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Cryptocurrencies is The Future of Money?
How Do Cryptocurrencies Work?
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The demand for digital currencies globally has continued to rise ever since their introduction in 2008. However, with more than 1500 types of cryptocurrencies, capped at trillions of dollars being traded globally, and with the expansion of the underlying blockchain ledger system, there is an increasing awareness by regulators and governments across the globe about the need for regulation of the cryptocurrency market.
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Interestingly, regulators around the world are divided on how to control this industry. Since these digital currencies do not have the backing of any central government, each country has been forced to devise their own codes and legal frameworks for the industry.
Cryptocurrency Terminology in Different Jurisdictions
Today, countries have different takes on the legal status and regulation of cryptocurrencies. There are those that recognise the security it offers to transacting parties, and they support it, while others have banned them outright.
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This divided stand is expected since most governments are not quite sure what they are dealing with. The situation is not helped by the manic ICOs (initial coin offering) that have given rise to scams and earned cryptos a bad name. Therefore, governmental regulators are generally having a difficult time defining this new, decentralised mode of exchange.
One of the most intriguing aspects of these fast-growing digital currencies is how fluid the terms that are used to describe its different products.
Although the various forms of digital money are similar in the sense that they are based on a decentralised and encrypted transaction ledger system known as blockchain, the terminology that is used to describe them is vastly different from one jurisdiction to the next.
Interestingly, the name that a regulator chooses to use often offers an insight into their approach toward controlling the trade of these cryptos. Some common terms used are:
- Digital currency (Australia, Argentina and Thailand)
- Virtual commodity (Canada, China and Taiwan)
- Payment token (Switzerland)
- Cyber currency (Italy and Lebanon)
- Crypto-token (Germany)
- Electronic currency (Colombia, Lebanon)
- Virtual asset (Honduras, Mexico)
How Cryptocurrencies Are Regulated
The rapid growth of cryptocurrency trading has elicited a mixed response from global regulators and governments in a number of different ways. Each authority has examined various aspects of the crypto-world and have come up with modalities of regulating it.
There are also countries and jurisdictions without clear guidelines on the regulation of the crypto trade, where investors operate within a grey area of the law.
Let us review some of these regulations:
Trading and Mining:
This regulation is related to the way digital currencies are traded. There is a raging debate going on in many countries about how cryptocurrencies should be classified. Should they be classed as securities or commodities? How cryptocurrencies are classified in a particular country will determine their regulatory status.
Another focus area for regulators is crypto mining operations. The term refers to the process of validating transactions on the blockchain ledger and is the method through which new coins come into the market.
This process involves powerful, purpose-made computer systems that consume large amounts of electricity, a situation that has concerned many governments, most notably China, which has banned cryptocurrencies outright.
In Austria for example, cryptocurrencies are not viewed as legal tender, and they are classified as commodities and are therefore viewed as a business asset for income tax purposes.
ICO and Crowdfunding:
Initial coin offerings (ICOs) provide a way for companies to raise funds through the issuance of a new cyber token in exchange for a cryptocurrency, like Ether or Bitcoin. This process is controversial as it has been the breeding ground for numerous scams where people form fake companies and run off with investors’ money.
In many countries, ICOs are undertaken within a grey area, but an increasing number have decided to regulate them. ICOs are now regulated in Russia, and Japan plans to introduce its own rules to clamp down on money laundering while restricting unfair trades.
As cryptocurrencies gain traction, many professional investors and experienced traders are exploring ways to enter the space. However, they are often put off by the perception of cryptocurrency exchanges as being risky, unregulated and susceptible to hacks. Because of this, there is a push to bring regulated financial derivatives of cryptocurrencies into the market.
For example, CBOE (Chicago Board Options Exchange) and the CME (Chicago Mercantile Exchange) offer crypto futures in the U.S. There are also leveraged Contracts for Difference (CFDs) that offer an avenue into this lucrative arena.
One of the many questions that arise from allowing investments in and the use of cryptocurrencies is the issue of taxation. In this regard, the challenge appears to be how to categorise cryptocurrencies and the specific activities involving them, for purposes of taxation.
This matters primarily whether gains made from mining or selling cryptocurrencies are categorised as income or capital gains, invariably determine the applicable tax bracket. The surveyed countries have categorised cryptocurrencies differently for tax purposes, as illustrated by the following examples:
- Taxed as an asset (Israel, Bulgaria)
- Taxed as foreign currency (Switzerland)
- Subject to income tax (United Kingdom, Spain, Denmark and Argentina)
- Subject to corporate tax (United Kingdom)
- Individuals pay capital gains tax (the United States and the United Kingdom)
The Final Word
One thing that is for sure, cryptocurrencies are here to stay. However, the success of the industry and its largely pseudonymous transactions have many regulators worried and, as a result, digital currencies are restricted or banned in some countries.
However, people living in these countries may still be able to legally profit from the cryptocurrency trade through buying and selling of derivatives, such as crypto CFDs.
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Cryptocurrency Regulation FAQ
- Who regulates cryptocurrency?
Every country has its own regulatory agency that is capable of making regulations that cover the use, sale, or trading of cryptocurrency. Some countries have taken a very relaxed approach and have very few regulations, while others are taking a more active role in regulating this new financial asset class. In South Africa there have been no new regulations created yet that target any of the emerging class of cryptocurrencies. This contrasts with the U.S., where cryptocurrencies are facing increasing regulation. Europe is a mixed bag, with some countries heavily regulating, and others mostly ignoring cryptocurrencies.
- Why are cryptocurrencies regulated?
One of the overriding reasons given for the regulation of cryptocurrencies is to provide users with safety. Without regulation, the argument goes, there is nothing barring the misuse of this new asset class in fraud or other misuse of financial funds. Another very probable reason for regulating cryptocurrencies is for governments to make them more trackable, and to enable taxation of gains made from the sale of cryptocurrencies. While many countries have yet to regulate cryptocurrencies, that is likely to change as they grow in popularity.
- Is cryptocurrency regulated in the U.K.?
The United Kingdom is taking a very measured approach to cryptocurrency regulation. So far there are no laws directed at cryptocurrencies, they are not considered as legal tender currency. In addition, cryptocurrency exchanges are required to undergo a registration procedure. In regards to tax treatment so far cryptocurrency profits and losses are subject to capital gains taxes, however it has been made clear that this could change as the unique identity of cryptocurrencies means that they can’t be compared with conventional assets or payment means.