12 June 2020

Gavel and cryptocurrency. Government regulation concept.

Are Cryptocurrencies Legal? How Are Cryptocurrencies Regulated Worldwide?

While cryptocurrency is a decade old now, since the inception of Bitcoin, it has been a cat-and-mouse game between crypto businesses and regulators. With the growing activity of investors in the crypto space, regulators have become significantly more vigilant over the last few years.

But before we get into understanding this complex relationship between crypto operators and regulators, let’s take a brief look into its past.

After the banking systems collapsed in the 2008 financial crisis, Satoshi Nakamoto soon came up with the Bitcoin whitepaper which stressed on having a ‘decentralized’ system of currency. The idea was to give people absolute control over their money and establish a much efficient, faster, and transparent system in place of the traditional banking systems.

Over the years, Bitcoin and other cryptocurrencies started getting more acceptance among global investors as one could easily transfer money across borders in just minutes, with no third-party involvement.

Thanks to the power of blockchain that provides an immutable distributed ledger with users connected all across the globe.

Legality Of Bitcoin and Other Cryptocurrencies

The basic decentralized framework of cryptocurrencies puts it out of reach of regulatory intervention. Since Bitcoin has become massively popular among retail as well as institutional investors across the globe, it has been enjoying a legal status in major economies in North America, United Kingdom, and Japan, as well as some other countries.

When it comes to the legal status of Bitcoin and other cryptocurrencies, there’s a large inconsistency in the approach. Different countries, and even different jurisdictions within the same country, govern cryptocurrencies differently.

Crypto exchanges play a crucial role in determining whether crypto trading activities are legal or not. This is because even if Bitcoin and other cryptocurrencies are based on a completely decentralized blockchain, these exchanges are fully centralized.

Thus, even if The Financial Crimes Enforcement Network (FinCEN) of the U.S. doesn’t consider cryptocurrencies as legal tender, it treats the exchanges similar to traditional money transmitters.

So, in response to the FATF (Financial Action Task Force) guidelines, FinCEN has mandated all exchanges to store and share information of its customers. Thus, all rules that apply to the traditional money transmitters also apply to the digital currency exchanges.

Just like the FinCEN in the U.S., the Monetary Authority of Singapore (MAS), the Australian Transaction Reports and Analysis Centre (AUSTRAC), the South Korean Financial Supervisory Service (FSS), and theFinancial Services Agency (FSA) look after regulating exchanges in their respective countries.

Note that even if some of these countries identify Bitcoin as a legal tender, they still might not consider other cryptocurrencies as legal tender.

Why Are Cryptocurrencies Regulated?

Since cryptocurrencies are completely decentralized in nature, the most pertinent question is, why are cryptocurrencies regulated in the first place?

With the growing popularity of Bitcoin and other cryptocurrencies around the world, illicit players like money launders, drug peddlers, and terror groups started using cryptocurrency as a potential tool to transfer money worldwide while staying safe from law agencies.

The Silk-Road market is one of the best examples of drug traffickers using Bitcoin for illegal purposes. This market was part of the dark-web that facilitated the trading of illicit drugs. The FBI had to intervene, and Silk-Road was completely closed in October 2013.

This is when several regulatory bodies decided to bring Bitcoin regulation forth, in order to protect the rights of common retail investors and prevent them from falling into any illicit matters. Since then, a number of regulators have been working on laws for cryptocurrency and its investment products which fall under their purview.

How Are Cryptocurrencies Regulated?

As said, cryptocurrency regulation is a broad subject, and several regulators are involved in the entire process.

  • CRYPTO TAXATION

For example, the Internal Revenue Services (IRS) looks after Bitcoin tax and other cryptocurrency taxes on the profits derived from crypto trading.

The IRS makes it mandatory for cryptocurrency investors and traders to declare all of their trading activity in a financial year. For this, the IRS has also issued a tax guideline for the users. Similarly, the Canada Revenue Agency looks after all the legal cryptocurrency taxation-related matters in Canada.

Both Singapore and Australia treat Bitcoin as a property, thereby subjected to the Goods and Services Tax (GST). In the world’s biggest crypto trading market Japan, the National Tax Agency taxes investors anywhere between 15-55% on crypto profits.

  • Cryptocurrency Derivative Products

With Bitcoin getting tremendous popularity, several financial institutions have put effort into developing Bitcoin derivative investment products on the market.

Over the last few years, many financial institutions like the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE) and its Digital Assets Bakkt, and many others have worked on offering Bitcoin Futures and Options Trading facility to investors. These institutions also provide Crypto custodial solutions for the safe and secure storage of digital assets.

The U.S. Commodities Futures Trading Commission (CFTC) looks after the regulations of all these offerings, allowing Bitcoin derivative products to trade publicly.

  • Cryptocurrency Securities And Bitcoin ETF

After Bitcoin, several cryptocurrencies came into the market through the public fundraising method called the Initial Coin Offering (ICOs). The U.S. Securities and Exchange Commission (SEC) regard such cryptocurrencies as securities.

Similarly, in Canada, the Canadian Securities Administrators (CSA) looks after the applicable securities laws for cryptocurrencies.

In Australia, the Australian Securities and Investments Commission (ASIC) provides all the regulatory requirements for cryptocurrency trading as well as Initial Coin Offering (ICO).

Similarly, for investment instruments like the Bitcoin Exchange-Traded-Fund (ETF), the SEC looks after all the regulatory requirements. The SEC Bitcoin ETF laws must be followed for any institutional player to launch this product in the market.

Global Efforts For Cryptocurrency Regulation

With the penetration of digital currencies in the mainstream global financial markets, the global efforts for cryptocurrency regulations have grown considerably.

The G20 economies have come together for a unified approach to dealing with crypto assets. While these G20 countries are working on this, they have yet to come up with a concrete plan.

On the other hand, the Financial Action Task Force (FATF) – who monitors any illicit use of money for activities like money laundering and terror financing – has provided new guidelines to follow and regulate any illicit crypto trading activity.

The International Monetary Fund (IMF) and the World Bank have also been working on global standards for crypto regulations.

You've reached the limit of 4 free articles per month

We love that you’re enjoying our collection of exclusive analysis and original guides on crypto investing. Become a member today and receive unlimited access to our Dchained Investor Community, Live Featured Expert Q&A, and live “Market Mover” alerts.
Dchained uses cookies to improve user experience and site performance, offer content tailored to your interests and enable social media sharing. By clicking “OK” or continuing to use our site, you agree to our use of cookies, Privacy Policy and Terms and Conditions.

Join our Early Access Newsletter List

Investing in cryptocurrency shouldn’t require you to be a computer scientist or banker. With our exclusive analysis & investing tools, investing in crypto has never been more simple.​

Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

Close Bitnami banner
Bitnami