, the Securities and Exchange Commission of Pakistan published a position paper on the regulation of cryptocurrency, suggesting measures for regulating it.
Brazil: A bill aiming to define cryptocurrencies is currently under discussion in the Brazilian Parliament. The bill allows crypto-currencies to be freely issued, transferred and used. In a guidance document issued by Brazil’s finance ministry, cryptocurrencies are recognized as a financial asset. The document requires individuals and businesses to report any cryptocurrency transactions above 30,000 Brazilian real (USD 7,600) to tax authorities.
South Africa is another country where cryptocurrency has been proposed to be regulated with sufficient checks and balances (see Table-A to this note).
c. Countries that have banned cryptocurrency:
China: According to a notice issued by various Chinese government agencies jointly, ‘fundraising and trading platforms’ such as crypto-exchanges are prohibited in China. All initial coin offerings in China are also illegal and prohibited. However, there is no law or regulation which prohibits Chinese people from holding or transacting in crypto-currencies. Thus, the ban envisaged by the Indian government will likely be wider in scope than that imposed by China.
Bangladesh: In 2017, Bangladesh’s central bank issued a notice stating that cryptocurrencies are illegal in Bangladesh. Transactions with cryptocurrencies violate existing foreign exchange, money laundering and terrorist financing regulations.
Algeria: It has prohibited the purchase, sale, use and possession of virtual currency, making it a punishable offence.
Cryptocurrencies are also illegal in Ecuador, Macedonia, Qatar, Morocco and Bolivia (see Table-B to this note). These are countries with generally regressive economic, social and political policies on many issues. By banning cryptocurrencies, India will also be joining this list of countries.
TABLE A- LIST OF COUNTRIES REGULATING/PROPOSING TO REGULATE CRYPTOCURRENCIES
|S. No.||Country||Crypto-friendly norms||Regulations addressing concerns of illicit use of cryptocurrencies|
|1||France||France currently does not regulate cryptocurrency trading. However, it is slowly moving towards regulation.||To combat anonymity of cryptocurrency transactions, it has proposed a new Ordinance is proposed with stricter AML and CFT norms, ensuring mandatory compliance with standards of the Financial Action Task Force (FATF).|
|2||Switzerland||Switzerland classifies cryptocurrencies as assets and accepts Bitcoins as legal tender in some regions. It recently enacted a law to regulate crypto-based assets, and requires a license for DLT trading facilities. Switzerland was one of the first countries to introduce progressive regulation for cryptocurrency businesses and has benefitted immensely. Switzerland is home to the ‘Crypto Valley’, which is a fintech hub catering to cryptocurrency businesses in Switzerland and Liechtenstein. It houses more than 900 companies, and the combined valuation of the top 50 companies is around USD 37.5 billion. Switzerland’s principal stock exchange, SIX Swiss Exchange, announced in January that its trading turnover for crypto products crossed USD 1 billion in 2020.||Cryptocurrencies and operation of trading platforms come under the scope of Switzerland’s AML law. Persons who exchange cryptocurrencies for fiat money and vice versa are also regulated under this law.|
|3||Germany||Cryptocurrencies are treated as financial instruments under a recently enacted German law. It introduces new licensing requirements for cryptocurrency businesses.||Pursuant to the new law, cryptocurrency businesses are subject to Germany’s AML law.|
|4||European Union (EU)||The EU Commission has introduced a directive on ‘Markets in Crypto-assets’ to regulate trading in crypto-assets and support digital finance in all EU states.||
All EU states have to follow the AML Directive 5 which has strict rules to combat money laundering. Member states are required to include cryptocurrency businesses within the ambit of these AML obligations.
EU has also introduced an Action Plan to prevent money laundering and terrorist financing, beyond the standards adopted by the FATF.
The Australian Taxation Office has a guidance document on tax treatment of virtual currencies. The guidance states that the transactions related to crypto-currencies are “akin to a barter arrangement, with similar tax consequences”. As per the guidance, the digital currencies are not money.
The Australian Securities and Investment Commission has issued a guidance on regulation of certain crypto-currencies as ‘financial products’ under its securities law. The guidance indicates that entities carrying on a cryptocurrency business need to be licensed.
|In 2017, the Australian government amended its AML/CFT law to require digital currency exchanges to register with the Australian Transaction Reports and Analysis Centre. They must also implement the necessary AML/CFT measures to mitigate the risks of money laundering, and to identify and verify their customers’ identity.|
In March 2020, the South Korean Parliament amended its ‘Act on Reporting and Use of Specific Financial Transaction Information’ to extend the AML/CFT obligations to crypto asset service providers, including crypto-currencies and crypto-exchanges.
The amended law requires crypto asset service providers to register with the Financial Services Commission and partner with one regulated bank for handling deposits and withdrawals.
|The law requires crypto asset service providers to comply with enhanced KYC and AML rules. Crypto asset service providers will have to file suspicious transaction and currency transaction reports with the Korean Financial Unit, and conduct customer due diligence.|
In April 2020, South Africa’s Intergovernmental Fintech Working Group (‘IFWG’) released a position paper on regulation of crypto-assets. The IFWG has recommended the South African government to employ clear “policy stances”, “enforce” strict oversight and codify AML measures for policing crypto-businesses. The members of IFWG include all the financial regulators of South Africa.
