Discussion in the preceding section affirmed, transactions of bitcoin and other cryptocurrencies were mostly unregulated. However, the trend has reversed or improved in recent years. The anti-money laundering (AML) and counter terrorism financing watchdog for the global community, Financial Actions Task Force (FATF), has set rules for the cryptocurrency industry.
FATF rules are essentially restricted to centralised systems such as cryptocurrency exchange markets, which are duly licenced to allow investors trade their digital tokens for other assets, including fiat currencies such as the American dollar, European euro, and British pound sterling. FATF has outlined “know your customer (KYC)” requirements for all the licenced virtual exchanges.
The know-your-customer requirements set out by the Financial Actions Task Force seeks to establish the identity of traders (buyers and sellers) on the various platforms. The requirements affirm the need for each virtual exchange to establish the identity of parties to a transaction on its platform. These new global standards, including KYC rules were not part of previous regulations; and this explains why some countries were hesitant to approve of cryptocurrency transactions in their jurisdictions in prior and recent years (Salami, 2020b).
Unfortunately, FATF rules are not directly applicable to decentralised systems and their related financial activities. Stated in different words, FATF rules are not expected to regulate, directly, the activities of buyers and sellers in decentralised systems to help curb the high incidence of fraud and anti-money laundering activities associated thereof. The high level of anonymity makes decentralised virtual exchange systems strong vehicles for promotion of anti-money laundering and other illicit activities on a global scale.
Limitations in the FATF rules attenuate the effectiveness of its regulations; and place enormous responsibilities on individual economies to institute measures that would provide the necessary shelter for investors in their respective jurisdictions.
Admittedly, the global traditional financial infrastructure has had challenges with control of the “new-order” introduced by the digital financial markets. And because regulators have been behind the curve, investors in the virtual currency markets have flourished in the vacuum (Cheah, 2020). Nevertheless, the traditional system has succeeded in derailing efforts of the new system with bureaucratic processes.
However, the new paradigm and constant introduction of innovative technologies make it quite herculean for a united regulatory front to be achieved at the global level. Paradoxically, lack of approval and meaningful adoption of cryptocurrencies as medium of exchange at the global level could be attributed to the absence of uniform regulations at the global level (Brown and Whittle, 2020).
The research revealed countries that hitherto placed ban on cryptocurrencies and refused to recognise same as a medium of exchange were beginning to whet their financial appetite with crypto assets; cryptocurrencies had begun to gain recognition in the financial laws and courts of these economies.
This sudden shift in financial goal post is likely to draw cryptocurrencies into the mainstream global financial system (Salami, 2020b). Ripple has gained popularity and recognition among governments and large banks in many countries due to its effectiveness (The European Business Review, 2020).
So far, the following selected economies across the globe have considered and adapted regulations to forestall any financial tsunami by the digital financial exchanges on individual and corporate investors: Australia, Canada, China, European Union (EU) and the United Kingdom (UK), Ghana, India, Japan, Nigeria, Russia and Belarus, Singapore, South Africa, South Korea, Switzerland, United Arab Emirates (UAE), United States of America (USA), Venezuela and Zimbabwe, among others.
A common belief held among these economies is the urgent need for them to take proactive steps to protect the investment purse of their citizens and foreign investors in their respective jurisdictions. This initiative is expected to improve the issue of lack of effective control over the activities of traders in bitcoin and other cryptocurrencies in the virtual currency markets.
Brown and Whittle (2020) noted individual economies have been late in their respective responses to the challenges posed by the global cryptocurrency industry. However, their “late” responses have been dramatic and powerful. The following section presents brief explanation on regulatory measures adapted by each of the above-listed economies.
