Cryptocurrencies are not legally recognized as currency or legal tender in many countries around the world. However, some governments do recognize them and are trying to regulate them for the sake of consumer protection.
While there are a few ways to ensure that cryptocurrencies are safe, some of the major concerns have to do with regulating them as securities and the use of anonymity in the digital wallets that host them. This is mainly because of the high risks associated with cryptocurrencies, such as identity theft and fraud.
The United States has a very centralized financial system, which means that all companies dealing in cryptocurrencies must comply with regulations set by the Federal Reserve, the Financial Crimes Enforcement Network (FinCEN), and other government agencies. This requires registering with FinCEN and implementing an anti-money laundering (AML) and counter-financing of terrorism (CFT) program, as well as maintaining records that help law enforcement and the government identify suspicious activities.
Most cryptocurrency exchanges are also subject to the regulatory scope of the Bank Secrecy Act, which means they must register with FinCEN and verify user identities. In addition, some governments have banned the use of centralized exchanges altogether.
In the United Kingdom, a cryptocurrency exchange is called a “money service business” and is subject to taxation. This means that any income or capital gain earned by the exchange must be reported to the tax authorities.
The UK also has a BitLicense scheme that allows crypto companies to become Special Purpose Depository Institutions, or SIDIs. These SIDIs can then lend out digital assets, provide crypto custody services, and offer other types of banking services.
Australia’s government has a cryptocurrency-friendly stance, which means that cryptocurrencies are seen as property for income tax purposes and can be used to buy goods and services online or at stores that accept them. The Australian Securities and Investments Commission has also rolled out guidance on cryptocurrencies in order to protect consumers.
A few other countries, including Canada and the United Kingdom, have taken a more lenient approach when it comes to regulating cryptocurrencies. They are more willing to work with the industry and accept a broader range of cryptocurrencies than others.
Some jurisdictions have regulated Bitcoin and related activities under provincial securities laws, while other countries have done so on a national level. For instance, the Netherlands and Germany have a soft-regulatory framework that encourages crypto use and provides a legal environment for innovation.
China, for example, has banned the use of cryptocurrencies. It also has a strict anti-money laundering and counter-financing of piracy policy, which makes it difficult for foreigners to conduct transactions in the country.
The European Union is one of the most complicated zones when it comes to regulating cryptocurrency because of its 27 member countries and the different regulatory approaches they take. Most countries have a very ambiguous position on the legality of cryptocurrencies, but they are trying to create a common regulatory framework to prevent regulatory arbitrage.