With over 1,500 denominations and ever-expanding uses for blockchain technology upon which cryptocurrencies are based, it is not surprising that many governments are turning a keen focus to close some of the tax loopholes and resolve the basis of anonymity in order to reduce money laundering and terrorism financing.
This article takes a broad look at the current state of laws governing cryptocurrencies in some of the major economies around the globe and the implications that it will have for individuals, and by implication, businesses. There are four key areas to consider, from a government and regulatory perspective.
- Taxation – virtually every Government is considering possible taxation positions for cryptocurrencies – these need to consider the basis of value for taxation and treated as income, tradeable asset, as a commodity, security or as a currency.
- Money transmission activities – and implications from know your customer, money laundering, sanctions legislation along with the very legal aspects around moving currency internationally.
- Regulation and Licensing with country-based regulators implementing internationally agreed principles along with industry-based self-regulatory bodies. If cryptocurrencies are deemed to be securities, additional layers of personnel authorization could be imposed upon many associated including exchanges, software providers, and the management of the “coin” itself.
- Criminal Laws including those pertaining to cryptojacking, fraud and theft, particularly where tracing perpetrators are frustrated by decentralized digital ledgers across international jurisdictions, particularly where anonymity is a key factor.
Cryptocurrencies are becoming increasingly acceptable as a form of currency for payment of good and services. However, this can mean that users face “double-taxation” impacts which will need to be resolved. The United States is considering whether to consider cryptocurrencies as a class of security, which would entail additional forms of regulatory compliance.
Let’s turn to some of the key geographies grappling with key issues to be resolved, starting with the United States.
The United States Joint Economic Committee issued a report in March 2018 which officially endorses cryptocurrency and blockchain technology. The current view is that cryptocurrencies are more akin to real assets or commodities, noting that extreme volatility making cryptocurrency values unpredictable.
As you would expect, Taxation (both income and capital gains taxes) is an important area, with the Cryptocurrency Tax Fairness Action which exempts taxation for virtual currency purchases under $600 (total for the year) – which is lower than the value of micropayments one would reasonably expect to make (e.g. paying for in-store merchant purchases like coffees, or online purchases, etc.) and Money Transmission activities which are licences activities in every state except for Montana.
Presumably, there will be a consideration where sanctions dealing with countries, organizations, and individuals.
In June 2018, the Director of the SEC’s division trading and markets stated that the regulator is “underwhelmed” by cryptocurrency exchanges’ efforts to conform to the agency’s registration and self-reporting requirements. The SEC is expected to issue a statement about whether cryptocurrencies are to be treated as a currency soon – until then, they are classified as commodities and taxed as property.
Initial Coin Offerings (ICOs), by which tokens or coins are offered through a fundraising process are classified as securities – with the implication that the SEC will seek to regulate the offering of the security and the trading of the security. ICOs now exclude US citizens and residents from obtaining tokens in order to exclude the reach of US securities regulation.
Lobbying is underway, led in part by the Venture Capital Working Group seeking to classify virtual currencies as “utility tokens”. There will be significant debate about the classification of these, and in the meantime, criminal proceedings are underway against at least one ICO’s management team. Another founder, Arthur Breitman’s for Tezos has been suspended by FINRA (Financial Industry Regulatory Authority) from associating with broker-dealers for two years.
In Europe, the regulatory landscape is very different, with principles agreed and then implemented in member countries through their individual Regulators. In July 2014, the European banking Authority advised EU banks not to deal in virtual currencies until a regulatory regime was in place and set up a task force to monitor virtual currencies to combat money laundering and terrorism.
Bitcoin was made a currency rather than treated as a commodity in October 2015, and VAT /GST exempt for exchanges as well as converting between fiat and bitcoin. However. VAT/GST and other taxes (eg income tax) may still apply where payment is made for goods and services.
In April 2018, the European Parliament passed new legislation to address the anonymity by implementing rules for cryptocurrency exchanges, platforms, and wallet providers to register with authorities and apply due diligence procedures, including customer verification. Member countries will have 18 months to bring the new rules into national law.
ICOs remain open to EU citizens and residents for now, but other issues have arisen, including whether the ICO needs to publish and register a prospectus in order to avoid criminal and civil prospectus liability in the EU. For now, expect more country Regulators to scan for ICO prospectuses to investigate whether the tokens may qualify as securities.