Australia
Ashley (2018) indicated in 2015, the Australian government decided to adapt a hands-off approach to the regulation of cryptocurrencies in the country. However, in August 2017, the Commonwealth Bank of Australia was saddled with a financial scandal. This compelled the Australian government to revise her initial stance from hands-off approach to adaption of more stringent rules to regulate digital currency and anti-money laundering as pertained in other global jurisdictions including Japan. The following statement affirmed the position of the Australian Taxation Office (ATO) on bitcoin:
Transacting with bitcoin is akin to a barter arrangement, with similar tax consequences. Our view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes. (ATO as cited in Nelson, 2018, para. 25)
Contrary to the stance of the Australian Taxation Office, lawmakers from the Labour and Coalition Parties, the two leading political parties in Australia, called on the Reserve Bank of Australia (RBA) to accept cryptocurrencies as an official form of currency. Australia lacked clear-cut policies on cryptocurrency, and this had adverse effects on performance of the economy towards the end of 2017: Australian cryptocurrency brokers stopped making deposits in Australian dollars (Ashley, 2018).
Australia has become a target for cyber-attacks in recent years. In early 2019, the Australian Parliament network was compromised by system-hackers. Later in February 2019, computer networks of major political parties in Australia were hijacked. The relatively short intervals highlighted the enormity of threats posed by the cyber-attacks to state-machinery and the nation as a whole.
The Australian Prime Minister, Mr. Scott Morrison, attributed the series of cyber-attacks to a “sophisticated state actor” (Finlay & Payne, 2019, para. 1). The frequency of attacks on state infrastructure compelled some analysts to describe the spate of cyber-attacks on Australia as the “new normal” (Finlay & Payne, 2019, para. 3).
In June 2020, Prime Minister Morrison announced new threats of cyber-attacks on his country. Prime Minister Morrison noted Australian businesses and government agencies were the main targets. He described the attack as “state-sponsored,” without making specific reference to any sovereign country.
To curb threats of the cyber-attacks, Prime Minister Morrison called on Australian businesses to use available government resources, look-out for spam, beware of distributed denial of service attacks, and have back-up plan, among other security measures (Elkhodr, 2020). In addition to the foregoing, the Australian government took steps to defend the country from incessant attacks.
Some of the measures rolled-out included augmenting the staff-capacity of the Australian Signals Directorate by 500 employees; and increasing its funding by A$1.3 billion. Further, Australia’s 2020 Cyber Security Strategy was expected to include strategies to proactively improve digital literacy and cyber security (Leins, 2020).
Canada
Canada holds an enviable record in the world of digital currency: it is the first country in the world to enact a national law on digital currencies. On 19th June, 2014, the Canadian Parliament approved Bill C-31 on digital currencies after weeks of several hearings and testimonies by key stakeholders.
The Financial Consumer Agency (FCA) in Canada does not accept digital currencies as a legal tender, save Canadian bank notes and coins. Nelson (as cited in Ashley, 2018) described Canada as the most transparent country with the exception of Switzerland, when it comes to understanding and appreciating laws related to cryptocurrency trading.
Generally, authorities in Canada are not strict on digital currency regulations; periodic regulatory requirements and guidance are issued to facilitate the activities of traders and investors in the digital currency markets. For instance, on 24th August, 2017, the Canadian Securities Administration (CSA) released regulatory notice on the potentials of applying Canadian securities laws to digital currencies.
The CSA released regulatory notice on digital currency trading and marketplace operations; and provided participants in the digital currency market with guidance on how to effectively analyse the regulatory requirements (Nelson as cited in Ashley, 2018).
Some key stakeholders in Canada expressed misgivings about use of the term, cryptocurrency. As an example, on 25th January, 2018, Mr. Stephen Poloz, Head of the Central Bank of Canada, expressed his objection to use of the term, cryptocurrency. He argued cryptocurrencies are crypto, but not currencies; cryptocurrencies have no intrinsic value and could therefore, not be analysed as assets; they could at best be described as securities.
Canada is an official member of the North American Securities Administrators Association (NASAA), which believes the risk of fraud associated with trading in digital currencies is high (Nelson as cited in Ashley, 2018).
However, the Canadian laws on cryptocurrency allow for bitcoin and altcoins to be used in payments for goods and services; the virtual currencies are recognised as a commodity, but not a legal tender. Canadian businesses that accept bitcoin and altcoins as payments for goods and services are required by the state tax laws to include the transaction amounts in their respective incomes for tax-reporting purposes.
