Blockchain and cryptocurrency regulations: a comparative study

Blockchain is a scheme of recording data in a way that makes it hard or impossible to change, hack, or cheat the system. A blockchain is fundamentally a digital record of transactions replicated and distributed across the whole network of computer systems on the blockchain. Each block in the chain includes various transactions. Every time a novel transaction happens on the blockchain, a record of that transaction is added to every participant’s record. The decentralized database managed by multiple members is recognized as Distributed Ledger Technology (DLT). Blockchain is a kind of DLT where the transactions are documented with an absolute cryptographic signature named a hash. The principal point of using a blockchain is to let individuals, in specific persons who do not believe one another, share essential data in a safe, tamperproof way.

The blockchain contains three (3) significant concepts: blocks, nodes, and miners. Every chain contains multiple blocks, and each block has three (3) elements:

Miners generate new blocks on the chain through a process named mining. Each block has its nonce and hash in a blockchain and references the last block’s hash in the chain, so mining a block is not easy, especially on large chains. Miners use special software to resolve the intricate math problem of finding a nonce that creates a recognized hash. As the nonce is 32 bits and the hash is 256, there are unevenly four billion probable nonce-hash groupings that shall be mined before the right one is found. Once that happens, miners are said to have found the “golden nonce,” and their block is added to the chain. 

One of the most significant notions in blockchain systems is decentralization. No one laptop or organization can own the chain. As an alternative, it is a distributed ledger via the nodes linked to the chain. Nodes can be any electronic device that preserves copies of the blockchain and retains the network’s functioning. Each node has its copy of the blockchain, and the network shall algorithmically accept any newly mined block for the chain to be renovated, trusted, and confirmed.

Meanwhile, blockchains are transparent; every action in the record can be easily checked and viewed. Each participant is given a single alphanumeric identification number that shows their transactions. Merging public information with checks and balances helps the blockchain maintain integrity and creates trust among users. Fundamentally, blockchains can be thought of as the scalability of faith via technology.

Blockchain’s most recognized use is in cryptocurrencies. Cryptocurrencies are digital currencies, for example, Ethereum, Bitcoin, or Litecoin, that can be used to purchase goods and services. As a digital form of cash, crypto can be used to buy everything from your lunch to your next home. For additional money, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are constantly verified and secured. So far, there are roughly 6,700 cryptocurrencies in the world that have a total market cap of $1.6 trillion, with Bitcoin holding a popular of value. These tokens have become very popular over the last years, with one Bitcoin totaling $60,000. Here are some of the principal’s grounds why everyone is suddenly taking notice of cryptocurrencies:

Nevertheless, there are many authentic arguments against blockchain-based digital currencies. First, crypto is not a very controlled market. Many governments were fast to jump into crypto, but few have a faithful set of codified laws regarding it. Additionally, crypto is highly unstable due to those speculators mentioned above. In 2016, Bitcoin was valued at approximately $450 per token. It then jumped to about $16,000 a token in 2018, dipped to around $3,100, and then augmented to more than $60,000. The absence of stability has caused some people to get very rich, while most have still lost thousands. Whether or not digital currencies are upcoming remains to be seen. Because of that, in this article, we will know the Blockchain and cryptocurrency regulations of different countries such as India (1), Japan (2), United Arab Emirates (3), United Kingdom (4), and United States of America (5):

 

1. Blockchain and cryptocurrency regulations in India

Cryptocurrencies are not legal in India. While exchanges are lawful in India due to the absence of a solid bureaucratic framework, a protracted licensing process makes it very arduous for some cryptocurrency facilities and innovative technologies to work. While there is currently an absence of clearness over the tax position of cryptocurrencies, according to the president of the Central Board of Direct Taxation anyone making income from Bitcoin will have to pay taxes on them. Other Income Tax Department sources have recommended that cryptocurrency profits should be taxed as capital gains.

