Criminal organizations can exploit the unpredictability and decentralized nature of cryptocurrency to commit fraud, money laundering and other crimes with ease, as well as use it to avoid sanctions or taxes.
Governments have responded to these worries by passing new regulations aimed at cryptocurrency exchanges and wallets that aim to combat international cybercrime by mandating these platforms to submit suspicious activity reports and identify users.
What is a Cryptocurrency?
Cryptocurrency is a digital token that enables individuals to exchange value online without the need for intermediaries, using public ledgers like blockchain which use cryptography to protect from tampering and counterfeiting. Bitcoin is perhaps the best-known crypto coin but there are numerous others as well. Like other intangible technology assets, cryptocurrency transactions may be subject to cyber theft with potential loss occurring if your private key for your wallet becomes compromised; should that occur there is likely no recourse available since cryptocurrency transactions typically don’t carry indemnification insurance and are non refundable unlike typical insurance and non refundable transactions that cover such scenarios.
Given their non-government origins and absence of central bank backing, cryptocurrencies were generally not recognized as legal tender until 2020 when FinCEN recognized them as “value that substitutes for currency”, making them subject to reporting requirements and money transmission registration under Bank Secrecy Act and anti-money laundering laws.
FinCEN also defines utility tokens such as XRP and ETH as utility cryptocurrencies that serve specific functions on respective blockchains, while most others fall under investment or speculation categories without providing any particular function other than purchasing and exchanging on said blockchains. As these investments lack tangible asset backing they tend to be more volatile as well as uninsured so any losses from theft cannot be reimbursed if stolen.
Many governments have taken an indifferent stance toward cryptocurrency, yet their rapid rise and evolution as well as DeFi’s rising popularity has forced regulators to create rules for this new sector. Regulators face the difficult task of striking a balance between traditional financial risks with innovation as well as potential for commerce expansion and financial inclusion.
Cryptocurrencies differ from traditional fiat currencies in that they lack an intrinsic value and their value comes solely from user trust and confidence. As such, cryptocurrencies are attractive to criminals seeking to use them for money-laundering and other illicit activities, prompting certain countries to make them illegal.
Legality of Cryptocurrencies in the U.S.
As cryptocurrency has grown more mainstream as an investment asset, government regulators are taking an increased interest in the industry. Agencies such as the Department of Treasury, Securities and Exchange Commission, Internal Revenue Service and Financial Crimes Enforcement Network (FinCEN) are considering how best to regulate cryptocurrency use.
One issue associated with cryptocurrency use is their high degree of anonymity, making it harder to track illegal activities such as money laundering. One such instance was on Silk Road’s Dark Web marketplace from 2011-15; Ross Ulbricht used Bitcoin as its main form of payment and later was charged with money laundering and narcotics distribution. Since then, several developers have created more anonymous cryptocurrencies like Monero and Zcash as protection from criminal transactions using their platforms.
The SEC views cryptocurrencies as assets similar to stocks or bonds and therefore subject to regulation under similar laws. To combat anti-money laundering regulations and ensure users can identify themselves quickly, the agency has taken measures against unregistered cryptocurrency exchanges that haven’t filed suspicious activity reports and identified users; additionally, CFTC has classified cryptocurrency as commodities that can trade on public derivatives markets.
IRS rulings indicate that cryptocurrency gains must be taxed as capital gains. Investors in cryptocurrencies must keep track of their holdings and report any sales or exchanges to the IRS; those holding investments for more than one year may even qualify for lower long-term capital gains taxes.
While the federal government has yet to implement comprehensive cryptocurrency regulation, several states have taken steps toward donning one themselves. New York for instance requires all companies that act as brokers between buyers and sellers of cryptocurrency transactions or provide crypto custody storage services register with FinCEN and obtain a BitLicense. It has also begun an educational campaign about their risks.
Overall, the United States’ approach to cryptocurrency regulation entails striking a balance between fostering growth of the industry and curbing any illegal uses of cryptocurrencies. Regulators will need to carefully weigh whether to continue mandating data collection requirements on cryptocurrency exchanges and wallets as well as maintaining lists of sanctioned intermediaries; or take steps towards creating a central bank digital currency (CBDC), as this would mean entering the crypto space without understanding how best to prevent theft, fraud and other forms of criminality.
Legality of Cryptocurrencies in the U.K.
Legal status of crypto in the UK remains uncertain. Some governments have banned them, while others are working on laws to regulate them. Either way, English law considers crypto property that could be confiscated in case of criminal offence or dispute between parties; wise investors should keep copies of their private keys safe at all times.
In April 2018, the FCA published a Dear CEO letter which issued guidance regarding how banks should treat cryptoassets for money laundering and terrorist financing purposes, along with advice for firms regarding whether their activities surrounding such assets might involve accepting deposits, issuing electronic money or providing payment services.
Shortly thereafter, the government unveiled the HMT Consultation regarding The Future Financial Services Regulatory Regime for Cryptoassets. This consultation seeks to position Britain at the forefront of cryptoasset technology and innovation while simultaneously ensuring adequate regulation and support from an effective industry.
HMT Consultation’s main area of concern is how to regulate crypto exchanges and custodian wallet providers. It proposes creating a new licensing regime for these firms with requirements imposed in order to protect customers such as FCA authorisation as well as complying with anti-money laundering and countering financing of terrorism reporting obligations, risk-based approach licensing for each firm considering size and activity level among others.
Proposed regulations also mandate these firms to obtain and verify client identity information; typically this involves gathering proof of address documents like bank statements, credit card bills or utility bills as proof. Furthermore, firms will also need to record all senders and recipients of cryptoassets under what’s known as Travel Rule requirement; it will become effective on September 1, 2023.
HMT Consultation also seeks to regulate crypto-related activities in the UK in various other ways, notably bringing exchanges and wallets that offer various functions into scope of FCA regulation – this could include e-money exchanges, tokens that represent securities such as security tokens and non-readily realisable securities as examples of such platforms.
Legality of Cryptocurrencies in China
China, home to the world’s largest cryptocurrency market, has taken an increasingly hardline stance towards digital assets. Recently, its central bank issued a circular that categorically prohibited crypto trading and warned those engaging in it of severe punishments; this ban covered both buying and selling transactions as well as financial institution participation in such deals, with strict penalties attached if anyone mined cryptocurrency coins.
The government made its move due to what they see as an increase in cryptocurrency-related fraud and other illicit activities, with their top financial regulator stating earlier this year that crypto investments and trading should be avoided by ordinary investors – marking a change from Beijing’s former cautious approach to regulating this industry.
Cryptocurrencies, or digital assets using blockchain technology to record and verify transactions on a massive shared database, offer promises of future value while their prices fluctuate widely; as a result, some see them as forms of gambling while they can also be used illicitly for activities like money laundering and terrorist financing.
Many governments are still grappling with how best to regulate the cryptocurrency sector, with some welcoming it while others prohibiting it altogether. According to experts, successful regulation requires striking a balance between traditional financial risks and innovation.
China’s ban is part of an overall campaign by its government to maintain control over industry and protect its economy. Leaders have long expressed fears that cryptocurrency‘s rise could pose threats to state-owned banks and weaken Communist Party control of financial system. Alongside banning crypto trading, they’ve also put restrictions in place regarding mining digital currencies which is known for being energy intensive process.
Winston Ma, a securities law professor from NYU, believes Friday’s announcement to be an intensified crackdown by China against cryptocurrency trading platforms such as Bitfinex. He anticipates this action having significant ramifications on global cryptocurrency markets.