Further, the laws regulating cryptocurrencies including bitcoin allow for mining of the virtual currencies in the country. Individuals are at liberty to mine bitcoin and other cryptocurrencies in commercial quantities, or as a hobby. Earnings from mining virtual currencies in commercial quantities would have to be reported for tax purposes. However, individuals who mine cryptocurrencies for fun or as hobby are not obliged to report their activities for tax purposes (Loc.gov. 2020).
China
Stalnaker (2013) and Nelson (2018) reported that adaption and implementation of cryptocurrency in China increased significantly in 2017. In the said year, adaption of digital currencies in China was higher than recorded in any other country across the globe. Bitcoin miners in China constituted over 50% of the total bitcoin mining population throughout the world in 2017.
However, in the midst of the sporadic surge in digital currency trading, the Chinese government was strongly committed to weeding out corruption and discouraging capital flights.
As part of measures aimed at achieving the foregoing objectives, the Chinese government, in January 2018, introduced strict rules to regulate cryptocurrency operations in the country. For instance, there was a ban on initial coin offerings (ICOs); all bank accounts related to cryptocurrency exchanges were frozen; bitcoin miners were prevented from continuing with their activities; and nationwide ban on mobile and Internet access to all cryptocurrency-related activities and transactions were implemented. The sudden change in stance related to cryptocurrency operations in China during the period surprised many digital currency analysts (Ashley, 2018).
However, the surprise among analysts was assuaged by the fact that these measures were adopted strategically by the Chinese government to resolve important economic issues. That is, to stamp-out corruption and discourage capital flights. During the current research period, the Chinese government was leading a comity of advanced economies in the “official” recognition and implementation of digital currency-related activities at the national level.
The Chinese government had created a digital coin known as digital renminbi which was operational on a pilot basis. Operations of digital renminbi are entrusted to the Chinese central bank called the People’s Bank of China. There were speculations of digital networks convergence. For instance, it was believed the digital currency electronic payments system operated by China would have some form of support for ethereum applications.
Holders of PayPal accounts in the United States have the opportunity to purchase bitcoin through their respective PayPal accounts, but unable to effect payments with bitcoin. However, operators of the PayPal system affirmed their commitment to enable PayPal payments with bitcoin effective 2021 (Potts & Rennie, 2020; Brown and Whittle, 2020).
European Union and the United Kingdom
Nelson (as cited in Ashley, 2018) reported as of 2018, the European Union, just like the United Kingdom, had not presented final legislation on digital currencies and their related activities. However, the European Union and the United Kingdom had demonstrated strong commitment to the adaption of rules to regulate digital currencies.
Regulatory initiatives by the two bodies included report of suspicious activities while due diligence is effectively conducted on traders in the cryptocurrency markets. Like South Korea, the European Union and the United Kingdom were seeking to end anonymity for digital currency traders to curb tax evasion and money laundering, among other legally unapproved financial transactions.
On 18th December, 2017, Mr. Pierre Moscovici, the European Union Commissioner, stated the European Union’s unpreparedness to regulate bitcoin and altcoins. However, on 20th December, 2017 Vice President of the European Commission, Mr. Valdis Dombrovskis, noted price volatility of bitcoins exposed consumers and investors to risk such as liability gaps, market manipulation, operational and security failures, and complete loss of investment.
Although there was little evidence to suggest use of digital currencies in money laundering, the United Kingdom, through its Treasury, began negotiations to allow the inclusion of some wallet providers; and platforms of digital currency exchanges in regulation related to counter-terrorism financing and anti-money laundering (Ashley, 2018).
The European Union recently proposed enactment of the Markets in Crypto-Assets (MiCA) Regulation for implementation in its jurisdiction. Some analysts in the virtual financial markets argued contents of the proposed legislation on virtual currencies including bitcoin by the European Union could potentially harm the operations, fortunes and success of some investment funds management firms in the digital currency markets.
Mr. Bruno Le Maire, the French Economic Minister, announced his country’s resolve to create a working group to regulate cryptocurrencies. Also, a Board Member of the German Bundesbank, Mr. Joachim Wuermeling, suggested the need for effective regulation of cryptocurrencies at the global level (Ashley, 2018).