Cryptocurrency exchange rules in India have grown increasingly severe. While theoretically legal, in 2018, the Reserve Bank of India (RBI) disqualified banks and any regulated financial institutions from “handling with or settling virtual currencies.” On January 14, 2018, RBI recognized that it had not issued any licenses or authorizations to any entity or company to work a scheme or deal but had issued warnings about dealing in virtual currencies and presented a prerequisite for firms to unwind or exit positions. It similarly established that new prohibitive regulations were deliberate. The sweeping rule forbade the trade of cryptocurrencies on domestic exchanges and gave existing exchanges until July 6, 2018, to wind down. In 2020, a landmark Supreme Court verdict ruled the prohibition unconstitutional, reversing the ban and allowing exchanges to reopen. 

Even though there were signs in 2017 and 2018 that India saw fewer prohibitive cryptocurrency rules, recent information indicates a change. In July 2019, an inter-ministerial board suggested a blanket prohibition on cryptocurrencies excluding a proposed official digital currency. The leaked, assumed draft bill offered jail time for persons who “sell, deal in, mine, generate, transfer, hold, issue, dispose of, or use cryptocurrency in India.” While that draft bill did not make it to the parliament floor, India’s dislike of cryptocurrency remains. In late 2020, leaks recommended that the government was drafting a new bill to prohibit cryptocurrency trading. Whereas it has come down hard on cryptocurrency from a supervisory perspective, India’s administration has laid down that it is open to exploring the potential of blockchain technology to enhance its financial services industry.

Recently, India suggests a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets. The bill, one of the world’s severest policies against cryptocurrencies, would criminalize mining, possession, trading issuance, and transferring crypto-assets, said the official.

The measure aligns with a January government plan to prohibit private virtual currencies such as bitcoin during the structure of a framework for an official digital currency. The government commentaries had elevated investors’ hopes that the authorities might go easier on the profitable market. In its place, the bill would give holders of cryptocurrencies up to six (6) months to dissolve, after which penalties will be levied, said the official, who asked not to be named as the bill’s contents are not public. Officials are self-assured of getting the bill ratified into law as Prime Minister Narendra Modi’s government holds a contented majority in parliament. If the prohibition becomes law, India would be the first major economy to make holding cryptocurrency unlawful. Even China, which has banned mining and trading, does not penalize possession.

With the proper checks and balances, united with the fast-growing Indian consumer Internet economy, India can become a spotlight to blockchain innovations that could drive India faster towards becoming a $10 trillion economy. A detailed set of recommendations and a whitepaper were newly consented to the government by IndiaTech.org, an Internet start-up industry association. The elementary step to address most of the concerns is for India to stop considering cryptocurrency as a currency and accord its identification as a digital asset, thereby taking away the fear and doubt around it being a challenging currency. Announcing a system of recording Indian cryptocurrency exchanges with FDI limits akin to banks and conceding them recognition by setting up checks and balances, mandatory KYC of all cryptocurrency holders, informing accounting standards for right accounting and disclosure through bodies like the Chartered Accountants/Cost Accountants, etc. are some of the recommendations made.

The recommendations also prescribe solutions around anti-money laundering, taxation, traceability, disclosure, imports linked with Harmonized System codes. Subsequently, India will save billions of dollars of revenues that may be payable to foreign exchanges. With the proper checks and balances, combined with the fast-growing Indian consumer Internet economy, India can also become home to blockchain innovations that could drive India faster towards a $10 trillion economy, similar to the I.T. and ITES boom that led us this far. This will permit Indians to participate in promising new wealth creation and investment prospects.

Cryptocurrency rules backed by an allowing framework around blockchain hold vast potential for India. Though, for India to seize this opportunity, the government and regulators will adopt a part statesman and part policeman role. This will safeguard openness to adopt new technologies, innovations and promote wealth creation backed by policies that would reduce the early mover advantage and continue to travel with other cryptocurrency-friendly geographies.