Australia declared Bitcoin legal tender in July 2017. By September 2017, Australia recognized that consumers are the double tax when purchasing anything already subject to GST (Goods and Services Tax) – which applies to almost everything except some education courses, some medical, health and care products, and most basic foods.
ICOs need to comply with the regulatory guidance issued by the Australian Securities and Investments Commission (ASIC), which classifies tokens according to their structure, either as a currency in receipt of a purchased service or where funds are pools as a managed investment scheme (eg as an investment).
The Australian Taxation Office (ATO) is exploring how best to incorporate the treatment of digital currencies in its own regulatory jurisdictions, identifying any issues related to the tax implications of cryptocurrencies, “whether as a result of new types of transactions, new structures or new participants entering the increasing digitized environment,”
In April 2018, the Australian Transaction and Analysis Centre (AUSTRAC) addressed the rise in cryptocurrency scams and prepared to close loopholes regarding tax and identity management by imposing new anti-money laundering and terrorism financing rules. Exchanges now need to register and within 6 months comply with four principal rules which also include reporting any suspicious and all transactions over $10k as well as retaining records for seven years.
In 2017, Japan recognized Bitcoin as a method of payment, prior to that, digital currencies were considered a “means of payment that is not a legal currency”.
Following Mt. Gox’s 2014 bankruptcy following a $400Million theft, Japan has put in place a legal system regulating cryptocurrency trading. Japan has been one of the largest players in the cryptocurrency world with about 60% of the world’s trading volume. This is due in part to Japanese familiarity with day-trading techniques used on foreign exchanges.
Earlier this year $500Million of digital tokens when $500Million were stolen from Coincheck, who will repay those affected from its own capital. Japan’s Financial Service Agency ordered Coincheck to improve security practices. It also requested that the Japan Cryptocurrency Business Association and the Japan Blockchain Association merge into a new self-regulatory organization.
However, some exchanges believe that Japan’s regulatory framework is too strict. HitBTC has recently announced that it will suspend its services in Japan.
Japan is also reported to be investigating individuals accused of using Coinhive for cryptojacking, eg using software to mine without the permission of the owners of the computer system.
It has been reported that Japan is now planning to regulate ICOs with rules to prevent money laundering, protect existing shareholder and debt holders, restrict unfair trade practices like insider trading as well as increasing cybersecurity.
South Korea’s government is taking steps to curb the crypto hype which has crazed the county – it is believed to be the world’s 3rd largest market for cryptocurrency speculation, the with over 1/3 of salaried Koreans holding $5,000 in crypto. In July 2017, the South Korean government legalized Bitcoin Service provides to facilitate payments, transfers, and trades. Not surprisingly, North Korean hackers were reported targeting these providers, leading the Government to take action to fight hacker attacks.
Additionally, the Korean Blockchain Association, an independent self-regulatory body as proposed rules which would mandate that exchange members hold at least 2BN Korean won in equity capital as well as filing financial statements and audit reports to them.
A bill has been proposed which would authorize the Korea Financial Intelligence Unit (KFIU) to regulate crypto exchanges the way it does with banks, which would mean that exchanges will have to abide by strict anti-money laundering rules.
In summary, the move to treat cryptocurrencies as a financial asset both recognizes its importance in a global economy and will mean that the shape of things to come will need to meet the needs of regulators who dominate the world stage. This is necessary to avoid overlapping, contradictory treatment from national regulatory regimens which leave investors exposed in an ever more complex and evolving global industry.
The Financial Action Task Force is planning to introduce rules for cryptocurrency exchanges, with the G20 stating that they “Commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards and call on the FATF to advance global implementation.” The Organization for Economic Co-operation and Development (OECD) has also called for cooperation on studying the tax consequences of cryptocurrencies and distributed ledger technology.
In short, look out for more financial market regulations, anti-money laundering and taxation legislation. The bottom line is that a properly regulated cryptocurrency market will be beneficial in long-term and accelerate business and consumer adoption of cryptocurrencies. Harmonising regulation around the globe in itself provides the opportunity to apply the decentralized nature of blockchain technology to a truly global economy.