The introduction of Bitcoin was motivated by the principle of decentralisation and the cryptocurrency emerged as an alternative financial system that cannot be controlled by corporations or governments. But this hasn’t stopped governments from trying.
As a private alternative to national currencies, governments have been figuring out ways in which to regulate bitcoin and cryptocurrencies. In this guide, we summarise the regulatory landscape across the world.
Why Do Governments Want to Regulate Bitcoin?
Governments have grappled with how to treat bitcoin and cryptocurrencies in terms of tax. Given bitcoin can be used without tying cryptocurrency addresses to identities, there is a concern over tax evasion. Countries do not want to lose out on tax revenue, especially given the phenomenal gains some cryptocurrencies have made in recent years.
Another risk is that if cryptocurrencies become popular enough, they will reduce the effectiveness of the policies of central banks. Being aware of this future possibility, central banks have issued warnings in the past to discourage people from investing and buying cryptocurrencies. Losing control of the economy and the seigniorage from the creation of money could erode the trust of the people in government and their policies.
Financial regulators have a mandate to ensure markets are fair and that consumers are not exploited. Because of the numerous scams associated with cryptocurrency and the volatile nature of cryptocurrency prices, governments have often stepped in to protect consumers by issuing warning or with outright bans. There are also concerns regarding law and order; given bitcoin’s pseudonymous nature and as a payment system that is permissionless, governments are worried that bitcoin and cryptocurrencies enable crime.
While there are risks from cryptocurrencies, governments have also recognised their innovation potential. Most countries have introduced regulations to protect consumers but have not been so restrictive that it stifles innovation. Just like the Internet revolutionised the global economy, the technology underpinning Bitcoin promises to be transformative.
How Do Countries Regulate Bitcoin?
Some countries have welcomed the cryptocurrency revolution with open arms, such as Japan, where bitcoin is a form of legal tender. Other countries have banned the use of cryptocurrencies outright, e.g., Ecuador.
Regulatory regimes across different countries fall into one of three categories:
- taxation laws,
- anti-money laundering and terrorism financing laws, and
- a combination of both.
Most countries that have applied a regulatory regime to bitcoin have done so through the taxation of cryptocurrency. A smaller number of countries have made bitcoin and cryptocurrency subject to anti-money laundering and counter-terrorism laws (for example, Estonia, Hong Kong, Singapore and South Korea). Other countries have implemented both taxation laws and anti-money laundering laws regarding cryptocurrencies (such as Australia, Canada, Japan, and Switzerland).
Bitcoin is legal to use in most countries in Europe and the English-speaking world. Most European countries are united in a cautious optimist approach to cryptocurrency. Several of these countries give tax-free status to cryptocurrency traders, such as Portugal. The United Kingdom, Germany and Malta are also progressive in terms of their regulation.
A handful of territories also permit payments with cryptocurrencies. For example, the Swiss Cantons of Zug and a municipality within Ticino. Another example is the Isle of Man, which permits the use of cryptocurrencies as a payment alongside the national currency.
In 2015, the European Court of Justice ruled that buying and selling bitcoin is exempt from Value Added Tax (VAT). Some of the most tax-friendly countries in Europe are;
- Germany, where taxes on cryptocurrency gains is exempt for amounts below €600 or if you have traded bitcoins after holding them for one year.
- Belarus also has a similar treatment, where the trading, mining, and capital gains of cryptocurrencies is tax free until January 1, 2023.
- Slovenia is another cryptocurrency friendly country where capital gains on cryptos are not taxed (however any income received with bitcoin or business activity with cryptocurrency is taxed).
Cryptocurrency is mostly nurtured in Asia with progressive stances in Japan, South Korea, Malaysia and Singapore. However, a few Asian countries have banned bitcoin (shown below), restricted financial institutions from using it (e.g., China and Cambodia) or banned crypto as a payment tool (e.g., Vietnam and Indonesia).
The United States is somewhat behind in terms of regulation of cryptocurrency as compared to many countries in Europe and Asia; citizens cannot trade derivatives, ICOs are heavily regulated and the tax burden is relatively higher.
Bitcoin is taxed as property in the US and capital gains tax applies to all crypto-to-crypto transactions. Cryptocurrency businesses are required to register with FinCEN and enforce an anti-money laundering program. States are also free to enforce their own legislation, so some rules relating to cryptocurrency and blockchain technology vary depending on where you are in the US.
A big issue for some cryptocurrencies is the Securities Law in the United States. Any project that has conducted an ICO, has a founder’s reward or is promising returns on investment is most likely to be considered a security and must comply with the SEC’s requirements.
While bitcoin is permitted in most countries around the world, there are some nations that have impeded its use. The map below shows the countries where there is a partial ban or full ban on the use of cryptocurrencies:
Source: Law Library of Congress
The nature of these restrictions varies from country to country.
Some have outlawed bitcoin completely, such as Algeria, Bolivia and Nepal. Other countries have banned their citizens from using cryptocurrencies within their borders but have permitted it overseas (e.g., Bahrain and Qatar) while some jurisdictions have only restricted financial institutions from transacting in cryptocurrency (e.g., Bangladesh, Iran, Lithuania, and China).