 

2. Blockchain and cryptocurrency regulations in Japan

Japan crypto-asset regulations allow users to buy, sell and own crypto assets. Purchasable from exchanges, ‘Bitcoin ATMs,’ and one another. Together with having a long, rich history of technological innovation, Japan is a global financial hub. Thus, the country’s laws and business environment are incredibly conducive to the blockchain system, with numerous DLT-native businesses working in Japan and Coinfirm. On a per-capita basis, the nation has one of the maximum acceptance rates of the technology. Japan is currently testing the use of a Central Bank Digital Currency (CBDC) of the Yen (JPY).

Moreover, Japan has been a participant of the Financial Action Task Force (FATF), the global financial regulatory watchdog, since 1990, and per se, strictly aligns it is compliance laws adjacent to anti-money laundering (AML) and combatting the financing of terrorism (CFT) to the FATF’s recommendations.

Crypto assets taxation can be categorized as ‘miscellaneous income,’ which means that other income streams cannot offset gains or losses from the sale of crypto assets. Japanese crypto-asset regulations governing taxes stipulate that the investments are subject to inheritance tax upon the estate of a deceased person.

Japanese crypto-asset legislation on anti-money laundering (AML) conditions are in the Act on Prevention of Transfer of Criminal Proceeds (APTCP), which are imposed by Japan’s financial intelligence unit (FIU), the Japan Financial Intelligence Center (JAFIC).

Under the APTCP, VASPs conducting exchange services must preserve rigorous KYC (Know-Your-Customer) checks and histories of suspicious transactions. These include:

to more effectively cover the regulation of crypto assets in Japan and their safe incorporation into the more comprehensive financial scheme. These adjustments have been imposed since May 2020. The Japan crypto-asset guideline the PSA has reformed the term ‘Virtual Currency’ about cryptocurrencies to ‘Crypto Asset,’ mirroring the use of the term crypto assets at the G-20. This is nowadays a legal definition. This adjustment, still, is not compulsory for implementation by exchanges and the media.

After April 2020, exchanges functioning in Japan must segregate customers’ funds separately from their own. Exchanges thus need to find a 3rd-party entity to custody users’ cash and crypto assets (a trust or the same legal entity). According to the Payment Services Act amendments, “reliable methods” must be used to manage customers’ funds (for example, cold wallets). Crypto-asset exchanges must hold “the same kind and the same quantities of crypto-assets” as the customers’ crypto assets if they are stored in hot wallets. This will ensure exchanges reimburse customers in the case of stolen crypto assets.

On March 15, the JFSA determinants that it would deal with “problematic crypto-asset” that are simply used for money laundering  due to transaction records not being auditable. But, the amendments to the PSA do not explicitly control privacy coins or anonymous cryptocurrencies like monero/zcash. Japan executed inspections on VASPs offering to trade of those kinds of protocols/coins in May 2019.

The Financial Instruments and Exchange Act (FIEA) is Japan’s central guideline on financial securities. It furthermore covers broker-dealers, tender offers, disclosure obligations of publicly traded companies, and investment trusts. The reviewed FIEA states that initial coin offerings (ICOs) and security token offerings (STOs) are restricted as electronically recorded transferable rights (ERTRs) and controlled by the FIEA. Japan’s ERTRs aid close the question of certain types of crypto-asset coins (for example, security tokens) as financial securities – that are dispensed and offered to investors with the prospects of profits. Also, ERTRs are omitted from using the legal term ‘crypto assets,’ as per the Payment Services Act.

Tokens dispensed under STOs can institute ERTRs if the three (3) basics below are reached:

– Investors contribute cash or other resources to a business,

– Funds/assets contributed by investors are capitalized in the company, and

– Investors have the right to receive dividends of profits or assets generated from investments in the industry.

 

3. Blockchain and cryptocurrency regulations in United Arab Emirates

The Securities and Commodities Authority (SCA) in the UAE has issued “The Authority’s Chairman of the Board of Directors Decision Number 21/R.M of 2020 Concerning the Regulation of Crypto Assets”. In 2019, the SCA referred to the business and the public on the wording of the draft text. The Decision was issued on November 1,2020, will become law thirty (30) days after publication in the UAE’s Official Gazette.

