The emergence of cryptocurrencies and revolutionary blockchain technology has drawn widespread attention across the globe. During the COVID-19 pandemic, the cryptocurrency market has shown an upward trend. Its mainstream adoption has seen a boost in 2020-21 with many countries accepting cryptocurrencies in one form or another.
Along with the adoption of private digital currencies in the economy, many countries have started working on their regulations. While some nations have allowed their usage and trade, others have restricted or even banned them. Likewise, different nations and their respective government agencies and regulatory bodies have classified (defined) these currencies differently.
Although cryptocurrencies have emerged as an exciting option for investors, they are speculative investments. They are highly volatile in nature and have no fundamental value. Therefore, uncertain market sentiments can lead to sharp fluctuations in price at any time.
In addition, these virtual currencies are decentralized and unregulated, which makes it difficult for investors to take legal recourse in case of fraud.
Technology is developing faster in comparison to the laws regulating such technological advancements. Currently, we don’t have a comprehensive regulation to govern cryptocurrencies and the activities associated with them. However, looking at the constantly evolving landscape of cryptocurrencies and their sustained engagement within the modern market, we may witness an international regulatory framework soon.
Why Is Cryptocurrency Gaining Popularity?
Cryptocurrencies or virtual currencies are digital means of exchange secured by cryptography (blockchain technology), which makes them almost impossible to counterfeit. They are considered alternative currencies since they are not regulated by the governments.
Cryptocurrencies offer cheaper as well as more secure ways for making payments. They also provide several beneficial applications in financial and non-financial fields. The development and adoption of cryptosystems are viewed by some countries as an opportunity for fostering economic growth and generating jobs.
During 2020-2021, international finance industry players like MasterCard, Visa, and PayPal, rushed to embrace crypto by allowing their clients to engage with crypto services. The banking industry has also been in the frontline in accepting crypto-currencies. In June 2021, Facebook released a white paper to formally announce the proposal to launch a global, private cryptocurrency – Libra.
Legal and Regulatory Status of Cryptocurrencies Around the World
The legal status of cryptocurrencies varies substantially from country to country. While some countries have already built a legal and regulatory framework for digital currencies, others strive for governing crypto activities. However, not all countries welcome the advent of cryptocurrency. There are countries like China, Bangladesh, and Bolivia that have explicitly banned them.
Thus, the legal and regulatory landscape is fragmented with different approaches and varying degrees of restrictions. Let’s see the jurisprudence of some countries concerning cryptocurrency.
Recently in September 2021, the small Central American nation El-Salvador became the first country to adopt Bitcoin as a legal tender along with the US Dollar. In June 2021, the country’s parliament voted in favour of making a law to adopt Bitcoin. Now, Bitcoin is allowed as a legal tender for all goods and services. The country’s government is hoping that the adoption of Bitcoin will help in economic recovery by bringing financial inclusion, investment, tourism, and innovation.
Cryptocurrencies are not legal tender in India, but buying and selling the currency is not illegal. They are available through cryptocurrency exchanges. The existing cryptocurrency exchanges in India, such as Zebpay and Unocoin, are incorporated and registered with the Registrar of Companies as a private company providing software and IT services.
Their legality depends on the legal treatment that will be granted to cryptocurrencies. Currently, there are no laws governing crypto trading in India, but cryptocurrency is valid as an asset such as gold. Trading in gold is allowed in India without there being any law to govern it, likewise the functioning of cryptocurrency exchanges or the trading in cryptocurrencies.
However, The Reserve Bank of India (RBI) and the central government have been antagonistic towards private digital currencies. In 2018, RBI issued a circular to impose a blanket ban on cryptocurrency, prohibiting all the banks and other financial institutions to be involved with crypto technology.
As a result, People started selling their crypto holdings which made the prices fall in the market. The Internet and Association of India (IMAI) challenged the RBI circular before the Hon’ble Supreme Court of India. In March 2020, the Supreme Court in [Internet and Association of India vs. Reserve Bank of India] lifted the ban imposed by the RBI.
While the RBI favours a complete ban on cryptocurrencies, it is planning to introduce its own digital currency under Central Bank Digital Currency (CBDC). Moreover, the government of India has introduced ‘The Cryptocurrency and Regulation of Official Digital Currency Bill 2021’ in the Parliament, but there is still speculation about the government stance on crypto, which forces investors into a wait-and-see mode.
The European Union (EU)
Cryptocurrency is legal across the EU, but the EU has not passed any specific regulation to govern its activities. Its governance and taxation depend on individual member states within the EU. However, EU’s Fifth Anti-Money Laundering Directive (5AMLD) and 6AMLD have come into effect directing crypto exchanges to follow the EU’s anti-money laundering regulations.
Recently, the European Commission and the EU Executive proposed a law to make crypto transactions traceable. The proposed MiCA legislation will ensure the prevention and detection of illicit activities through crypto-currency .
The United States of America (USA)
While the USA has many cryptocurrency investors and blockchain firms, it is yet to develop a clear regulatory framework for crypto assets. Crypto exchanges are legal in the country and fall under the regulatory regime of the Bank Secrecy Act (BSA). They are required to comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) obligations.
