As cryptocurrency usage increases, so too do cryptocurrency regulations around the world that are put in place to govern them. The crypto landscape is constantly evolving and keeping up to date with the rules in different global territories isn’t easy.
To help you navigate the array of cryptocurrency regulations around the world, their legislative attitudes and the activities associated with them, we’ve put together this guide. Learn how different nations approach coin and exchange regulation and if they have any upcoming legislation which could alter their approach to cryptocurrencies.
What is cryptocurrency?
Digital or virtual currency is an electronic medium of exchange that is not a representation of U.S. or foreign currency. Cryptocurrency is a type of digital currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. According to the IRS: “Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality.”
Current and Proposed Cryptocurrency Regulations
At present in the United States, regulations regarding cryptocurrency are mainly only proposals and are based on the Bank Secrecy Act (BSA) of 1970 and the Patriot Act.
The BSA requires U.S. financial institutions to assist in the detection and prevention of money laundering and terrorist financing.
In the wake of the 2001 attacks on the World Trade Center, U.S. financial institutions were required by amendments to BSA and Title III of the Patriot Act to actively identify, report and deter terrorist-orchestrated money laundering activities.
The Financial Crimes Enforcement Network (FinCen) is the U.S. Treasury agency responsible for administering the Bank Secrecy Act and collecting and sharing financial-crime intelligence.
FinCen issued guidance in 2013 to include cryptocurrency exchanges (places where you can buy and sell crypto) within the definition of a money transmitter, making them subject to BSA and Patriot Act rules.
In 2019, $119 billion of suspicious cryptocurrency transactions were reported to FinCen.
In December of 2020, FinCen proposed new rules aimed at cryptocurrency money laundering. The new rules would require money transmitters to identify and keep records of all parties in cryptocurrency transactions of more than $3,000 with an unhosted wallet, or a wallet that is hosted in a “problematic” country listed by FinCen. If the transaction is greater than $10,000, the transmitter has to report the names and addresses of all payors and recipients to FinCen. The proposed rules are very similar to the rules for bank wires.
The Biden administration has frozen all pending rule changes, so there has been no further action on the FinCen proposal. However, in a February 2021 interview with CNBC, Treasury Secretary Janet Yellen expressed concerns that Bitcoin is “inefficient,” and that it may be used “often for illicit finance,” so it would seem likely that there will be additional regulation of cryptocurrency at some point.
Legal Concerns Around Cryptocurrency Use
The U.S. Attorney General’s cyber-digital task force 2020 report identified three areas of concern with cryptocurrency use:
- Direct use of cryptocurrency commit crimes and finance terrorism
- Using cryptocurrency to launder money and evade taxes
- Cryptocurrency theft and investment fraud.
In general, a common legal concern about cryptocurrency is the certain level of anonymity cryptocurrency can offer because they create a perfect environment for criminal activities. Cryptocurrency developers are now offering anonymity enhanced cryptocoins (AECs) like Monero, Zcash, and Dash specifically to make tracking transactions more difficult.
Silk Road
One of the most well-known examples of how cryptocurrency can be used to commit crimes is the infamous dark-web marketplace Silk Road. The site operated from 2011 to 2013 as a marketplace for drugs, forged documents, ransomware, and other illicit goods and services. The site was specifically designed to use bitcoin as the means of payment in order to hide user identities. Ross Ulbricht, Silk Road’s founder, was convicted in 2015 of multiple charges, including narcotics distribution and conspiring to commit money laundering.
Cause for Caution With Crypto Investing
The same features that make cryptocurrency so attractive are also why investors need to be cautious. The anonymous nature of transactions can make cryptocurrency exchanges a target for hackers because it is difficult to track and recover bitcoin if it’s stolen.
The Mount Gox cryptocurrency exchange was hacked in 2014 and investors lost hundreds of millions of dollars of bitcoin. Those who held their crypto on the exchange were left with little recourse.
Cryptocurrency is not legal tender anywhere in the United States and isn’t backed by the government or a central bank. Its value is based largely on demand. As an investment, cryptocurrency like bitcoin has produced substantial returns, however, cryptocurrency is also extremely volatile, which makes its value as a currency questionable.
Finally, if FinCen’s proposed regulations go through, cryptocurrency exchanges would be regulated as money transmitters, and consumer protections are at the state level. Federal regulation of money transmitters is primarily directed at money laundering and terrorist financing. There are no state or federal financial guarantors for cryptocurrency exchanges like the FDIC.
The Commodities Futures Trading Commission, SEC, and FINRA have published fraud warnings about cryptocurrency initial coin offerings, and other cryptocurrency investments. The New York State Attorney General bluntly warned investors in March 2021 that “cryptocurrencies are high-risk, unstable investments that could result in devastating losses just as quickly as they can provide gains.”
Cryptocurrency Crime and Tax Evasion
Cryptocurrency regulation has been included in bipartisan infrastructure bill talks by U.S. legislators in recent months.
One possible provision would expand the definition of a brokerage to include companies that facilitate digital asset trades — like cryptocurrency exchanges. This kind of change would mean increased tax reporting responsibility to help the IRS track crypto tax evasion.
Additionally, Gensler has spoken about a need to increase regulation and help prevent more ransomware attacks, like the one that shut down the Colonial Pipeline in May 2021. The pipeline attack was one of a number of high-profile instances of hackers seeking Bitcoin ransoms.
While Gensler hasn’t said exactly how the SEC planned to help stop these crimes, he did say that the agency would continue to exercise the full extent of its power.
“[The SEC] will continue to take our authorities as far as they go,” Gensler said during an appearance at the Aspen Security Forum in Colorado.
A recent U.S. Treasury report voiced the same concerns as Gensler, saying cryptocurrency “poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”