The Decision is a complete text and is written using technically neutral terms. The SCA’s Decision describes the SCA’s licensing rule for anyone who wishes to offer crypto-assets within the UAE. This comprises ICOs, exchanges, marketplaces, crowdfunding platforms, custodian services, and related financial services based upon or leveraging crypto assets.

The SCA’s Decision founded its definition of crypto assets generally as a record within an electronic network or a distribution network that performances as a medium of storage, exchange, unit of account representation of ownership, usufruct that can be moved electronically from one person to another with the maneuver of a computer program or an algorithm leading its use. It relates the regulatory regime that also applies to commodity tokens and security tokens.

Providers who wish to offer crypto-assets (or any related services) shall be incorporated onshore within the UAE or one of the UAE’s economic free zones. Licensees may ‘passport’ the recording of crypto assets on one or more cryptocurrency exchanges. On the other hand, providers who wish to offer crypto-assets within the UAE shall be licensed by the SCA. As a part of that procedure, applicants shall demonstrate strict compliance with UAE’s anti-money laundering and counter-terrorism financing laws, cybersecurity compliance standards, and data protection regulations. To proceed with regulations you must have an expert beside you, who would be well-laid expertise on financial market law and capital market regulations. For such a purpose, you can approach the capital market practice department at Fotis International Law firm.

The SCA’s Decision shaped two classes of people to whom crypto assets may be offered to:

Licensees shall file documents with the SCA before offering crypto assets to Qualified Investors. In all other cases, licensees shall request prior approval from the SCA before submitting crypto assets to non-Qualified Investors.

For the determination of conducting anti-money laundering and “know your customer checks on potential investors, the SCA explained that all customers should be classified and assessed as if they were a ‘high risk.’ This largely translates into conducting ‘enhanced due diligence into a customer’s source of funds, political exposure risks, ultimate beneficial ownership structure, the potential risks of customers being used as conduits for money laundering activities and any geographical perils presented by customers, their directors, shareholders, and associated suppliers and intermediaries.

Furthermore, the world’s flagship Free Zone and Government of Dubai Authority on commodities trade and enterprise – has entered into a memorandum of understanding (MoU) on March 2021 with the Securities and Commodities Authority (SCA) to create a directing framework for businesses offering, listing, trading, and issuing crypto assets in DMCC.

The contract will see businesses dealing with crypto assets gain access to tailored licenses obtainable by the DMCC Crypto Centre, first-class customer service, a range of inducements, and the robust business regulatory framework established by DMCC. Working strictly with DMCC’s onboarding teams, the SCA will issue endorsements for crypto-related businesses looking to set up in DMCC. In October 2020, The SCA will then regulate the crypto activities in line with their announced policies to develop a unified ecosystem for the crypto and blockchain businesses. The contract will foster growth within the sector and promote the development of blockchain applications in Dubai.

This latest agreement builds on DMCC’s comprehensive strategies to promote technology-driven trade and attract innovative companies to Dubai. In 2020, DMCC launched Digital Sugar, a blockchain-enabled trading platform for sugar, and the Agriota e-Marketplace, an Agri-commodity trading and sourcing platform that uses blockchain to help bridge the gap between millions of rural farmers in India and the UAE’s food industry.

 

4. Blockchain and cryptocurrency regulations in The United Kingdom

The United Kingdom’s method to cryptocurrency regulations has been measured but has matured in the post-Brexit financial landscape. Although the U.K. established in 2020 that crypto assets are property, it has no particular cryptocurrency regulations, and cryptocurrencies are not considered legal.

