Cryptocurrencies, which were introduced to the world through blockchain technology, have gained popularity as a viable alternative to traditional state-backed currencies. While some countries remain cautious about cryptocurrencies, many are actively working on regulating their use. Countries have different approaches when it comes to cryptocurrency regulation, but they all prioritize public order and safety.
Cryptocurrency platforms, which act as exchanges for buying and selling cryptocurrencies, have been a particular focus of regulatory activity in countries like the United States and Japan. These countries have sought to establish licensing requirements for these platforms.
Blockchain technology, which underpins over 2000 cryptocurrencies and tokens, has a role beyond the financial world. Because of its distributed system, blockchain can operate effectively without central control. It has become increasingly important due to its token features and initial coin offerings (ICO). However, the failure rate of ICO projects was 46% in 2017, leading to concerns about fraud. As these activities remain unregulated and there is no registration system in place, it is possible for fraudulent activities by crypto scams to take place. This has led to countries such as China banning the opening of new ICO campaigns.
Anti-money laundering (AML) for crypto services and investment companies is one of the trending topics. People, all around the world, must have knowledge if they want to conduct any financial activity with these digital assets.
Legal Status of Cryptocurrencies on Continents
Cryptocurrencies, one of the most popular applications of blockchain technology, have been at the forefront of regulatory activities since Bitcoin first emerged. While cryptocurrencies are an innovative and striking technological product, their uncontrolled and decentralized nature has increased the need for regulation to protect users from victimization.
The approach to regulating cryptocurrencies varies across different countries, reflecting differences in their socioeconomic conditions and financial systems. However, the growing perception is that giving cryptocurrencies a legal status worldwide will help prevent their use in illegal activities such as money laundering, tax evasion, and drug trafficking, which will ultimately increase their long-term value. Crypto transaction monitoring and AML screening for customers who conduct digital asset transactions are essential steps to stop crypto scams and these illegal activities. AML crypto procedures target to support legal activity while preventing financial crime.
This blog will examine the different regulatory measures taken for cryptocurrencies by specific regions. By analyzing these regulatory approaches, it aims to provide a better understanding of the current state of the cryptocurrency market and its potential for future growth.
While most countries in Africa are still monitoring and tracking the development of blockchain technology and cryptocurrencies, they are not recognized as legal tender in any country on the continent. Governments across the region have issued warnings to their citizens about the risks of dealing with cryptocurrencies. However, Mauritius and South Africa are leading the way in terms of developing regulatory frameworks for cryptocurrencies.
Mauritius has implemented a "regulatory sandbox" application, which is a significant development in the region. Meanwhile, South Africa is moving closer to putting cryptocurrencies in a legal framework. However, countries such as Morocco, Algeria, and Libya have banned cryptocurrencies outright.
Despite the lack of legal recognition for cryptocurrencies, South African financial service companies report an increase in customer demand for cryptocurrency products. While no regulations in the region give cryptocurrencies legal status, some ICO activities have been initiated to support financial and trade systems in South Africa and Morocco.
In December 2014, the South African Reserve Bank (SARB) issued an article on virtual currencies, stating that they are "digitally tradable and accepted as a medium of exchange, but not as a legal currency unit and/or value storage medium." However, in February 2018, SARB announced that they were working on creating an appropriate regulatory framework for cryptocurrencies.
The United States of America has a complex regulatory and legal framework for cryptocurrencies, which varies between states and government agencies. For instance, while the use of cryptocurrencies was banned for a year by a municipality in Washington state, a bill has been submitted to the Wyoming state legislature to determine the legal status and classification of cryptocurrencies in the state. At the federal level, the US Treasury Department classifies cryptocurrencies as decentralized virtual currency that can be exchanged, while the Securities and Exchange Commission (SEC) includes them in the commodity class if certain conditions are met. The SEC also conducts studies on Initial Coin Offering (ICO) activities in the country.
In Canada and the USA, supportive steps are being taken for the use of cryptocurrencies in commercial life, and there are efforts to become a leader in this technology in the future. In contrast, South American countries have taken a more restrictive approach to cryptocurrencies, with many prohibiting their use due to concerns over crimes such as tax evasion and money laundering. For example, Bolivia has banned the use of cryptocurrencies entirely.