In November 2020, South Africa’s Financial Services Conduct Authority released a draft declaration of crypto-assets as a financial product under South Africa’s financial services law. If enforced, this law will require crypto asset service providers to apply for authorisation as a financial services provider.
There are no AML/CFT compliances specifically for crypto-currency currently in South Africa. South Africa’s AML law requires all businesses including crypto asset service providers to report suspicious and unusual transactions to its Financial Intelligence Centre.
The IFWG’s position paper has recommended the government to introduce enhanced AML/CFT requirements for crypto asset service providers. This will include conducting customer identification and verification, customer due diligence, keeping records, monitoring for suspicious and unusual activity on an ongoing basis, and reporting of suspicious transactions to the Financial Intelligence Centre.
Trading in crypto-currency is regulated in the Netherlands.
In May 2020, the Dutch AMLD5 Implementation Act was passed. The Act requires crypto-exchanges and crypto custodian wallet providers to register with the Dutch central bank to offer services in the Netherlands.
|The Dutch Implementation Act also updated the existing anti-money laundering rules to implement EU’s AMLD5 directives in the Netherlands. Therefore, the crypto service providers in the Netherlands now have to record and verify customers identity, monitor transactions and file Suspicious Activity Reports (SARs) with local law enforcement agencies.|
Thailand passed a law in May 2018 to regulate businesses relating to crypto-currencies and digital tokens under the supervision of the Office of the Securities and Exchange Commission (SEC). Any entity interested in offering digital tokens has to obtain approval for offering from SEC. On the other hand, all entities wanting to operate as digital asset business operators have to obtain a license from the finance minister on the recommendation of the SEC.
In November 2020, Thailand’s finance ministry notified the Digital Asset Business Notification to recognise new categories of digital asset businesses, and the Digital Asset Business Licensing Notification to introduce additional licensing requirements for such businesses.
|Digital asset business operators and digital token portal service providers are regulated as financial institutions under the Anti-Money Laundering Act B.E. 2542 (1999) and are required to implement AML measures prescribed therein.|
Under Japanese law, crypto-assets are defined and regulated under the Payment Services Act, 2009 (PSA 2009). All business entities interested in operating crypto-asset exchange services are required to be registered with the Financial Services Agency of Japan.
Security Token Offerings and Initial Coin Offerings are regulated under Japan’s Financial Instruments and Exchange Act (FIEA).
|Under the Act on Prevention of Transfer of Criminal Proceeds, crypto-asset exchange services have to comply with advanced KYC procedures. These businesses are required to verify identity of customers, record and verify transaction records and report suspicious transactions to the concerned authorities.|
TABLE-B: COUNTRIES THAT HAVE BANNED CRYPTOCURRENCIES
|S. No.||Country||Status of ban|
|1||Ecuador||It passed a law banning Bitcoin and decentralized digital currencies in 2014. The Central Bank of Ecuador clarified that Bitcoin and other decentralized digital currencies are effectively banned in Ecuador. It also clarified that the purchase and sale of crypto-currencies through the internet is not forbidden, but the same do not qualify as legal tender.|
|2||Macedonia||In 2016, the National Bank of Macedonia issued a statement prohibiting Macedonian residents to have investments in cryptocurrency.|
The Saudi Arabian Monetary Agency has issued statements warning against trading in virtual currencies as they are out of government supervision. It was further clarified that virtual currencies are not approved as official currencies.
In 2019, the finance ministry reiterated its warning against dealing or investing in virtual currencies, including crypto-currencies.
|4||Morocco||The Moroccan Exchange Office informed the public that transactions through virtual currencies constitute a violation of the exchange regulations and are subject to penalties and fines. However, the press release also stated that various financial institutions in Morocco are following the evolution of virtual currencies in Morocco with interest.|
|5||Qatar||In February 2018, Qatar’s Central Bank issued a circular to banks declaring Bitcoin as illegal, and prohibited all banks from dealing with crypto-currencies. In January 2020, the Qatar Financial Centre (QFC) also announced that it will ban activities related to cryptocurrency.|
In October 2017, the State Bank of Vietnam issued a decree on cryptocurrency outlawing the issuance, supply and use of cryptocurrencies. It also imposed fines up to 200 million dongs. The directive became enforceable in 2018.
In March 2020, the Vietnamese finance ministry reportedly established a Digital Asset Research Group to propose guidelines and regulations on crypto-related activities.
|7||Bolivia||The Central Bank of Bolivia effectively banned crypto-currency, stating that the use of coins not issued or regulated by countries or zones, as well as the processing of electronic payment orders in currencies and monetary denominations not authorised by it in the field of the national payment system, are illegal and prohibited.|
This representation has been authored by the team at Ikigai Law.
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