The FCA or the Financial Conduct Authority, formed in 2013, is the United Kingdom’s financial regulatory authority that controls U.K. financial markets and “58,000 industries which hire 2.2 million people and contribute around £65.6 billion in yearly tax income to the economy in the U.K.”. An autonomous agency, the FCA has the power to control the promotion of financial products and services, examine entities/individuals, prohibit products, and freeze monies. The FCA is part of the U.K. Crypto- assets Taskforce.

As stated by the Bank of England, meanwhile, cryptocurrencies lack classical definitional characteristics; they are not considered ‘money’ and do not pose a general risk to the stability of the banking ecosystem. Nevertheless, because the legal costs, rules, and status of crypto assets and currencies can vary concerning their nature, kind, and usage, the FCA and the Bank of England have dispensed various advice and guidance about their practice. Those pieces of advice concern the absence of regulatory and monetary safety, the status of cryptocurrencies as stores of value, and the perils of hypothetical trading and instability.

The controlling uncertainty associated with cryptocurrencies prompted the U.K. government to create a dedicated task force in 2018. The task force distinct three (3) sorts of cryptocurrencies and three (3) ways in which crypto assets are implemented – previously setting out a prerequisite for additional AML/CFT and taxation considerations. HMRC has distributed a brief on the tax treatment of cryptocurrencies, stating that their “unique identity” means they cannot be related to conventional investments or payments and that their “taxability” depends on the actions and parties intricate. On cryptocurrencies, gains or losses are subject to capital gains tax.

Exchanges have registration requirements in the U.K. Although it left the E.U. in 2020, the U.K., before transferring the cryptocurrency regulation requirements start out in 5AMLD and 6AMLD into national law. From January 10, 2021, all U.K. crypto-asset firms that have a presence or market product in the U.K. or that provide services to U.K. resident clients shall register FCA. Disapprovingly, these groups must comply with AML/CFT reporting and client protection duties. FCA guidance stresses that companies engaging in activities involving crypto-assets shall also obey with the Terrorist Financing, Money Laundering and Transfer of FundsAdjustments to those regulations came into force in January 2020 and incorporated the latest FATF guidelines. 

From January 2020, the FCA has been recognized as the Anti Money Laundering and Countering Terrorist Financing (AML/CTF) controller for industries carrying out numerous cryptocurrency ventures. In July 2019, the FCA delivered the final guidance on how AML & CFT in the crypto area would be treated in “PS19/22: Guidance on Crypto-assets “.

Industries such as VASPs and P2P exchanges, crypto and bitcoin ATMs, Tx of cryptocurrency, issuance of new coins and publication of open-source software around coins, protocols, etc. must adhere to guidelines laid out in PS19/22: Guidance on Crypto-assets

Furthermore, UK AML requirements need CDD (Customer Due Diligence) and KYC (Know-Your-Customer) and checks for all buyers of crypto native businesses such as their photo id as shown in an official document, the user’s legal name, and their proof of residence. These conditions are made in the “The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017″. Also, KYC and CDD risk management policies to fight AML, VASPs must keep comprehensive records of receivers, carry out Enhanced Due Diligence (EDD) of PEPs (Politically Exposed Persons), nominate an individual in charge of inspection of these compliance issues and other regulatory hurdles that the wider financial system must adhere to.

 

After the exit of the European Union in 2020, it is expected that the U.K.’s cryptocurrency regulations will remain broadly consistent with the bloc in the short term, implementing directives equivalent to the E.U.’s Markets in Crypto-assets (MiCA) and E-Money proposals, along with numerous Payment directions. Nevertheless, it is to be awaited that the U.K. will diverge from the E.U.’s crypto-regulatory landscape to some degree. Currently, there is no specific U.K. crypto legislation on the horizon, but H.M. Treasury guidance, issued via the U.K. Crypto Asset Task Force in January 2021, emphasized the U.K.’s purpose to consult on taking specific cryptocurrencies under the scope of ‘financial promotions regulation’ and to continue to contemplate a ‘broader regulatory approach’ to crypto-assets. 

