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.
So far, the following selected economies across the globe have considered and adopted 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 challenges posed by the global cryptocurrency industry. However, their “late” responses have been dramatic and powerful. In the following section, we continue with the brief explanation on regulatory measures adapted by each of the above-listed economies.
Nigeria
Nigeria remains Africa’s largest economy with a gross domestic product of US$448.10billion in 2019 (Trading Economics, 2020). In 2017, the Nigerian economy went through recession leading to a fall in value of its local currency, the naira. To stem the tide of a crumbling economy, the Nigerian government restricted traders’ access to the American dollar. This compelled businessmen and women in the country to seek financial refuge in bitcoin and other cryptocurrencies (Ashley, 2018)
Act 2007 of the central bank of Nigeria (CBN) affirmed the exclusive rights of the central bank to issue legal tenders of any kind in Nigeria. The Act bars other persons and authorities from issuing tokens which are likely to pass as legal tender in the country.
Pursuant to the foregoing, on 12th January 2017 the central bank of Nigeria decided to apply strict rules and regulation to use of the digital currency, and a circular was issued to that effect. It was argued that non-traceability of cryptocurrencies, including bitcoin, renders them highly susceptible to manipulation and abuse by terrorists and criminals. The foregoing possibilities and consequential effects underscored the need for integrity of the financial system in Nigeria to be protected (Aelex.com, 2020).
However, this decision was later rescinded; Mr. Musa Itopa Jimoh, Deputy Governor of the central bank of Nigeria, noted CBN did not have the locus to regulate or control bitcoins, blockchain or the Internet since the country does not own any of them. In Nigeria, trading in bitcoin surged by 1,500% in 2017 (Nelson as cited in Ashley, 2018).
On 25th January 2018, Mr. Edwin Emefiele, Governor of the central bank of Nigeria, renewed government’s commitment to regulating digital currency trading. The Governor likened investment in digital currencies to gambling, and said the Nigerian government could not support instances where individuals and groups of investors alike risk their savings to gamble.
Nonetheless, the Nigerian economy’s unimpressive in 2017 posed a challenge to successful implementation of any legislation seeking to regulate digital currency trading in the country during the period (Nelson as cited in Ashley, 2018).
Pending the release of final legislation to guide use of virtual currencies, the central bank of Nigeria advised financial institutions, including banks, not to transact, hold or trade in any way with bitcoins and altcoins. Further, traders on the various virtual exchanges must ensure strict compliance with the relevant laws on combatting the financing of terrorism (CFT) and anti-money laundering.
Also, financial institutions – including banks that are not satisfied with the framework on combatting the finance of terrorism and anti-money laundering of virtual exchange operators and virtual currency customers – could discontinue with their relationship. Moreover, the central bank of Nigeria reiterated its stance on cryptocurrencies: bitcoin and altcoins are not legal tender.
Consequently, anyone who uses or transacts business with them does so at his or her own risk (Aelex.com, 2020). The foregoing suggests the official position of Ghana and Nigeria on cryptocurrencies is not distinct. However, discussion in the following section indicates caveats by financial regulators in Nigeria have had little impact on control of cryptocurrencies trading in the country.
The Investment and Securities Act of 2007 and the Rules and Regulations of the Securities and Exchange Commission provide the regulatory framework for securities in Nigeria. In 2017, the Securities and Exchange Commission responsible for regulating securities and investments noted non-authorisation of firms and individuals engaged in cryptocurrency trading in Nigeria; and warned the general public of the dangers involved in trading with virtual currencies.
In the midst of these caveats, regulators in Nigeria were keen on emerging with comprehensive legislation that could guide the activities of virtual currency trading and related activities in the country. In 2019, the Fintech Roadmap Committee was established by the Securities and Exchange Commission. Part of the Committee’s findings focused on the regulation of virtual currencies and virtual financial assets.
Based on its findings, the Committee recommended the need for virtual currencies to be categorised into securities or commodities under existing regulations of the Securities and Exchange Commission. The Committee’s report urged SEC to work assiduously to emerge with a regulatory framework for the virtual currency market in Nigeria (Aelex.com, 2020).
The investor-population engaged in cryptocurrency trading in Nigeria is high, in spite of the absence of a clear-cut regulatory framework to guide and protect investors from the risk inherent in the trade. Statistics released by Coin Market Cap, Bitcoin.com and Binance, among others (as cited in Aelex.com, 2020), paid glowing tribute to the virtual financial market in Nigeria.
Coin Market Cap has a platform for tracking prices of virtual currencies. Its report (as cited in Aelex.com, 2020) suggested tracking of prices for cryptocurrencies in Nigeria increased to 211%, while Bitcoin.com reported 11% of connected Nigerians use virtual currencies.