However, Venezuela, a country with one of the highest inflation rates, aims to trade with Petro, a cryptocurrency indexed to oil. Mexico has enacted a Fintech Law that covers crowdfunding activities, payment services, and digital assets. Despite this, practitioners in the country argue that the law lacks sufficient regulations to prevent digital assets from facilitating crime.
Brazil has established a working committee to regulate digital currencies, while the Banks and Financial Institutions Surveillance Authority in Chile is working on blockchain technology. Colombia is also exploring tax implementation on cryptocurrencies.
It seems that Asia is a significant player in the cryptocurrency market, with various countries implementing regulations and taking steps towards their adoption.
Japan, for example, has recognized cryptocurrencies as legal money and has established regulations for ICO activities. China, despite banning cryptocurrency trading, has established a digital currency unit within its Central Bank to issue its own digital currency. South Korea has introduced regulations to combat money laundering and to monitor tax regulations, prohibiting anonymous bank accounts for cryptocurrency trading.
Singapore has become a popular country for ICO activities and has established regulations for digital assets recognized as capital market instruments. Malaysia has made various regulations regarding digital assets and ICO activities, requiring approval from the Securities Commission for digital asset platforms operating in the country.
Thailand also has two different regulatory frameworks for the taxation of transactions with digital assets and cryptocurrencies and the income derived from these transactions. Crypto transaction monitoring become crucial to comply with these two regulations. ICO platforms must obtain approval from the SEC to operate in the country and separate approvals for each ICO project. Japan and Hong Kong have also established regulations for ICO activities.
The European Union and its member countries continue to study policies and regulations for cryptocurrency trading and blockchain technology. On June 19, 2018, the European Union financial institutions issued a warning to citizens about the risky nature of virtual currencies because they are not fully regulated. The Fifth EU Anti-Money Laundering Directive (5AMLD) offers some benefits, but the European Banking Authority (EBA) stresses the need for separate independent regulation to minimize the risks posed by cryptocurrencies.
On March 8, 2018, the European Commission released a " FinTech Action Plan" that examined many financial sector innovations, including blockchain technology, artificial intelligence, and cloud storage services. While cryptocurrencies' legal definition remains uncertain in the Union, most member states subject them to profits tax, which varies between 50-0%. The Court of Justice of the European Union has ruled that the exchange between cryptocurrency and other national currencies should be exempt from VAT. Switzerland and Malta are among the countries that most support cryptocurrency activities, and they encourage the development of cryptocurrencies and regulation studies to clarify market activities.
Malta has focused on distributed ledger technology and enacted three new laws: the Financial Assets Act (VFAA), the Innovative Technology Arrangements and Services Act (ITAS), and Digital Innovation Authority Act (MDIA). These regulations define and regulate distributed ledger technology beyond cryptocurrencies and classify it as electronic money, financial instruments based on distributed ledger technology, virtual tokens, and virtual financial values. The VFAA introduces a framework for regulating distributed ledger technology products and related service providers, including a new class of intermediaries called Virtual Financial Asset Intermediaries. The VFAA also authorizes the Malta Financial Services Authority to develop a Financial Instrument Test to determine whether a ledger technology asset belongs to one of the mentioned classes and can thus be regulated.
Similar studies have been conducted in Switzerland, where virtual currencies are considered assets, not national currencies in circulation. In Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) decides whether regulations regarding securities and banking will be applied according to the contractual relations and the purposes of tokens used in each ICO project. BaFin defined cryptocurrencies as financial instruments and provided regulatory clarity. In France, the French Parliament passed an important bill on ICO activities on September 12, 2018, which established an approval mechanism for ICO projects, regulations for cryptocurrency intermediary platforms, and a special tax regime for transactions with crypto assets. Gibraltar requires the registration of cryptocurrencies currently located in Gibraltar and has created a licensing process for companies using distributed ledger technology to store or transmit value belonging to others. The Proceeds of Crime Act transposed the EU Anti-Money Laundering Directive into Gibraltar's national law, expanding the definition of "related financial enterprise." Reporting necessary documents and activities requires to have an comprehensive crypto transaction monitoring system. Thus, compliance and preventing crypto scam become easier for companies.
It appears that the governments of most countries on the continent support cryptocurrency activities and blockchain technology in Australia. The use, trade, and mining of cryptocurrencies are considered legal in Australia, and taxation guidelines are available to provide guidance to the public. In particular, the Australian Securities and Investments Commission (ASIC) published a study in 2017 that outlines when and under what conditions ICO projects can be considered financial transactions. The evaluation is based on the economic purpose of the tokens used in the ICO project.