The recent Infrastructure Bill passed by the Senate includes provisions for crypto regulation. The proposed provision would help track crypto tax evasion by increasing the tax reporting by companies that facilitate crypto trading.
In addition, the US Department of Justice has created the National Cryptocurrency Enforcement Team (NCET) to investigate the crimes related to virtual currency including ransomware cases such as “Colonial pipeline Attack”, and to provide expertise in blockchain and cryptocurrency transactions.
Taking a progressive approach, Japan acknowledged cryptocurrency as legal property in 2017 under the Payment Services Act. Crypto exchanges in the country are governed by the Financial Services Agency (FSA), and are required to comply with AML and CFT obligations. It is considered a hub for cryptocurrency trading in Asia.
Although cryptocurrencies are not legal tender in Canada, they can be used as a medium of exchange for goods and services between the parties who agree to use them. The Canada Revenue Agency (CRA) treats cryptocurrency as a commodity for the Income Tax Act. In February 2021, it became the first country to approve a Bitcoin Exchange-Traded Fund (ETF) for retail investors.
Russia gave legal status to cryptocurrencies in 2020 but banned them from being used as an exchange for goods and services. In June 2021, Russia launched the trial of its own digital currency ‘CryptoRuble’. Recently, the Central Bank of Russia recommended commercial banks block suspicious crypto accounts and wallets to combat suspicious transactions.
In September 2021, China explicitly banned all crypto-related activities including cryptocurrency transactions and mining, to root out financial crimes. A few months back China banned financial institutions and payment companies from facilitating crypto transaction services. Those who are involved in illegal financial activities will be prosecuted.
Foreign websites providing such services to Chinese citizens are also declared an illegal activity.
Repercussions of Inter-Jurisdictional Differences
Although no country except El-Salvador has made cryptocurrency a legal tender, many developed and developing nations have legalized it. Cryptocurrencies pose many serious challenges to regulators, governments, investors, and society at large.
- No Legal Recourse: Cryptocurrencies are decentralized i.e. they are not backed by a central authority, which can be a risk for investors. In cases of fraud, investors will not have the same legal recourse as traditional fraud victims. Also, if a crypto exchange is hacked and customers’ holdings are stolen, recovery of missing funds is not possible. Therefore, the protection of investors/consumers remains a question.
- Limited Acceptance: Cryptocurrencies are still accepted by a small group of merchants. Uncertainty of government stance makes it infeasible to rely on crypto-currencies.
- Regulatory Restrictions: In many countries, businesses that accept cryptocurrencies do not currently need to register or obtain a license to do so, but with changing laws and regulations, they might need it to operate in certain jurisdictions.
- No uniform classification: Different departments of the governments accord different treatment (as commodity, property, security) to cryptocurrencies to impose a tax on crypto transactions. Definitional challenges concerning cryptocurrencies exacerbate the critical legal consideration.
- High Volatility: The rate of demand and supply is inconsistent, and therefore, it is highly volatile in nature. Recently, Bitcoin and other leading cryptocurrencies experienced a sharp drop in price after ‘Tesla’, an American electric vehicle and clean energy company, made a U-turn on accepting Bitcoin as payment for its products.
- Affects Financial Stability: Since central banks cannot exercise control over private digital currencies, they cannot monitor the inflow and outflow of foreign exchange. It heightens the risks to the stability of the financial system.
- No Guaranteed Valuation: Due to its unregulated nature, many alternative currencies have emerged and will continue to emerge in future. So, if a group of merchants decide to dump a digital currency and leave the system, its valuation will decrease, making it worthless for many investors. For example, Bitcoin witnessed a significant price drop after China announced a blanket ban on crypto trading and mining.
- Illegal Transactions: Cryptocurrency’s ability to transcend national borders, coupled with difficulties in detection, makes it a safe channel for criminal organizations to commit financial frauds and fund terrorism and other illegal activities.
- Violation of Right of Investors: Many regulatory concepts collide with the fundamental right to property of the owners of cryptocurrency and the freedom to pursue a trade or profession of owners and operators of exchange platforms, mining pools, etc.
Global adoption of cryptocurrencies has soared, and the calls to embrace cryptocurrencies are getting louder day by day. However, despite the mounting excitement, the determination of the legal status of cryptocurrency is still at a primary stage.
Regulators worldwide have a tedious task to allow cryptosystems to flourish in their countries with checks and balances. They are trying to address the challenges posed by this virtual transaction system, but due to the large and continuously growing number of cryptocurrencies with different technological characteristics, it is not easy for them to cope with the cryptosystems.
While it is difficult to find a consistent legal approach, it is likely that regulators work collaboratively to adopt rules and policies to deal with rapid innovation in the digital currency sector.
At the same time, the international position on cryptocurrency is not homogeneous.
While many countries have shown a positive attitude towards its adoption, others have shown pessimism. Investments in and trade with crypto-currencies have a cross-border dimension, and therefore, regulations’ concepts require an international context. International and Interdisciplinary research is needed to develop efficient and legit regulations.
By Preeti, 2nd Year LL.B., Faculty of Law, The Maharaja Sayajirao University of Baroda, Vadodara