Binance research affirmed growing interest in virtual currencies and Nigeria’s leadership among countries with increasing interest in virtual currencies. Apps and exchange platforms related to virtual currencies are on the rise with Buycoins processing over five hundred million naira (N500million) worth of virtual currencies in three months. The increasing taste for cryptocurrencies’ usage in Nigeria can be attributed mainly to their role in facilitating payments and transfers in international transactions (Aelex.com, 2020).
Russia and Belarus
Prior to September 2017, the Russian Federation adopted a soft stance that allowed “qualified investors” to trade in digital currencies. In September 2017, Head of the central bank of Russia, Elvira Nabiullina, announced the central bank’s unpreparedness to regulate digital currencies as a medium of payment for goods and services.
The head noted the central bank was equally not prepared to regulate digital currencies as a foreign currency equivalent. These statements assured investors of a progressive hands-off approach to regulation of the digital currency market in Russia (Nelson as cited in Ashley, 2018).
However, pronouncements by the Head of the central bank of the Russian Federation were short-lived: on 8th September 2017, Mr. Alexei Moiseev – the Russian Federation’s Deputy Finance Minister – disclosed at a Moscow Financial Forum that use of virtual currencies as a medium of payment was not yet legal in Russia. He noted the existence of a legal vacuum, which required redress to affirm the status of virtual currencies in the Russian economy.
On 11th October, 2017, the Deputy Finance Minister of the Russian Federation’s stance was corroborated by President Vladimir Putin when he catalogued potential risks associated with cryptocurrencies. He described digital currencies as an avenue for tax evasion and spreading fraudulent schemes; a hub for financial laundering and funding of terrorism activities; and a conduit for possible victimisation of Russian nationals, among other harmful effects (Ashley, 2018).
The Finance Ministry in the Russian Federation, on 28th December 2017, outlined some regulatory measures including taxation on digital currency ventures. Again, on 11th January 2018, President Vladimir Putin supported this call by affirming the need for regulatory measures on the digital currency market in the near future.
However, President Vladimir Putin acknowledged the prerogative powers of the central bank in the administration of cryptocurrencies until new and strict legislations were introduced to regulate the virtual financial market in the country (Ashley, 2018).
A draft law on Digital Financial Assets was published by the Finance Ministry of the Russian Federation on 25th January 2018. The law’s final version was expected to establish, clearly, procedures for initial coin offerings; affirm the legal regimes for digital currencies and mining; and to provide a clear definition for tokens.
However, political opponents in the Russian Federation – such as Mr. Boris Titov – described the draft law as excessively strict; and tougher than proposed legislations in countries such as Armenia, Belarus, Japan and Switzerland. Mr. Titov believed the Russian Federation would be better off not adopting anything rather than to implement such legislation (Nelson as cited in Ashley, 2018).
Like the G5 banks including the Bank of England, United States Federal Reserve, Bank of Japan, European Union Bank and Bank of Switzerland, the Russian Federation has already taken steps to launch its digital currency in the not-too-distant future (Brown and Whittle, 2020).
In December 2017, Belarus introduced legislation on cryptocurrencies called the Digital Economy Development Ordinance. The content of the Belarusian legislation was more investor-friendly than the legislation proposed by the Russian Federation.
As a result, some officials of the Russian Federation – including Mr. Alexei Moiseev – believed implementation of stringent legislation on the cryptocurrency industry might result in capital flight from Russia to neighbouring economies such as Belarus (Ashley, 2018).
Singapore
A report by Nelson (as cited in Ashley, 2018) revealed in December 2017 that traders in virtual currencies were warned of the dangers of speculating in the digital currency markets, especially when the price of bitcoin was at its peak. The warning was issued by the Monetary Authority of Singapore (MAS).
As noted earlier, on 26th January 2018, the system of Coincheck – a Japanese virtual exchange – was hacked by predators and US$530million worth of investment was lost to the hackers. It was believed the hackers’ initial target was NEM coins based in Singapore.
These challenges notwithstanding, authorities in Singapore were hopeful of successful development for the virtual currency market if necessary checks and balances were effectively put in place. The authorities in Singapore believed with the current wave of strong regulations across the globe, a meltdown of the digital currency market as witnessed in the case of Lehman Brothers is quite remote.
Tharman Shanmugaratnam, the Singaporean Deputy Prime Minister, believed existing laws in the country did not make clear distinctions between transactions that are completed using digital currency, fiat currency or “other novel ways of transmitting value”. The foregoing statement suggests an acceptance of digital currencies such as bitcoin as legal tender in the Singaporean economy.
On 28th January 2020, the Payment Services Act (PSA) came into force in Singapore. The act, inter alia, requires businesses trading in virtual currencies to secure licence from the Monetary Authority of Singapore to ensure effective compliance with regulations related to anti-money laundering and others. The licence requirements extend to all businesses that transfer virtual currencies within Singapore and outside the country to other jurisdictions (6AMLD Report, n.d.).
