Throughout the history of money, dating back to the very first time currency was used, there have been certain individuals who felt that cheating the system was acceptable. Each time a new form of currency has been introduced, the same results were seen. This is why regulations have been needed, an effort to prevent currency from being used for illicit or illegal activity. When cryptocurrency first made headlines, it received a fair amount of negative attention due to its link to illegal activity. As digital currency gains a stronger position in the financial market, however, that is changing and more countries are actively implementing regulations for its use. Jason Simon, a FinTech and cryptocurrency expert, explores how different countries are establishing legal and regulatory frameworks for digital currencies and what this means for the larger, global financial ecosystem.
Eventually, there will be common terminology linking digital currencies into a single group. Currently, some countries reference cryptocurrencies, others reference digital currencies and others call them virtual commodities. However, the underlying regulations that build the structures supporting the assets are the same, and are all designed to provide a legitimate foundation for cryptocurrency as a financial solution. Asserts Simon, “Money has always been a subject that requires a great deal of attention. It wasn’t until the last century that a unified, global approach was created to address currency, despite the fact that it had been in use for thousands of years. Even now, the way in which money is valued is almost constantly changing.”
At the core of the need for regulations is a common thread found in all developed countries around the world. By law, money can only be created and distributed by the government, which has made it difficult for cryptocurrency to be accepted as a legitimate form of money.
However, since 2018, countries have begun to work on establishing regulations that provide better clarity on the status of cryptocurrency, with many beginning to accept it as a legitimate and viable alternative to fiat.
There are now more than 130 countries that have addressed cryptocurrency from a legislation standpoint and most of these have developed positive regulations to help support the nascent ecosystem. A few, however, mostly in the Middle East, have decided to place a complete ban on digital currencies, while others have implemented an “implicit ban.” Adds Simon, “When the US dollar was first introduced, it was not received well. It took almost 100 years before it was seen as a legitimate form of currency and, until that point, was viewed in the same way as what we call Monopoly money – all the physical characteristics of currency with no value. Cryptocurrency has seen a substantial increase in support by governments in a matter of just a few years, and there are now more countries recognizing digital currency as being on the same level as national currencies.”
One of the more contentious components of digital currency continues to be the subject of taxes. Tax authorities in all countries that have chosen to legitimize cryptocurrency are still not completely sure how to address tax obligations. Israel, for example, taxed it as an asset in 2018, but updated its position early last year to clarify different types of tax holdings. Switzerland, one of the first countries to embrace digital currency, initially taxed it as a foreign currency. The UK requires individuals to pay a capital gains tax on their holdings and the US has a patchwork of tax regulations that run from the federal down to the local government level.
There is a major effort to improve the regulation of digital currency as a currency, with the Financial Crimes Enforcement Network (FinCEN) taking a leading role in creating the rules. Simon states, “FinCEN does not have the legal authority to establish financial regulations; however, its position affords it the ability to make recommendations that, historically, have been accepted by all developed nations. It has been more involved over the past 24 months in developing cryptocurrency policies and, within the next couple of years, it is expected that digital currency will be on par with government-issued currency in many countries around the world.”