Tracking the development of crypto regulation across the countries is not an easy task. Each attempt seems to rely on specific, proprietary, definitions and scopes. Hence, comparisons and aggregations are difficult. The following is an overview of the most important.
The involvement of financial regulators in the crypto space has become more intense and increasingly pro-active/anticipatory from mid-2017 onwards as a direct consequence of the developments in the ICO space. Some nations have developed early on supportive frameworks or banned crypto in different ways. Several other countries representing important capital markets took more time to develop supportive frameworks. More recently, we have witnessed the adoption of crypto regulations in Africa and Central & South America.
Data from a wide variety of sources
The Law Library of (the US) Congress updated the report Regulation of Cryptocurrency Around the World in November 2021. The report focuses on the legal status of cryptocurrencies, and applicable tax and AML/CFT laws. It records 103 jurisdictions (including EU member states) that have provided a legal status to cryptocurrencies and largely applied such laws.
Thompson Reuters 2022’s Cryptocurrency regulation by country covers 70 jurisdictions, taking a broader scope than the US Congress Law Library report. Complyadvantage looks at the most active countries – a couple of dozens of jurisdictions – focusing on cryptocurrencies and crypto exchanges. The Atlantic Council tracks CBDCs initiatives in 105 countries. METI Advisory AG has been tracing developments in crypto regulation for 5 years, with a scope encompassing most of the dimension mentioned above and currently covers 120 jurisdictions.
Considering these sources, it emerges that until five years ago, the regulation of DLT-based finance was reactive and minimal. Few regulators reacted to entrepreneurial developments in their jurisdictions and focused on basic conduct violations and tax issues. They tackled fundamental definitional issues, legal in nature, raised by these innovations.
Pioneers in the adoption of crypto
Regulatory pronouncements mushroomed from mid-2017 onwards and were initially concerned with informing consumers and retail investors about the speculative and risky nature of ICO and more broadly cryptocurrency investments. On balance, the desire to promote ICOs in a risk-controlled environment prevailed. Several jurisdictions went further and issued guidance providing the market with regulatory certainty around the ICO process or embarked on developing stepwise a broader regulatory framework for crypto. These jurisdictions include:
- Switzerland (ICO guidance’s in 2017, 2018 and further work culminating in the entry into force in 2021 of a comprehensive DLT Framework)
- Liechtenstein (ICO Factsheet in 2017 and further work leading to the entry into force of a comprehensive blockchain Act in 2020)
- Germany (with legislation on crypto assets enacted in 2020)
- Singapore (which regulated DLT-based finance in 2017 and step-wise since then)
- The UK (which issued a crypto assets regulatory guidance in 2019, followed by continuous ongoing adaptations)
- Hong-Kong (which issued several crypto legislations from 2019 on)
- Japan (which enacted incremental crypto legislation from 2017 onward)
Other adoptions followed
By contrast to the early adopters mentioned above, the large capital markets of the USA and the EU were late adopters. The USA have long suffered from their intricated federal and state-based regulatory system and by a directionally unsettled economic policy stance. The issuance of the White House Executive Order on Ensuring Responsible Development of Digital Assets on 9 March 2022 was a watershed event, as it marked an official endorsement of cryptofinance by the US and set out its intention to become a global leader in the field.
The EU did not legislate DLT-based finance at the single market level until September 2020, leaving member countries to take the initiative, and limited its policy action to recommendations supportive of DLT, while addressing AML aspects of crypto through the EU-wide AML directive.
In September 2020, the EU issued a Digital Finance Package (DFP) that includes a proposal for an EU regulatory framework on crypto assets aimed at seizing related opportunities in a risk-controlled environment. The DFP also includes a proposal for a pilot regime for market infrastructures based on the DLT. The proposal complements existing EU-wide regulations that already apply to crypto assets, such as AML / Combating the Financing of Terrorism (CFT) provisions and the Markets in Financial Instruments Directive (MiFID), and it is based on the principle of "same activity, same risk, same rule".
The latest developments
The last 18-24 months have witnessed an exponential number of initiatives to provide a regulatory framework to crypto in regions including Africa, Central and South America, and the Middle East. Some of these countries took an earlier interest in crypto but have only more recently developed a regulatory framework. The desire of the BIS to see an increasing number of countries analysing and implementing CBDCs has helped this development, as well as the broader and well-recognised private sector use cases for crypto assets.
In Africa, Ghana, Namibia, Nigeria, Rwanda, South Africa, Zambia, Cameroon, and the members of the East Africa Community (Burundi, Kenya, South Sudan, Tanzania and Uganda) took recently an active interest in CBDCs. Also in the region of Central and South America a good number of countries are already involved into crypto finance. Brazil has been the most active and crypto supportive state in the region. However El Salvador wrote history in 2021 by passing the “bitcoin law” on 9 June, making bitcoin legal tender as of 7 September 2021.
In the Middle East, the blockchain strategy launched in 2018 by the UAE around the pillars of government efficiency, industry creation, and international leadership, and the early move by Abu Dhabi (guidance on ICO and crypto assets in October 2017) were followed by plans to introduce a regulatory framework for tokenised securities and cryptocurrencies by Dubai in 2021.
Rejecting stance through prohibitions
Some jurisdictions banned crypto at the outset. Examples include South Korea, Venezuela, Vietnam, India, and China. It should be noted that in most cases the ban was driven by the need to understand better the developments before taking a permissive action. As the number of nations that have issued supportive legislation around crypto has grown exponentially during the last five years, the number of countries that took a restrictive stance on crypto assets has been dwindling consequently, in relative and absolute terms. One of the most positive decisions, however, was the lifting of South Korea's 2017 ICO ban in May 2022.
Less positive, on the other hand, was when China stated in September 2017 that Bitcoin shall not serve as a fiat currency and all ICOs should be regarded as illegal financing activities. The regulations have explicitly provided that no crypto assets may be used as investment assets for trusts and investment funds, and no financial institutions or payment-processors may accept Bitcoin as payment. The government has focused heavily on CBDC in the course of 2020, releasing its digital yuan. The authorities have otherwise been highly supportive of DLT, announcing plans to make Beijing a blockchain innovation hub by 2022.
Further also India recognised the potential of DLT as early as 2013. However, the authorities emphasised the risks for consumers associated with DLT-based financial products and services and in May 2018 announced a ban for all financial firms operating in the country from dealing with or providing services to crypto asset operators. Later india communicated despite all its readiness to consult on a global framework for digital assets in June 2022.
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Conclusion
Without the generally proactive involvement of financial regulators, crypto finance would not have witnessed the development it has over the last five years, both in terms of diversity of products and services, and in terms of global adoption. Fundamentally driven by a technological innovation – blockchain/distributed ledgers – the refinement of existing, and the development of new, products and services, the growth of crypto financial markets and related intermediaries and service providers, are ineluctable.
Crypto finance regulation has been a major driver for this development, despite tensions in areas – such as DeFi - where the extension of traditional financial regulatory principles is not straightforward and perhaps possible without paradigmatic changes. An open and constructive dialogue between regulators and the industry is key to harvest the benefits of Distributed Ledgers Technologies.