New regulations proposed by the Monetary Authority of Singapore in July 2020 were expected to have significant impact on the cryptocurrency industry. This followed earlier warnings issued by MAS in January 2018 to Singaporeans on the dangers of investing in cryptocurrencies.
Some financial analysts described the move by the Monetary Authority of Singapore as a step in the right direction; the initiative has a tendency to clamp-down on virtual currency operating firms whose activities have tendencies to increase the risk inherent in cryptocurrency trading (6AMLD Report, n.d.).
South Africa
Over the past decade, the South African rand has been a financial victim of several devaluations by successive governments. Strong economic ties between South Africa and China seem to have an effect on their respective currencies; the Chinese renminbi has a direct relationship with the South African rand. For instance, a devaluation exercise by the South African government in 2015 resulted in an about-26% drop in value of the rand – with a corresponding 2% drop in value of the renminbi (Ashley, 2018).
Nelson (as cited in Ashley, 2018) shared that South Africa’s general position on cryptocurrencies is progressive. In 2014, the Reserve Bank of South Africa issued a paper stating the country’s position on digital currencies. The paper’s content appeared promising to traders in the virtual currency industry.
In July 2017, the South African government collaborated with Bankymoon – a blockchain-based solutions provider – to draw a balance-based regulation for bitcoins. Unlike most of the countries discussed in this section, South Africa remained tight-lipped on digital currency regulation in 2018.
There are no definitive laws regulating cryptocurrency trading in South Africa. In effect, there are no laws protecting investors in the virtual currency markets in the country. Traders in the virtual financial markets can buy and sell digital currencies on various platforms. However, cryptocurrencies are not defined as securities as stipulated in the Financial Markets Act of 2012 (Act No. 19, 2012).
This implies regulatory standards that are applicable to trading in securities in South Africa do not apply to cryptocurrencies. Although cryptocurrency trading remained integrally unregulated in South Africa, Goitom (2019) believed there is light at the end of the financial tunnel; proposed legislations could reverse the trend positively to the benefit of all parties – including virtual exchange operators, investors and the South African government.
Passage of a Taxation Law Amendment bill that was laid before the South African Parliament in 2019 was expected to categorise crypto-assets as financial instruments under the 1962 Income Tax Act. The amended law would subject investments and transactions involving cryptocurrencies under the 1962 Act’s ‘ring-fencing of asset losses clause’ (Goitom, 2019, para. 1).
The amended bill would categorise buying, selling, collection, acquisition, issuance or transfer of ownership for any crypto-asset as a financial service under the 1991 Value-Added Tax (VAT) Act. This would exempt crypto-assets from application of the Act (Goitom, 2019, para. 1).
South Korea
Bitcoin Magazine and Nelson (as cited in Ashley, 2018) revealed South Korea was one of the economies with strong presence in the digital currency space. It became an attractive destination to cryptocurrency investors following the introduction of strict regulations in China during the latter part of 2017.
However, investors’ hope of a continually friendly investment environment in South Korea suffered a setback in January 2018, as top officials in the South Korean government became divided on future regulatory measures to adopt for the cryptocurrency industry. The officials were divided on the type of information to clarify and declare; the accuracy of information that was circulated; and whether to allow limited or broader implementation of digital currency legislation in the economy.
On 23rd January 2018, the South Korean government began enforcing a legislation that did not permit use of anonymous accounts in trading in digital currencies. There were six Korean banks with branches in the state of New York in the United States of America during the period.
To further clamp down on the activities of cryptocurrency traders, the South Korean government on 26th January 2018 requested for customer information on accounts related to digital currency trading in the six South Korean bank branches from the New York State’s Department of Financial Services (DFS). This resulted in massive sell-offs of digital currencies on 30th January 2018 (Bitcoin Magazine & Nelson as cited in Ashley, 2018).
However, the South Korean government’s request was not granted by the New York State’s Department of Financial Services. Some industry analysts believed the Department of Financial Services reluctance dealt a major blow to the South Korean government’s efforts at implementing tougher rules on the cryptocurrency industry during the period (Ashley, 2018).
In March 2020, financial regulators in South Korea amended their existing laws to align with standards set by the Financial Actions Task Force. This followed a court ruling in France on 26th February 2020, in which bitcoin was recognised as a medium of exchange and belonging to the financial assets class in the country.
Prior to these ruling and legislation reviews, South Korea was on record to have banned cryptocurrency transactions that were anonymous; and the ban was in force for several years. Under the revised legislation, virtual currency exchanges in South Korea are obliged to open bank accounts with real names to reassure existing and potential investors of their investments’ safety (Salami, 2020b). This would reduce the high level of anonymity, increase the financial responsibility of virtual exchanges, and increase protection for investors.