The Middle East and North Africa
The countries attract blockchain technology in the region, and research continues for regulation studies in many countries. Especially after the statements that cryptocurrencies are halal in the fatwas given within Islamic Law's scope, there has been a stir in the sector. Despite these statements, it is thought that the steps to be taken by the governments in the countries of the region will determine the situation of the sector. Cryptocurrencies are favored by some countries, especially in order to avoid the sanctions of the United States. For example, Due to the fact that VISA and Mastercard transactions cannot be made in Iran and inflation is at high rates, the value of the national currency is constantly changing; This ensures that cryptocurrencies are followed with keen interest by individuals across the country.
In Israel, although digital currencies are not accepted as a valid currency by the Bank of Israel, the Israel Tax Authority stated on January 1, 2018, that the use of virtual currencies should be seen as a "virtual payment tool" and should be taxable.
It is noteworthy that at the point where cryptocurrency's ongoing conflict relationship with law and regulation has come to a place, it is noteworthy that the actions are taken to act in cooperation with regulatory organizations, especially by realizing that the regulation of institutional structures will not always have restrictive consequences for cryptocurrencies and will benefit in spreading. As a matter of fact, in the Libra White Paper issued by the Libra Association (Libra Association), which consists of companies such as Visa, Mastercard, Paypal, eBay, Uber, Lyft, Spotify, and Vodafone Group, as well as Facebook regarding the Libra cryptocurrency unit, the financial It is noteworthy that an innovative call for cooperation was made to the sector and regulatory bodies.
Regulation Steps for Cryptocurrency Trading Platforms
Governments worldwide are exercising caution towards cryptocurrency platforms and their activities and have varied views on the use of cryptocurrencies and ICOs. Many countries have unregulated trading platforms for cryptocurrencies and have warned individuals about the risks associated with trading in these assets. However, the European Union has taken significant steps towards regulation by including virtual currency exchange and custodian wallet providers in the scope of the 5AMLD. This means that cryptocurrency platforms and wallet service providers must comply with CDD obligations under 5AMLD and prepare policies to prevent money laundering and combat terrorist financing.
For the first time, the changes brought by 5AMLD have placed cryptocurrency platforms in a regulatory framework to fight crypto scams. While Union member countries caution citizens against the risks of trading on cryptocurrency platforms, they also impose obligations on these platforms. For instance, cryptocurrency trading platforms in Germany must obtain authorization from the German Federal Financial Supervisory Authority before they become operational. Similarly, Malta requires all technology platforms operating on distributed ledger technology to complete the Malta Digital Innovation Authority certification process.
Other countries, such as Singapore and Canada, have also implemented regulations on cryptocurrency platforms. In Singapore's draft Payment Services Law, brokerages operating in cryptocurrency trading must comply with AML/CFT obligations. In Canada, businesses using digital currency are required to register with the Canadian Financial Transactions and Reports Analysis Center ( FINTRAC), and new regulations require businesses working with cryptocurrencies to obtain and report larger amounts of identifying information from customers.
The United States has different definitions and regulations for crypto assets and transactions, varying from state to state and institution to institution. Crypto assets that can be considered securities are subject to SEC's regulations, while cryptocurrency trading that deals with other regulated commodities is subject to the Commodity Futures Trading Commission. Financial Crimes Enforcement Network ( FinCEN) businesses offering cryptocurrency trading services must register with FinCEN and carry out AML compliance processes.
Although many states in the US lack regulations for digital currencies and business models enabling cryptocurrency trading, New York State has published new regulations requiring licensing for platforms that engage in cryptocurrency trading activities. Compliance with AML regulations and preventing money laundering and terrorist financing crimes are the primary legal requirements for cryptocurrency platforms. It is anticipated that licensing or certification of these platforms by countries' authorities will be the most crucial regulatory issue. Since the most common usage of cryptocurrencies is encountered in cryptocurrency trading platforms, comprehensive regulations for these platforms are expected in the future.
Today, it is an obvious fact that crypto transaction monitoring and screening to detect suspicious customers who try to conduct activities with digital assets are crucial steps for companies. AML for crypto companies and investors aims to provide a safer arena. Sanction scanner is here to support these processes for your company. Contact us and request a demo today to try our solutions.