On 26th February, 2020, judgement by a court in France described a loan involving bitcoin as a consumer loan. This ruling placed bitcoin in the category of legal tender and other financial assets in France. It was the first time bitcoin was upheld and recognised; and this reassured cryptocurrency traders of equal protection under the financial laws in France.
In a related development, on 2nd March, 2020, the financial regulator in Germany, Federal Financial Services Authority (BaFin), amended its existing legislation on virtual assets to align with the Financial Actions Task Force standards (Salami, 2020b).
On 22nd January, 2018, Mr. Dombrovskis predicted a bubble in bitcoin trading. And on 25th January, 2018, former Prime Minister of the United Kingdom, Madam Theresa May, called for a serious look at the cryptocurrency markets since they could serve as a safe financial “haven” for criminals. Prime Minister May’s clarion call was made when plans were far advanced to ensure the exit of Britain (known as Brexit) from the European Union by March 2019, although the exit was extended to and implemented on 31st January, 2020.
However, the Brexit arrangements had no effect on the collaborative efforts of the two aimed at clamping down on the activities of cryptocurrency traders, which decelerate economic development and growth (Nelson as cited in Ashley, 2018).
Recent findings shared by the Cambridge University (as cited in Brown, 2020) revealed most businesses in the cryptocurrency industry were operating without licences. As part of measures and efforts to clamp-down on unapproved activities on the virtual exchanges, the Financial Conduct Authority (FCA) in the United Kingdom announced ban on sale and promotion of derivatives of bitcoin and altcoins to non-professional or inexperienced investors.
FCA is the financial regulator in the United Kingdom. Brown (2020) described FCA’s initiative as a big blow to the growing virtual exchange markets. However, the foregoing initiative of the UK government was not intended to discourage or harm trading in bitcoins and other cryptocurrencies, but to ensure both amateur and professional actors in the virtual exchange markets are provided with the necessary protection to assure safety of their investments while minimising eventual blame by these investors on the government.
In the United Kingdom, rules adapted by the Financial Conduct Authority for implementation could deny retail investors in the cryptocurrency industry the opportunity to buy and sell cryptocurrency options and futures. Some investors in the virtual currency markets use cryptocurrency options and futures to hedge their bets on underlying assets, which is consistent with one of the recommendations in Ashley (2018).
To illustrate, an investor in the virtual currency market may decide to purchase an option to sell an X number of bitcoins at a pre-determined price (US$28,600.00 per unit), should there be a fall in the initial price (US$28,500.00) by say 5% (US$1,425.00). Thus, the option provides the investor the necessary insurance cover against volatilities, especially price falls, in the virtual exchange markets. The tendency to place a bet or hedge on the fluctuating prices of bitcoins and other cryptocurrencies is known as index option (Ashley, 2013, p.99).
Ban on use of cryptocurrency options and futures as strategic investment hedges in the United Kingdom was expected to take effect from 6th January, 2021. The Financial Conduct Authority argued valuation of bitcoin and altcoins has no reliable basis. To this end, the ban was necessary to protect inexperienced investors against the risk of losses that could best be described as sudden and unexpected; and which could occur through investment sensationalism.
That is, the likelihood of inexperienced investors believing every news-headline about the current and future prospects of cryptocurrencies, and investing all their savings therein. FCA (as cited in Brown, 2020) argued inexperienced investors have limited understanding of happenings in the virtual currency exchanges which are often characterised by financial crime, market abuse, and high volatility; and which affect effective measurement of market capitalisation values for bitcoin and altcoins.
Effective implementation of FCA’s rules may suffer a setback, especially when investors have the opportunity to trade on virtual exchanges not located in the UK; and not under the jurisdiction of the Financial Conduct Authority. A significant observation during the research period was FCA’s ban was not extended to hedge fund institutions and professional traders; these categories of investors are allowed to access riskier financial products than the general population owing to the former’s level of expertise and understanding of the financial markets.
