Regulation might seem anathema to cryptocurrencies, whose entire raison d’être is to circumvent the power of governments and banks to control how people use their money. But as the technology pushes into the mainstream, there’s a growing sense that new rules are both necessary and even beneficial, leading to a boom in national experiments in crypto regulation.
Some countries clearly see cryptocurrencies as a direct threat to the power of the state and have instituted outright bans, most famously in China, which had previously been a major hub for crypto activity. But others are attempting a careful balancing act, trying to manage the potential dangers without stifling innovation in a potentially lucrative new industry.
There’s no established playbook for how to regulate such a new technology though, and Sergiu Hamza, CEO of crypto analyst firm Coincub, says the pace of experimentation has accelerated dramatically in the last year. His company provides a ranking of crypto-friendly countries which considers things like adoption levels and local talent, but also regulation and tax rules.
“It changes so fast,” he says. “In the last month, we have compiled a list of 150 news articles on different regulation changes, with at least 10 countries radically changing their positions.”
Many in the cryptocurrency industry welcome regulation, because it provides clarity for both users and service providers about where they stand in the eyes of the law.
What those regulations look like varies considerably from country to country, says Hamza. In general though, they typically deal with questions of taxation, how to recognize and regulate the activity of key crypto players like exchanges and coin issuers, and also whether to classify cryptocurrencies as money, investments, or something else entirely.
One of the most pressing questions often concerns taxes, and some countries have implemented highly favorable regimes to tempt crypto users and firms to their shores. Hungary, for instance, has initiated a flat 15 percent tax on cryptocurrency gains at the time they’re converted into fiat, with no other income or capital gains taxes.
And while die-hard crypto-anarchists might bristle at this kind of government oversight, Hamza says many in the industry welcome regulation of its core activities, because it provides clarity for both users and service providers about where they stand in the eyes of the law. Perhaps unsurprisingly, major financial hubs like Singapore and Switzerland and tax havens like Malta and the Bahamas have been ahead of the pack when it comes to passing more sophisticated crypto regulation.
“Countries that are used to financial innovation and countries that are at the forefront of technology, obviously it’s easier for them to understand crypto and deal with it,” says Hamza.
Malta for instance was one of the first countries to formally regulate cryptocurrencies when it passed a trio of laws in 2018 that defined what counts as a “Virtual Financial Asset” and set out rules for how they could be issued, traded, and exchanged. Singapore has also been proactive, running a regulatory sandbox for fintech companies since 2016 that relaxes legal requirements to enable experimentation. It also introduced the Payment Services Act in 2019, which regulated how cryptocurrencies could be issued and brought exchanges and other crypto firms under the oversight of the Monetary Authority of Singapore.
The country that topped Coincub’s rankings for crypto-friendliness was Germany. While its first-place finish was also due to high adoption and a burgeoning crypto industry, Germany has been making progressive regulatory moves, says Hamza. The country charges no tax on gains from crypto held for longer than a year, and a law close to being passed will allow investment funds called spezialfonds, which are not available to retail investors and therefore more lightly regulated, to invest up to 20 percent of their holdings in cryptocurrency.
“Cryptos work best at the places where more traditional instruments are not working.”
—Max Semenchuk, blockchain entrepreneur
Hagen Weiss, senior expert adviser at the country’s financial supervisor BaFin, says the core of its strategy for regulating crypto is “same risk, same business, same rules”. The country hasn’t set out in law how different crypto products should be treated, instead regulators look at them on a case-by-case basis and treat them the same way they would treat a traditional asset with the same level of risk, but that is only possible thanks to close collaboration between regulators and the industry.
“It is probably the No. 1 tool that should be used—engagement with the market,” says Weiss. “The main benefits are that if you are proactive and engage with the situation, you do two things. First, you will protect your citizens and their money, and secondly, you will harness the potential of that technology.”
The attitude of regulators can often be just as important as the regulations themselves, says Hamza, which is why Coincub’s rankings include a measure of Institutional Outlook. This accounts for public statements about the authorities’ general attitude towards cryptocurrencies and how they intend to govern them going forward. That’s critical, says Hamza, given the rapid and sizable shifts that can happen.
He gives the example of Portugal, which has long been seen as a crypto-friendly destination because trading and using cryptocurrencies have been tax-exempt since 2018. But the government recently announced it plans to reverse course, and although a recent bill designed to tax cryptocurrencies failed to make it through parliament, it seems likely that the country’s laissez-faire approach is coming to an end.
How countries approach crypto regulation also varies considerably depending on what their motivations are. Most countries setting crypto-friendly rules are trying to boost their domestic crypto industry, but there can be other reasons too. There have been plenty of headlines about the use of cryptocurrencies in Ukraine since the start of the Russian invasion—in particular the fund the government set up to allow people to donate cryptocurrencies toward its war effort.
But a law recognizing cryptocurrencies as legal assets and introducing financial monitoring measures, which passed shortly after the start of the war, had been in the pipeline for years. Max Semenchuk, a blockchain entrepreneur who is currently acting as an adviser to Ukraine’s Ministry for Digital Transformation, says the country has had a progressive attitude to cryptocurrencies for some time and its goals are quite different from those of a financial hub like Switzerland.
The country has had the highest level of adoption of cryptocurrency for some time, currently standing at about 12 percent of the population, and Semenchuk says the aim is primarily to support the use of the technology by individuals. “Cryptos work best at the places where more traditional instruments are not working,” he says. “There’s not so much trust for the banks. We have got some history of banks folding, and crisis and devaluation of currency.”
The main use cases in Ukraine, he says, are for business-to-to business transactions, as a form of investment for everyday people, and a way to transfer money in to and out of the country. The technology also feeds into the government’s desire to push increasing digitalization of municipal services and the economy. “ ‘We should be the country of the smartphone’ is one of the big slogans,” says Semenchuk.
However, experimentation inevitably involves some upsets, and regulations are likely to remain highly dynamic. Ukraine’s central bank recently banned cryptocurrency purchases in the local hryvnia currency—alongside deposits in e-wallets and foreign-exchange accounts—over concerns about money flowing out of the country during the war. And despite its generally light regulatory touch, Singapore banned crypto providers from advertising directly to retail customers at the start of the year. And in April it extended its oversight powers to include crypto companies headquartered in Singapore but providing services abroad.
“The position is changing so fast right now that we can only talk about what’s happening this week or this month,” says Hamza.
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Edd Gent is a freelance science and technology writer based in Bengaluru, India. His writing focuses on emerging technologies across computing, engineering, energy and bioscience. He's on Twitter at @EddytheGent and email at edd dot gent at outlook dot com. His PGP fingerprint is ABB8 6BB3 3E69 C4A7 EC91 611B 5C12 193D 5DFC C01B. His public key is here. DM for Signal info.