Cryptocurrency Regulation in the States and Abroad

By the end of 2023, the global market capitalization for cryptocurrencies was $1.7 trillion. Bitcoin remains the most prominent cryptocurrency, with mainstream markets offering exchange-traded funds and futures that track its price movements.

The popularity of cryptocurrency trading has given rise to a variety of regulations. Countries try to establish legal frameworks and policies that manage the trading of digital currencies, protect investors, and discourage fraud, money laundering, and other illegal activities. Effective regulation can help make crypto markets more stable and draw mainstream investors.

Regulators face a variety of challenges. Cryptocurrencies are decentralized by nature, so traditional financial market rules are difficult to apply in many cases. Countries have very different approaches to crypto regulation, with the U.S. taking a distinct approach compared to countries in Asia, the Middle East, and Europe.

U.S. Crypto Regulation

Regulators in the U.S. initially struggled to classify digital currencies like Bitcoin, but as they grew in popularity and value, the need for guidelines became apparent. The U.S. took a decentralized approach to regulation, with different agencies focusing on different aspects of cryptocurrencies.

There are four main regulatory authorities focused on cryptocurrency.

• The Securities and Exchange Commission (SEC) oversees crypto trading and ensures currencies that are considered securities follow the same rules as other tradable assets. The agency has taken action against some initial coin offerings (ICOs) that didn't properly register before they began trading.
• The Commodity Futures Trading Commission (CFTC) regulates futures, commodities, and other derivatives. The CFTC's authority extends to derivatives based on cryptocurrencies. In addition to enforcement, the agency provides guidelines for traders to avoid problems in crypto futures markets.
• The Financial Crimes Enforcement Network (FinCEN) enforces anti-money laundering (AML) laws. This agency requires crypto exchanges to comply with strict reporting standards. They also have to verify the identity of all traders and investors who use the markets.

Recently, the government focused on tax reporting, using the Infrastructure Investment and Jobs Act to require brokers to document transactions for tax purposes.

The regulations have helped crypto spread beyond the blockchain, with derivatives and exchange-traded funds offering mainstream investors the opportunity to trade using traditional securities. At the same time, some crypto developers avoid the U.S. due to strict AML and securities rules.

Global Crypto Regulation

Cryptocurrency regulations differ around the globe. Some countries, such as Japan and the United Arab Emirates, create supportive environments to attract cryptocurrency investors, companies, and blockchain developers. Meanwhile, the EU seeks to standardize rules across all member states. Other places, such as China, take the opposite approach by limiting or outlawing crypto transactions.

The different approaches can cause price volatility in crypto markets, which respond positively to supportive regulations and negatively to limitations like the recent ban in China.

Here is a closer look at regulations in Europe and Asia.

Europe

The European Union focuses its regulatory offers on the Markets in Crypto-Assets (MiCA) framework. MiCA's goal is to have the same rules for all member states. Unlike the U.S., the EU unifies its regulations in one place. MiCA gives EU states guidelines for new coins, trading, and holding cryptocurrencies.

EU countries adopt MiCA, but some have additional regulations. For example, Germany's Federal Financial Supervisory Authority (BaFin) has additional regulations for the registration of crypto businesses and guidelines for cybersecurity.

Asia

East Asian countries take differing approaches to cryptocurrency. Japan has established and altered its regulations as crypto has evolved. Its Payment Services Act and Financial Instruments and Exchange Act govern crypto as a form of payment and a tradable asset.

China took a different approach, banning crypto transactions. However, some Chinese investors still trade the currencies through underground channels.

Finally, South Korea, one of the world's largest cryptocurrency markets, focuses on enforcing strict identity verifications for traders and reporting for exchanges.

Middle East

On the other side of Asia, Middle Eastern countries like Saudi Arabia and the United Arab Emirates are creating clear and concise regulations meant to attract crypto investors and businesses.

The UAE offers cryptocurrencies through the regulated free-trade zones known as the Dubai Multi Commodities Centre (DMCC) and the Abu Dhabi Global Market (ADGM).

Saudi Arabia has joined its neighbor with initiatives meant to promote regulated cross-border transactions in the region. These efforts are aimed at turning the Middle East into a cryptocurrency hub.

Comparing U.S. and Global Crypto Legislation

The U.S. has a multi-agency approach that is different from the centralized approaches of the EU and Japan.

Here is a closer look at the pros and cons of these different approaches and how better cooperation may be possible in the future.

Advantages and Disadvantages

The U.S. cryptocurrency regulation approach offers investor protection and sets the stage for mainstream securities based on crypto assets. It also has a strong emphasis on preventing fraud and money laundering, which have been problematic for crypto markets.

On the other hand, the lack of a centralized framework and some strict legal requirements can make compliance complicated and force developers to take new technology and ideas elsewhere.

Globally, frameworks in the EU and Japan create a more predictable environment for crypto businesses. This can encourage development and attract entrepreneurs and investors.

On the other hand, more favorable crypto regulations can attract bad actors and lead to problems like fraud and money laundering.

Finally, restrictive regulations, like those adopted by China, stop legitimate crypto activities altogether. This approach eliminates problems on the surface but often forces traders underground to markets that do not have the protections offered by regulated markets.

Areas of Conflict and Cooperation

The primary conflict in cryptocurrency regulation is the different approaches between the U.S. and other countries. For instance, the U.S. treats certain cryptocurrencies as securities regulated by the SEC. Other countries do not make this distinction, leading to complications in cross-border cooperation.

Organizations like Global Digital Finance try to provide a forum to help countries come up with regulatory frameworks that allow for international cooperation and harmonize regulations so that they are enforceable across borders.

Future Trends in Crypto Regulation

Emerging trends in cryptocurrency regulation include the rise of central bank digital currencies (CBDCs) and the growth of decentralized finance (DeFi).

CBDCs are being explored by several countries, including the U.S., as a way to modernize payment systems and, eventually, provide greater regulation for digital currencies. They can also help speed the mainstream adoption of digital currencies by consumers, businesses, and the finance sector.

Meanwhile, the DeFi movement offers decentralized financial services. Regulators need to develop frameworks that address these innovations to protect consumers and avoid problems related to fraud or money laundering. As this technology evolves, regulators need to keep pace, especially with services that do not fit within the conventional centralized model.

It's important to keep up with current regulations and proposed changes, especially if you are involved in cryptocurrency markets. Even regulatory changes in other countries can impact markets in the U.S., causing price fluctuations and leading to changes in U.S. laws.