However, it is worth-mentioning Brown’s (2020) interactions with some retail investors revealed their in-depth knowledge and understanding of the art of bitcoin and altcoins trading than some of the licenced financial institutions, albeit there were many other retail investors with limited knowledge about the level of risk assumed in their respective investments, implying the ban was necessary. Investor-losses to be prevented by the FCA rules were estimated between £19 million and £101 million.
Ghana
Nelson (as cited in Ashley, 2018) revealed on 22nd January, 2018 the Governor of the Bank of Ghana, Dr. Ernest Addison, held a press briefing in Accra, the nation’s capital, to state the position of the Ghanaian government on bitcoin. Dr. Addison was categorical on the country’s position at the press briefing: “Bitcoin is not yet a legal tender.” A Bill on cryptocurrency trading has already been laid before the Parliament of Ghana.
Content of the proposed Bill sought among other things, to regulate use of digital currencies in the Ghanaian economy. Until the Bill is passed, cryptocurrencies, including bitcoins, are not recognised as a legal tender in Ghana. Prior to the Bank of Ghana’s statement, Groupe Ndoum, one of the investment institutions in Ghana, suggested the need for Bank of Ghana to consider investing 1% of its reserves in bitcoin.
The Bank of Ghana Act of 2002, Act 612, Section 4, Sub-sections (1) (d) and (e); and the Banking Act of 2004, Act 673, Section 51, Sub-sections (a) (3) allow the Bank of Ghana to regulate transactions concluded on mobile phones and related electronic devices. The operations of bitcoin and other cryptocurrencies are likely to be considered under the Payment System Act of 2003, Act 662, which mandates the Bank of Ghana to ensure promotion and supervision of electronic and other payments; and transfer of funds, clearing, and settlement systems (PWC as cited in Ashley, 2018).
Owusu (2020) averred bitcoin and altcoins trading in Ghana has become a thorny issue among regulators; and this has affected the understanding of the general public in laws regulating virtual currency trading in the country. The imminent question posed by many investors and admirers of cryptocurrency trading is whether or not bitcoin and altcoins trading in Ghana remains legal or illegal.
In response to the foregoing question, Owusu (2020) maintained there are no clear-cut laws regulating bitcoin and altcoins trading. Stated differently, trading in bitcoin and other cryptocurrencies in Ghana is neither legal nor illegal; there are no definitive regulatory frameworks in place to guide the activities of virtual exchange operators and investors, albeit the Bank of Ghana (BoG) assumes the role of financial regulator with the Securities and Exchange Commission (SEC) playing a supporting role.
Both the Bank of Ghana and Securities and Exchange Commission have issued statements on blockchain technology and virtual currency trading over the years. However, they are yet to present implementable regulatory framework on cryptocurrency trading in the country.
Final legislations on bitcoin and other cryptocurrencies could determine the “main” regulatory body in Ghana. Suppose bitcoin and altcoins are categorised solely as commodities in the proposed Bill to the Parliament of Ghana. When passed into law, cryptocurrencies would fall under direct supervision of the Securities and Exchange Commission which has oversight responsibilities over securities and investment companies in the country.
In this case, the Bank of Ghana would assume a complementary role in the regulatory process. However, should the Bill recognise bitcoin and altcoins solely as medium of payment for transactions, the supervision may fall under the purview of the Bank of Ghana; and SEC would assume a supporting role in the regulatory process.
Further, should the proposed Bill recognise bitcoin and altcoins as both commodity and medium of payment for goods and services, SEC and the Bank of Ghana would assume regulatory roles concurrently. Even when bitcoin and altcoins are recognised solely as commodity, role of the Bank of Ghana in the regulatory process may extend beyond complementary, especially when the enacted laws make it possible for virtual exchange operators to transact business with banks in the country.
As of the research date, the Bank of Ghana was yet to activate bitcoin and altcoins trading under the Payment System Act of 2003, Act 662 or any other Act. As a caveat, the Bank of Ghana reminded the general public of non-activation of Act 662 to include bitcoin and altcoins trading while the Securities and Exchange Commission maintained investors’ decision to trade and invest in cryptocurrencies is at their own risk.
