Crypto regulation and its prospects across the globe
In recent years, substantial growth of the blockchain has pushed governments across the globe to adopt or consider a regulatory framework for crypto.
Currently, cryptocurrency regulations vary from country to country. While some states ban crypto outright, in others, crypto is allowed, but restrictions apply. In most countries, cryptocurrencies are subject to anti-money laundering (AML) requirements.
Crypto regulation status by territory
Dubai — just like many other parts of the UAE — is working hard on attracting cryptocurrency companies and has already gained a reputation as a hub for crypto and blockchain technology in the Gulf region. One of the steps taken by the emirate even included the launch of the Dubai Metaverse Strategy. In addition to favorable conditions offered to companies, Dubai promotes the overall spread of cryptocurrencies. In a crypto OTC shop, such as Sell Bitcoin in Dubai (SBID) anyone can buy and sell BTC, ETH, USDT and other cryptocurrencies with cash. There is also an opportunity to pay for real estate in crypto. Plus, the emirate has zero percent personal income tax in its free zones, and this exemption also covers cryptocurrency and any operations with it, like trading, staking, farming or others. Meanwhile, recent proposals made by Dubai’s Virtual Assets Regulatory Authority stipulate banning anonymous cryptocurrencies whose owners can be identified neither through cryptocurrency providers nor through blockchain, which would apply to such coins as Zcash or Monero.
Among Latin American countries, El Salvador stands out as the first country worldwide to introduce BTC as a legal tender back in 2021, also exempting foreign investors from paying taxes and issuing a public digital wallet application.
Moreover, in late 2022, El Salvador’s President Nayib Bukele tweeted about a new government investment strategy of purchasing 1 BTC per day. Another country in the region, Brazil, recently passed a law legalizing cryptocurrencies as a means of payment, according to the Brazilian federal government’s official journal.
Following El Salvador, the Central African Republic (CAR) adopted BTC as legal tender in 2022.
In Singapore, there is no capital gain tax on trading profits, and cryptocurrency payment-for-goods transactions can be classified as barter trade, which excludes them from taxation. The same applies to Malaysia, but with an exception for day traders.
As for the U.S., cryptocurrency is regulated by state agencies at the federal level — the Financial Crimes Enforcement Network (FinCEN), the United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) — and local regulators at the state level where the differences mainly apply to license issues. Taxes depend on the amount of earned crypto and can reach up to 37% on short-term capital gains.
The issue of more explicit regulation in securities, taxation, customer protection and many other crypto-related areas has been a hot topic lately, particularly in the light of the ban for Paxos on the issuance of the BUSD stablecoin, classified by the SEC as security, the FTX collapse and the shutdown of Kraken’s staking service in the US. 2022 saw several attempts to craft crypto legislation by the Biden administration. As a result, a number of initiatives were released, including the Responsible Financial Innovation Act, that could form the basis for a future regulatory framework. It would require the Internal Revenue Service (IRS) to eliminate capital gains taxes by excluding cryptocurrencies used to purchase goods and services up to $200 per transaction, legalize DAOs, adjust taxation on income from mining and staking and more.
Puerto Rico exempts crypto from capital gains tax on income that occurred after moving to the country. But a real crypto tax haven is the Cayman Islands, as well as Bermuda and Vanuatu, with no capital gains or income taxes at all.
An example of a European crypto-friendly country is Switzerland, which offers significant tax benefits. Private investors are exempt from paying capital gains tax on their personal wealth assets, while capital gains of self-employed crypto traders are subject to progressive income tax. Moreover, according to the canton of Zug’s official page, BTC and ETH are allowed as payment methods for city fees.
Germany encourages “hodlers” by treating cryptocurrencies as private money, not as capital assets. Holding a cryptocurrency for over a year eliminates taxes on further activities with it. Portugal tends to follow the same approach in 2023, switching to long-term gains taxes from selling, swapping and trading. The same principle is adopted in Malta.
A relaxed regulatory environment for cryptocurrencies attracts tech companies to Slovenia and Estonia.
As for the European Union, generally, cryptocurrency is subject to gains tax, but the rate varies from country to country. Exchanges must be registered only in certain EU member states, but EU AML legislation normally applies.
To address scams and failures issues, in 2024, the European Council intends to implement the Markets in Crypto Assets law (MiCA) as part of the broader Digital Operational Resilience Act (DORA). Just like in Dubai, upcoming regulations will come as a crackdown on anonymous coin treatment. MiCA requires trading platforms to deal only with the assets whose holders and transaction history can be verified.
Other countries legally welcoming cryptocurrencies include Canada, the U.K., Australia, Japan, Hong Kong, Israel, India, Turkey, Pakistan, Chile, South Korea, the Philippines, Thailand and New Zealand.
Among countries that banned cryptocurrencies are China, Bolivia, Qatar, Egypt, Algeria, The Republic of Macedonia, Morocco, Nepal, Bangladesh, Afghanistan and the Dominican Republic.
Upcoming regulation issues
Meanwhile, some governments are trying to implement crypto-related technologies in financial services and to take advantage of the rising sector by opening consultations to receive comments on regulation proposals. While some proposals are still under consideration, steps have already been made aimed at improving the protection of retail investors or just introducing more restrictions. One of the focuses remains on how exchanges manage their assets to avoid mixing them with customer assets. However, stablecoins, staking and lending have also been specifically addressed in new laws and drafts.
EU: Coming into force in early 2024, MiCA primarily focuses on users’ protection by requiring stablecoin issuers to create a sufficiently liquid reserve. The MiCA regulation aims to protect consumers by “requesting” stablecoin issuers to build up a sufficiently liquid reserve with a 1/1 ratio that can partly consist of deposits. Stablecoin transactions will be subject to a limit of 200 mln euros per day. Stablecoins would be moved under the oversight of the European Banking Authority (EBA), meaning that they can be regularly audited to ensure the reserves’ validity. One more requirement refers to the issuer’s presence in the E.U. Companies outside the E.U. will still be allowed to provide services once they fulfill the MICA regulatory requirements.
Australia: The Reserve Bank of Australia has published a report on stablecoins that evaluates their effectiveness and addresses the possible introduction of stablecoins into the national payments ecosystem.
UK: Regulations on stablecoins could arrive within the Financial Services and Markets Bill, which is currently at the committee stage. H.M.Treasury previously issued a consultation on managing the failure of stablecoin firms. It also proposed a consultation paper regulating crypto-assets, trading, lending and storage in the same regime as traditional financial services.
U.S.: Senior U.S. House lawmakers drafted a bill allowing bank-like oversight of stablecoins and determining a classification of securities and commodities.
Singapore: The Monetary Authority of Singapore (MAS) has released a consultation paper that contains proposals for measures on cryptocurrencies that are planned to be part of the Payment Services Act. The paper admits the potential of stablecoins to become a means of exchange to facilitate transactions in the digital asset ecosystem. The requirements for stablecoins focus on increasing their security: they must be backed by the local dollar or G10 currency (such as the U.S. Dollar, Australian Dollar, British Pound Sterling, Canadian Dollar, Euro, Japanese Yen, and other popular currencies). Stablecoin issuers must hold 100% equivalent reserve assets in the form of cash or short-dated sovereign debt securities.
The paper also includes proposals on banning leveraged retail crypto purchases and using tokens deposited by retail investors for lending or staking.
Some of the proposed measures referring to popular yield-generating options can potentially limit users’ access to DeFi. Meanwhile, most of the measures are at a stage of receiving feedback, so their eventual implementation might be different from the original proposals.