The Union government's decision to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, in the winter session of the parliament, has created a nationwide buzz about the digital currency market.
Crypto prices plummeted while stakeholders like Shivam Thakral, CEO of BuyUcoin, continued to remain optimistic but cautious about the introduction of the crypto bill.
A detailed explainer on how exactly cryptocurrency functions and on the stances of the Government of India and various stakeholders can be found here.
In this piece, however, we focus on the cryptocurrency regulations around the world. Where are crypto transactions legal and where are they illegal? Which countries have limited restrictions and regulations, and where is crypto trading unregulated?
The legal status of cryptocurrencies varies from country to country and there are different types of legalities.
The first and most rare type of legality is the governments allowing cryptocurrencies to be used as legal tender by the people.
In September earlier this year, El Salvador became the first country in the world to allow the use of bitcoin as a legal tender, pegged alongside the United States (US) dollar.
The International Monetary Fund, however, citing risks such as high price volatility, financial integrity, and consumer protection, urged the government of El Salvador to reconsider the decision and recommended "narrowing the scope of the bitcoin law and strengthening the regulation and supervision of the new payment ecosystem," The Hindu reported.
However, other than El Salvador, as of 25 November, no other nation has legalised any cryptocurrency, including bitcoin, for use as a legal tender.
In countries like the US and Canada, trading in virtual currencies is legally permitted.
In others like China and Russia, even trading practices are prohibited by the law.
Let's take a look at some of these countries one by one.
Countries That Have Banned Crypto
China’s central bank, the People’s Bank of China, fully banned cryptocurrency transactions in the country on 24 September, BBC reported.
"Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited," the bank stated on the PBoC website, as a senior official of the bank named Yin Youping warned Chinese people to "protect their pockets", according to Euronews.
The Chinese Communist Party's crackdown on cryptocurrency is largely perceived to be influenced by two factors – an obstruction to the plans of the party to float its own own e-currency and fears that not taking steps to regulate crypto would undermine the influence of the party on economic activity.
However, according to Daniel Lane, a senior stock analyst, "sweeping and heavy-handed reforms might scare off crypto users in the short term but it might just prompt the industry to go back underground."
Nepal and Bangladesh have also placed a total ban on crypto.
The central bank of Bangladesh does not even allow trading in cryptocurrencies as it violates the Money Laundering Prevention Act of trading in foreign currencies, according to Business Today.
Trading or any form of crypto transactions are banned in Nepal as well but the government is reportedly open to the idea of a state regulated digital currency in the country.
Countries That Have Strong Regulations on Crypto
Cryptocurrency is not outlawed per se in Russia, but it has been subjected to some strong regulations.
Russia passed the Digital Financial Assets and Digital Currencies Law to regulate cryptos in July 2020, which did not totally ban their use but disallowed it for exchange of goods and services.
The law puts forth taxation guidelines for crypto transactions and the Russian civil servants were banned from owning it.
During an interview, Daniil Egorov, head of the country's Federal Tax Service, stated that Russian officials are "watching this market closely and [they] understand that this payment system can significantly erode the taxation base," The Indian Express reported 23 November.
Russian President Vladimir Putin has repeatedly insisted that cryptocurrency promotes criminal activity, especially with respect to cross-border transactions.
Turkey is another country that is not at all pleased with the boom in the crypto market.
Its central bank banned the use of cryptocurrencies and crypto assets for purchases due to the likelihood of "irreparable" damage, Reuters reported.
The central bank ruled, similar to the Russian government, that digital currencies based on a system of distributed ledgers could not be used in any manner to transact in goods and services.
Therefore, as of now, Turkey's rules say that the only way to deal in crypto is through banks or the postal office, according to TRT World, a Turkish State-owned English language news channel.
Countries That Permit Crypto Trading
Then there are countries that may not have legalised the use of crypto as legal tender, but allow trading practices with minimal regulations.
For example, while the Internal Revenue Service (IRS) of the US does not recognise crypto as legal tender, it does define it as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value."
Since crypto can be legally used for retail transactions, like the exchange of goods and services, American taxpayers must report their crypto transactions in order to be taxed as per the guidelines issued by the IRS.
The European Court of Justice (ECJ), the apex court of the European Union, has ruled that the exchange of digital currencies can be considered as a supply of services.
Therefore, within the EU, transactions and trading in cryptocurrencies are legal, subject to individual state rules.
For instance, the Bundesbank in Germany has created a framework of crypto transactions in which citizens and legal entities can trade in crypto assets, but only if they do so within the rules set down by the German Federal Financial Supervisory Authority.
Finally, cryptocurrency is not regulated in the United Kingdom (UK).
According to the Bank of England, because they lack orthodox defining characteristics, cryptocurrencies are not considered as money per se and therefore don't really challenge the stability of the UK banking system, according to ComplyAdvantage , an anti-money laundering technology headquartered in London.
The UK's central bank has, however, issued guidelines warning about the dangers of crypto such as the lack of regulatory protection and the risks of speculative trading and price volatility.
(With inputs from BBC, The Guardian, Euronews, TRT World, The Indian Express, The Hindu, ComplyAdvantage, and Business Today.)
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