Progress in Cryptocurrencies: Global Overview and Implications

Cryptocurrency regulatory progress: a global overview and its implications for investors

Regulators in different countries have been creating cryptocurrency legislation piece by piece for many years. It all started with the rise of bitcoin, when the price of the first cryptocurrency jumped to $1,000 and attracted the attention of IT specialists, crypto enthusiasts and regulators.

The growing anonymous market posed huge risks to the global economy in terms of terrorist financing and money laundering. Uncontrolled financial flows threatened international security and the stability of banking systems.

For a decade now, much work has been done to create viable legislation to regulate blockchain technology and cryptocurrencies at the global and local levels. This year has been characterized by bringing new cryptocurrency legislation to a systematic and applicable level in the current reality, integrating it with the rules and regulations of traditional legal and financial systems, and optimizing taxation for investors and traders around the world.

Global Crypto Regulatory Review

Earlier this year, PwC analysts provided an overview of the global cryptocurrency regulatory landscape in their report “Navigating the Global Crypto Landscape with PwC: 2024 Outlook”. The audit firm’s experts conducted a cross section of the global legislative landscape in the crypto sector and the evolution of the regulatory framework in different countries around the world.

The report provides a brief overview of the legislative, regulatory and licensing status of digital assets as of January 2024. It visualizes the stages at which legislators are addressing cryptocurrency regulatory issues such as:

Regulatory framework (general rules);

Licensure/registration;

Stablecoin regulation;

Travel Rule compliance (FATF standards that professional participants in the crypto sector must adhere to as part of the fight against money laundering and terrorist financing).

From this, we can see that governments around the world are actively engaged in crypto-regulatory issues, with regulatory initiatives being implemented to some degree in 42 countries as of early 2024. Of these: 25 have enacted comprehensive regulations on all of the above (mostly in the EU, but also in Japan and the Bahamas).

The vast majority of countries (35 for each point) have adopted licensing and registration requirements, as well as anti-money laundering and anti-terrorist financing legislation. At the time of the study, only 25 jurisdictions had decided to regulate stablecoins. According to PwC analysts, despite the high level of legislative activity, global regulation of digital assets remains fragmented and there is still “a lot of work to be done” in this area. In particular, they draw the attention of crypto companies to the importance of choosing the right jurisdiction for registration: it is necessary to take into account the regulatory maturity, the reputation of the country and the availability of personnel.

Positive aspects of cryptocurrency regulation

Better issuance and investor protection. This is one of the main benefits at the forefront of cryptocurrency regulation, according to lawmakers’ statements. Setting legislative measures for the issuance and circulation of digital assets serves as one of the preventive measures to keep unscrupulous participants and fraudulent companies out of the market. The situation with huge investor losses after ICOs in 2017, when colossal funds were invested in projects that were not covered by the laws in force at the time, has formulated the need for an urgent response of the authorities to ICO and STO regulation. Strengthening the threshold requirements for issuers under cryptocurrency legislation facilitates the issuance of more efficient and sec
ure tokens, and reduces the risk of unreliable projects being present on the market.

Attract institutional investors. Increasing the legitimacy of the industry serves to increase the confidence of large investors. The volatile, skyrocketing cryptocurrency market, with an incomparably higher level of risk compared to the traditional financial systеm, raises certain concerns among institutional investors. This budget-conscious segment of investors in the crypto sector is reluctant to enter the market, preferring to rotate in a more familiar environment. And the more stable and regulated the situation becomes, the more attractive this class of digital assets will be for the largest investment funds, and the larger the share of cryptocurrencies will be in their impressive portfolios.

Negative effects of regulation on cryptocurrencies

Screening out valuable but low-budget projects. Licensing and token issuance management requirements create serious regulatory and financial burdens for market participants. They can become an unsustainable burden for talented projects with high potential and insufficient funding. As a result, small, capital-starved companies may be left behind before they are born.

Complicating the user experience. In addition to the already familiar KYC and AML in cryptocurrencies, regulatory updates may inсlude increasingly complex customer identification procedures and confirmation of the source of funds. These measures are aimed at reducing the threat of terrorism and combating money laundering, but they are unlikely to make life easier for traders and investors, as they will add some inconvenience to current transactions.

Regulation stifles market development / impedes innovation. According to many reputable participants in the cryptocurrency industry, regulation and market growth are in constant conflict by slowing innovation. Excessive regulatory pressure stifles the introduction of new ideas, thereby slowing the natural evolution of the segment.

