Bitcoin Regulation Around the World: The Current State

When we talk about the scale of investments in the blockchain technology, or about the global acceptance and popularisation of Bitcoin as currency, the issue of regulation comes up all the time. Businesses would not be able to deal with cryptocurrencies, were it not for complete negligence or — on the contrary — green light from the governments. However, in the case of no regulation, it is probable that ordinary customers would be left unprotected. It is important to establish the perfect balance between regulation and non-intrusion.

Commodity vs. currency

Prior to making cryptocurrencies subject to regulation, the first question which needs to be answered is “What are they exactly?” There are three most popular alternatives — currency, commodity, or surrogate money. In the first case, Bitcoin can be treated as, for instance, foreign currency. If it is viewed as commodity, it can be treated like goods or possessions — and taxed accordingly. In the case of “surrogate money”, its value is not recognised by the government, and dealing with cryptocurrencies is penalised. It is often questioned whether Bitcoin and other digital money should be treated in a completely different way, which would call for creation of the special legislation base.

The risks

A big concern is risks associated with Bitcoin and cryptocurrencies. After a bunch of stories, such as the MtGox bankruptcy and the Silk Road trials, the governments have become more alert.

Issues such as money laundering, funding of terrorism, drugs, and other illegal activities have arisen because of the anonymous and decentralised nature of Bitcoin and crypto in general. Thus, Bitcoin-related businesses are more often required to comply with AML (Anti Money Laundering) and KYC (Know Your Client) policies.

Bitcoin-related legislation around the world

There are some resources (Merkletree.io, for example) providing data on the official status of Bitcoin and blockchain technology. Most of the world is marked green or yellow (permissive or contentious regulation, accordingly), but there is no data on a significantly large part of the world, such as Africa. Currently, there are only two countries where legislation is hostile — Iceland and Ecuador. Let us take a look at the current state of cryptocurrency regulation in some of the countries.

USA

In what concerns Bitcoin regulation US is a rather interesting, although complicated, case. There are two legislation levels — the federal one and the state one. On the federal level, FinCEN (Financial Crimes Enforcement Network) is the main authority to look up to. Bitcoin seems to have drawn its attention in 2013, right about the time when the price increased significantly, and it has made a statement that Bitcoin is a payment system.

According to FinCEN, every business dealing with cryptocurrencies, should have an MSB status (money service business). It is the necessary condition for any exchange or a payment processor to operate legally on the US territory. This status means that a company complies with AML and KYC policies, so that the risks of illegal activities are reduced to the minimum. AML and KYC are also partly covered by the PATRIOT Act that was signed in 2001 to prevent terrorism.

There is a different picture in every state. The authorities’ attitude towards Bitcoin may vary significantly, especially when it concerns a Money Transmitter License — every state has its own requirements for obtaining it. There are currently 3 states, in which businesses that operate virtual currencies do not need an MTL for sure: Montana, South Carolina, and New Mexico. Others either require businesses (exchanges and payment processors) to be registered as money transmitters or do not have a definite view on this matter.

New York has its own processes going on — it has the famous BitLicense, which has been in development since 2013. It is planned to be a document which specifically regulates the activity of Bitcoin and crypto companies in the state of New York.

EUROPE

In summer 2014, European Banking Authority (EBA) released a document in which is outlined risks associated with “virtual currencies” and expressed an opinion that regulation is needed. It has also made a number of long-term and short-term suggestion on crypto regulation.

In the long-term perspective, exchanges and creators of alternative cryptocurrencies should be registered as a legal person, so that they are liable and accountable for their activities. Of course, it means that they should be authorised to deal with Bitcoin and other digital currencies. Risk assessment and strict AML/KYC measures are the priority. In the short term, EBA has recommended all financial institutions to abstain from buying, selling, or holding cryptocurrencies until the regulation is implemented.

On the other hand, EBA’s document encourages relationships between financial institutions and “virtual currency schemes”, and it also acknowledges the need for development of cryptocurrencies — just on their own, outside the financial system. Moreover, although the main financial authority in the EU has made its concerns clear, these are only recommendations which are currently optional. In its view on Bitcoin regulation Europe is very diverse.

Germany

Germany was the first country to officially recognise Bitcoin as ‘private money’ and a financial instrument. This was in mid-2013, even before the price boom. Currently, Bitcoin payments and sales are taxable, and the companies dealing with Bitcoin payments should comply with the Anti Money Laundering Law.

United Kingdom

In November 2014, the UK government launched a call for information on cryptocurrencies, in order to collect data from researchers, policy makers, key figures in the crypto industry, etc. In March, after having received over 120 responses from people and organisations, HM Treasury has published their Response to the call for evidence.

According to the document, the most important thing is that all crypto exchanges operating in the UK should comply with AML regulations — which is not that surprising. Secondly, British Standards Institution will need to collaborate with the Bitcoin industry in the development of standards for the sake of the customer protection. Also, the funding of research will be increased by £10 million to support the development of blockchain technology.

Iceland

In Iceland, Bitcoin and other cryptocurrencies are banned. The reason is that, according to the existing legislation, Icelandic national currency cannot leave the boundaries of the country. This rule contradicts the universal nature of Bitcoin which is transferrable across borders.

ASIA

Russia

In Russia, Bitcoin is treated as “money surrogate”, and there are penalties for dealing with cryptocurrencies — even for those who provide information on Bitcoin. In late 2014, the officials began shutting down websites (or shutting off the access to them), which has created even bigger challenges for crypto developers and enthusiasts.

China

In China, despite the fact that there is no direct ban on cryptocurrencies, financial institutions and payment processors are not allowed to deal with bitcoins. Bitcoin itself, just as any other cryptocurrency, is a ‘virtual commodity’ — it means that people can own and trade it privately. Thus, China provides a moderately favourable environment for many companies which are neither financial institutions, nor payment processors.

Hong Kong

In Hong Kong, Bitcoin is considered as neither money nor virtual currency; it is viewed rather as a virtual commodity. The only role of the government is to advise against using cryptocurrency because of the high risks associated with it.

Vietnam

While it is not prohibited for individuals to own cryptocurrencies in Vietnam, it is so for financial institutions. The authorities do not recognise Bitcoin as either currency or commodity. Its status is unclear, and any business dealing with it will be penalised.

The purposes of Bitcoin regulation

There are two main reasons which make Bitcoin regulation welcome. The first one is protecting the users, and the second one is facilitating innovation. With some regulation, people will be more inclined to trust the new payment system. Also, having a clear legislative landscape will help Bitcoin companies find their investors without fear of sanctions.

In the light of the fact that governments have started to take Bitcoin seriously, there is a growing interest from the big players. Thus, Nasdaq has provided their trading technology to Noble Markets; Coinbase have received funding in January, and IBM have been wondering how the blockchain can help exchanging money, contracts, and secured data via mobile devices. These are good signs for the Bitcoin.


Originally published at bit-post.com.

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