Cryptocurrencies are digital assets designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Terms such as digital currency, and virtual currency are used in place of crypto currency.
As the numbers of persons involved in cryptocurrencies increase, the need for regulation increases. This is because it is prone to financial crimes. Connected to cryptocurrency are Blockchain Technology, Initial Coin Offering (ICO), and Distributed Ledger Technology (DLT).
While the laws of some countries are silent on cryptocurrency transactions, some have established legal and regulatory framework to monitor the crypto currency transactions or totally ban its use.
This article seeks to examine laws legalizing and regulating cryptocurrency transactions in different countries.
Canada: Cryptocurrencies are not Legal tender
Although cryptocurrencies are not considered legal tender in Canada, its use is permitted for the exchange of goods and services. The Currency Act defines “legal tender” as “bank notes issued by the Bank of Canada under the Bank of Canada Act” and “coins issued under the Royal Canadian Mint Act.”
For the purpose of taxation, digital currencies are categorised as commodity and are subject to the Income Tax Act (ITA). Whenever it is used for the purchase of goods and services, it is taxed under the seller’s income tax
China: Cryptocurrencies are virtual commodity
The government of China defines cryptocurrencies as virtual commodity but greatly discourages the use.
No law has been enacted to regulate the use of cryptocurrency and it is not recognized as legal tender or a tool for retail payments, and the Chinese banking system is not accepting any existing cryptocurrencies or providing relevant services.
In 2017, China completely banned Initial Coin Offerings (ICO) and the ICO Rules made stated that cryptocurrencies are not issued by the country’s monetary authority and therefore are not mandatorily-accepted legal tender. The rules also prohibit the primary business of cryptocurrency trading platforms from converting legal tender into cryptocurrencies, or vice versa; purchasing or selling cryptocurrencies, setting prices for cryptocurrencies, or providing other related agent services. Government authorities may shut down the websites and mobile applications of platforms that fail to comply with the directive
Switzerland: Cryptocurrencies are taxable
The operation of virtual currency trading platforms in Switzerlgand generally comes under the scope of the Anti-Money Laundering Act.
The Anti-Money Laundering Act (AMLA) generally applies to “financial intermediaries,” who are defined as natural and legal persons who accept or hold deposit assets for third parties or who assist in the investment or transfer of such assets on a professional basis. By the provisions of Articles 3 and 4 of AMLA, crypto currency trading platforms have the duty of verifying the identity of the contracting party and establishing the identity of the beneficial owner.
Cryptocurrencies are taxed as either wealth tax or income tax.
Japan: Cryptocurrencies are virtual currencies
In Japan, cryptocurrency transactions are regulated by The Payment Services Act.
By Art. 2(5) of The Payment Services Act “virtual currency” is defined as
- Property value that can be used as payment for the purchase or rental of goods or provision of services by unspecified persons, that can be purchased from or sold to unspecified persons, and that is transferable via an electronic data processing system; or
- Property value that can be mutually exchangeable for the above property value with unspecified persons and is transferable via an electronic data processing system.
Under the Payment Services Act, only business operators registered with a competent local Finance Bureau are allowed to operate cryptocurrency exchange business.
Cryptocurrency exchange businesses must keep accounting records of cryptocurrency transactions and submit annual reports on business to the Financial Services Agency (FSA).
Art. 2 of the amended Act on Prevention of Transfer of Criminal Proceeds added cryptocurrency exchange businesses to the list of entities subject to money laundering regulations. Cryptocurrency businesses are mandated to identify their customers, keep records of their transactions and report suspicious transactions to authorities.
Under the Income Tax Act, Profits from the sale of cryptocurrency is taxed as a miscellaneous profit which is to other taxable income.
Gibraltar: Maintain high standards
The government of Gibraltar introduced the Financial Services (Distributed Ledger Technology Providers) Regulations 2017 under the Financial Services (Investment and Fiduciary Services) Act. These regulations entered into force on January 1, 2018.
The regulatory framework covers firms that operate in or from Gibraltar and provide DLT services.
The regulation provides that;
A business must provide adequate information of the risk involved to customers
A company must take all reasonable precaution to protect customers’ asset in their custody from unseen threats and contingencies.
A DLT Provider must have effective corporate governance arrangements.
A DLT Provider must ensure that all of its systems and security access protocols are maintained to appropriate high standards.
A DLT firm must apply adequate anti-money laundering and counter terrorist financing protocols.
Mexico: Crypto is a virtual asset
In March 2018, the Mexican government enacted Ley para Regular las Instituciones de Tecnología Financiera [Law to Regulate Financial Technology Companies] which includes a chapter on operations with “virtual assets”. Art. 30 of the law defines Virtual Asset as representations of value electronically registered and utilized by the public as a means of payment for all types of legal transactions, which may only be transferred electronically.
Mexico’s central bank, Banco de México, is granted broad powers under the Law to regulate virtual assets.
By the provisions of Article 17(XVI) of Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita [Federal Law for the Prevention and Identification of Transactions with Resources of Illicit Origin], providing services involving virtual assets is an activity classified as vulnerable to money laundering. Thus, providers of such services have the duties to;
- Keep records of transactions.
- Identify their clients and verify their identity