Weakening decentralization through geographic fragmentation of regulation. Cryptocurrency regulations vary significantly from jurisdiction to jurisdiction, hindering the global adoption and use of cryptocurrencies.

Cryptocurrencies and Tax Laws

Fiscal policy regarding taxation in different countries around the world depends primarily on the interpretation of the concept of digital assets (commodity, property, money, security, etc.). In some countries, cryptocurrencies are not taxed at all.

In most countries that apply taxation to digital assets, tax is levied on profits from cryptocurrency transactions (capital gains tax). The tax may not apply in the case of small transactions or in the case of holding cryptocurrencies for a certain (usually long) period of time prior to the transaction. In countries where cryptocurrency is allowed as a means of payment, a tax is levied on the use of cryptocurrency. Capital gains tax is levied on the entire amount of the payment (the consumer technically sells the cryptocurrency and receives taxable income that is then used to pay for the goods or services). The same principle applies to taxation when receiving income from mining and steaking in DeFi. The amount payable is determined by the exchange rate of the digital asset to the national currency of the taxing state at the time of the transaction. As a rule, receiving donations in cryptocurrency or transferring assets between a user’s wallets is not subject to taxation.

Taxation peculiarities in different countries

In Europe

All European countries tax cryptocurrencies as capital gains. The rates depend on the legal norms of each country and usually vary between 10-20%. Higher rates may apply to transactions above a certain monetary threshold.

UNITED STATES

In the United States, there is a zero capital gains rate on annual income from cryptocurrency transactions up to $41,675; a 15% rate above and up to $459,750; and a 20% rate thereafter.

Asian countries

The general vector in the regulation of cryptocurrencies in Asia has not yet been formed.

Hong Kong. In this jurisdiction, income from any activity related to crypto-assets is subject to income tax at a rate of 15%. Since June 2023, regulations on the regulation of professional market participants have been introduced, according to which DeFi platforms and crypto exchanges are subject to licensing. The peculiarity of the city-state is that income from investments in blockchain projects and cryptocurrencies is not subject to taxation.

China. The use of cryptocurrencies will be banned in the Celestial Empire from 2021.

Japan. The country applies a progressive tax rate when trading cryptocurrencies on profits exceeding 1385 EUR at a rate from 15% to 55% as the amount increases.

India. Capital gains tax on income from digital assets is 30%.

Countries without cryptocurrency taxation (or with minimal rates)

First of all, these are states that try to create ideal conditions for residents (such as Monaco, UAE).

Singapore is the country with the most investor-friendly regulatory initiatives in the crypto industry and other sectors of the economy.

El Salvador also offers optimal conditions: as of 2021, bitcoin will be officially used in the country and cryptocurrency transactions will not be taxed.

Malaysia, Andorra and Portugal have near-zero tax rates for individuals.

Conclusion

As you can see, the regulation of cryptocurrencies in different jurisdictions can vary dramatically. In recent years, emerging markets have shown leadership in the adoption of cryptocurrencies. Chainalysis research suggests that countries such as Morocco, Vietnam, the Philippines and India are increasing their rate of entry into the crypto industry. At the same time, the foundations of cryptocurrency regulation are being laid in developed countries where cryptocurrencies are already widespread, such as EU countries, the UK, Japan and the US.

In 2023, regulators around the world will be busy actively developing and updating their regulatory frameworks after a pivotal year for the industry in 2022. Cryptocurrency regulations in 2024 are already more in the vigorous implementation and testing phase, with the US and EU countries starting to implement new regulations that take into account the negative experience with the FTX crypto exchange and aim for the future stability of cryptocurrency markets.

The United States, which is in the run-up to elections and in litigation with major cryptocurrency market players, has lower expectations for the implementation of formal regulatory measures compared to European countries. The United States is undeniably lagging behind, despite pressure from both global financial institutions interested in early regulation and U.S. bankers and institutional investors.

So, while the SEC and CFTC are engaged in an internal battle for the right to control various market segments, the near future of crypto regulation in the world depends on how successfully the MiCA rules are implemented. The main provisions of the European uniоn’s Markets in Cryptoassets Act (MiCA) will come into force this year. This is the first law of its kind in such a large jurisdiction, and by all accounts, it will become an important benchmark for global crypto regulation in the coming years.

Thank you for your attention!

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