 

5. Blockchain and cryptocurrency regulations in United States of America

While it is hard to find a consistent legal approach at the state level, the U.S. remains to make progress in developing federal-level cryptocurrency regulation. The FinCEN (The Financial Crimes Enforcement Network) does not contemplate cryptocurrencies to be lawful tender but considers cryptocurrency exchanges to be money transmitters because the cryptocurrency tokens are “other value that replaces for currency.” The Internal Revenue Service (IRS) does not contemplate cryptocurrency as lawful tender but describes it as “a digital illustration of value that works as a unit of account, a form of exchange, and/or a store of value” and has supplied tax guidance consequently. Cryptocurrency exchanges are allowed in the U.S. and fall under the governing scope of the Bank Secrecy Act (BSA). In practice, this means that cryptocurrency exchange facility providers shall obtain the necessary license from FINCEN, apply for an AML/CFT and Sanctions program, keep appropriate records, and submit reports to the authorities. For the moment, the U.S. Securities and Exchange Commission (SEC) has specified that it considers cryptocurrencies to be securities and applies securities rules to digital wallets widely in a method that will affect both exchanges and investors similarly. On the other hand, the Commodities Futures Trading Commission (CFTC) has adopted a friendlier, “do no harm” approach, recognizing Bitcoin and Ethereum as commodities and letting other virtual and cryptocurrency derivatives trade publicly on exchanges it controls or supervises. In response to guidelines issued by FATF in June 2019, FinCEN has also made clear that it supposes crypto exchanges to comply with record-keeping requirements and the “Travel Rule” by sharing data about the inventors and beneficiaries of cryptocurrency transactions.  The U.S. Treasury has underlined a crucial need for crypto guidelines to combat worldwide and illegal domestic activities. In 2018, Steve Mnuchin(Treasury Secretary) declared a new FSOC working group to discover the progressively crowded cryptocurrency marketplace. In December 2020, FinCEN planned a new data collection prerequisite for persons accountable for managing digital assets, cryptocurrency exchanges, crypto payments, and DTLs. If executed, the guideline would also require exchanges to submit suspicious activity reports (SAR/CTR) for transactions and require non-registered financial establishments or MSB wallet owners to recognize themselves when sending $3,000 or more in one or series of related transactions.  With the SEC, CFTC, and other agencies over future cryptocurrency legislations, the Justice Department coordinates to ensure adequate consumer protection and more efficient regulatory oversight. However, with the Covid-19 crisis obstructing efforts to advance cryptocurrency regulation, the federal approach continues to be gradual. Despite setbacks, U.S. lawmakers remain keen to bring cryptocurrencies under regulatory oversight to anticipate their potential destabilizing effect on the globally dominant U.S. dollar and the impact that private and centrally banked currencies might have.  The U.S. maintains a usually positive outlook on the practice of Bitcoin and other cryptocurrencies; however, few formal rules have essentially been introduced. Most of the regulatory discussion surrounding blockchain has been at the agency level, counting the Federal Trade Commission (FTC), the Department of Treasury, Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), and Financial Crimes Enforcement Network (FinCEN). While FinCEN does not contemplate cryptocurrency as legal tender, it considers exchanges as money transmitters subject to their jurisdiction. Meanwhile, the IRS has begun considering cryptocurrencies’ property and has issued tax direction consequently. Notwithstanding interest from these agencies, the federal government has not trained its preemptive constitutional power to control blockchain to the omission of states, thereby leaving individual states free to introduce their own rules and regulations. New York converted the first state in the U.S. in June 2015 to legalize virtual currency businesses through state agency rulemaking. As of 2019, 32 states have presented regulations taking or promoting the utilization of Bitcoin and blockchain distributed ledger technology (DLT), while a few have previously passed them into law. Some of these states have also recognized task forces to study the technology’s use further. Bitcoin took a significant step in 2017 when it was allowed the same financial safeguards as traditional assets. The FTC gave cryptocurrency trading program operator LedgerX approval to become the first federally regulated digital currency options exchange and clearinghouse in the United States.