SEC emphasised that under the current dispensation, bitcoin and other cryptocurrencies are neither legal tender nor currency in Ghana. The securities law regime in the country did not provide protection for investments in cryptocurrencies and crypto-assets during the research period.
India
Nelson (as cited in Ashley, 2018), noted many economic experts and financial analysts describe the Republic of India as a cash-reliant economy. That is, most business transactions are concluded on cash basis. However, the craving for digital currency trading assumed a greater dimension in the Indian economy until early 2018 when the government introduced more stringent regulatory measures to clamp-down on the activities of traders.
The Indian government argued the digital currency markets are fertile grounds for tax evasion, proliferation of illegal activities, and sponsoring of terrorist activities, among others. These notwithstanding, digital currency traders in the domestic Indian economy did not believe the more stringent rules adapted earlier by the Chinese government would be replicated by the Indian government (Ashley, 2018).
In April 2018, financial institutions in India were banned from engaging in direct transactions with virtual currency firms by the central bank. A notification issued by the Reserve Bank of India (RBI) banned financial institutions and banks under its supervision from providing services to clients and non-clients transactions related to cryptocurrencies.
Repeated warnings on dangers of investing in cryptocurrencies were issued by the Reserve Bank of India to the investor community and the general public (Anand, Dusad & Patel, 2020). However, on 10th March, 2020, the ban was overturned by the Supreme Court (Salami, 2020b).
Conversely, as of October 2020, cryptocurrency trading activities in India were not regulated. In spite of this hands-off approach, investors were prohibited from trading in cryptocurrencies including bitcoin; the Indian government and Reserve Bank of India had imposed ban on dealing in cryptocurrencies.
The Reserve Bank of India described cryptocurrencies as “stateless digital currencies” (Anand et al., 2020, para. 8) with minimal level of traceability. Salami (2020b) noted a drastic reduction in the use of cryptocurrencies in India, prior to the Supreme Court’s ruling, meaning pessimism of investors in the potentials of trading in cryptocurrencies remained high owing perhaps, to the caveats issued by the financial regulator and the Indian government.
Japan
Nelson (as cited in Ashley, 2018) revealed regulatory measures on cryptocurrency in Japan were neither stringent nor liberal; the country appeared to be more receptive to the activities of cryptocurrency operators than its neighbours including china and South Korea. Japan was believed to be the investment hub of cryptocurrency operators who found regulatory measures in other Asian countries hostile and unfriendly.
As of 2018, plans were underway in Japan to introduce a cryptocurrency awareness campaign group known as the J-pop band. However, it was uncertain if the Japanese government would approve of the activities of this novel digital currency awareness campaign group.
Fortunately, the objective of founders of the J-pop band was achieved; marketing of digital currencies through concerts by the J-pop band was not inhibited by the Japanese government; and the band was widely-acclaimed and accepted by the Japanese people.
Japanese name for the J-pop band is Kasotsuka Shojo, which means Virtual Currency Girls (Ong, 2018, para. 2). The band is made up of eight girls, each of whom represents different cryptocurrency such as bitcoin, ethereum, ripple and cardano, among others. The custom-made hat of each of the girls in the band represents a cryptocurrency.
A press statement issued by the group’s leader, Rara Nause (as cited in Ong, 2018), noted the group’s intention to “promote the idea through entertainment that virtual currencies are not just a tool for speculation but are a wonderful technology that would shape the future” (para. 3).
In April 2017, Japan enacted laws that recognised bitcoin as a legal tender. This notwithstanding, the Japanese interest in cryptocurrencies suffered a setback, following the predatory hack on 26th January, 2018 of a Japanese exchange, resulting in the loss of about US$530 million worth of NEM coins.
This development raised public uproar and the need for the Japanese Financial Services Agency (FSA) to ensure close supervision on digital currency trading in the country. Concerns expressed by the investor-community in Japan were legitimate since Ong (2018) revealed cryptocurrency trades in Japan account for about half of trade volume at the global level.
Author’s Note
The above write-up was extracted from an earlier publication on “Effect of Bitcoin Trading on the Global Economy” by Ashley (2022) in the Global Scientific Journal.