Switzerland
As part of measures to strengthen and facilitate cryptocurrency trading in the country, the Swiss government thought it expedient to establish an initial coin offering working group. The working group was finally established on 18th January 2018. The purpose of this group was to ensure legal certainty of the cryptocurrency industry is enhanced while the Swiss financial sub-sector’s integrity is maintained.
Further, the group sought to ensure implementation of technology-neutral regulation. The initial coin offering group was expected to do due diligence; and to submit a report to the Swiss Federal Council by the end of 2018 (Nelson as cited in Ashley, 2018).
On 18th January 2018 Mr. Johann Schneider-Ammann, the Swiss Economics Minister, declared his country’s readiness to become the crypto-nation. The State Secretary at the Finance Ministry, Jörg Gasser, noted the Swiss government’s interest in observing a prosperous initial coin offering market – but not based on compromise of standards, or compromise of the financial market’s integrity (Ashley, 2018).
The foregoing pronouncements were not surprising; Switzerland is noted for maintaining progressive attitudes on the rights of individuals in banking – and similar rights are being granted to investors in the digital currency markets. The seemingly relaxed digital currency regulation in Switzerland may make the nation attractive to investors from other jurisdictions where there are clamp-downs and strict regulatory measures on cryptocurrencies, including bitcoin trading (Nelson as cited in Ashley, 2018).
Operations of virtual exchange markets in Switzerland are subject to approval of the financial regulator, the Financial Market Supervisory Authority (FINMA), which is responsible for financial markets, banking supervision and insurance firms, among others.
United Arab Emirates
On 28th February 2020, authorities in the United Arab Emirates thought it expedient to review their existing legislation on financial services to align with standards of the global anti-money laundering body, the Financial Actions Task Force, after a court ruling in France on 26th February 2020 upheld bitcoin as a legal tender under French financial laws.
However, as of November 2020 there were no definitive laws regulating cryptocurrency trading in the United Arab Emirates; the virtual financial market in the country was still waiting for final legislation on cryptocurrency and related assets’ trading. The foregoing notwithstanding, cryptocurrency trading was still in vogue in the United Arab Emirates; and guided by the Financial Services Regulatory Authority’s (FSRA) detailed framework.
The Financial Services Regulatory Authority Framework provides regulatory requirements for operating crypto-asset businesses including know-your-customer rules, and allowed crypto assets and holding equivalent capital resources, among others (Administrator, 2020).
To expedite the formal legislation process, the Securities and Commodities Authority (SCA) in the United Arab Emirates was committed to completing impending legislative infrastructure for crypto-assets in relation to financial markets and financial instruments.
SCA was committed to ensuring funds of investors in the cryptocurrency industry were protected. Finally, SCA was committed to flushing-out money laundering and terrorism financing in the United Arab Emirates (Administrator, 2020).
There are three major regulatory bodies on cryptocurrency trading in the United Arab Emirates. These include the Dubai Financial Services Authority (DFSA), responsible for free zones regulations; the central bank which serves as the federal regulator for UAE; and the Securities and Commodities Authority. Each of these bodies has a different regulatory position on cryptocurrency.
Detailed explanation on the level of progress made by the United Arab Emirates in the enactment of laws related to cryptocurrency trading can be found in the publication by the Administrator on 5th November 2020.
United States of America
Concerns about the rapid growth of bitcoin in the financial space were raised by the United States Congress in 2013. As a result, the Senate thought it necessary to assess effectiveness of the decentralised digital currency systems that had attracted global attention. To this end, in November 2013 the United States Senate Committee on Homeland Security and Government Affairs began hearing from various stakeholders as a step toward crafting laws to regulate the activities of bitcoin and other cryptocurrency exchanges in the country (Pagliery, 2013; Nelson, 2018).
Contrary to its initial stance in early 2018, the United States Senate deemed it appropriate to dialogue with stakeholders in the bitcoin and altcoins’ industry before drafting comprehensive laws to regulate digital currencies. This development notwithstanding, some lawmakers raised concerns about the “geometric” increase in value of the bitcoin trade.
The United States Justice Department believed it required the assistance of other government agencies and civilians to apprehend criminals who operate through bitcoin and altcoins systems in the virtual financial markets. Some authorities in the United States bemoaned the possibility of digital currencies becoming equivalent to a bank account in Switzerland; and expressed interest in partnering other G20 member-nations to avert its occurrence (Ashley, 2018).
Further, lawmakers in the United States expressed reservations about new developments in the bitcoin and altcoins markets. That is, the introduction of initial coin offerings which involved sourcing funds through the use of digital tokens. The lawmakers believed the existing Federal laws must be beefed-up to effectively deal with fraud and theft that may be associated with use of digital currencies in the country.
In the United States it was hoped that through concerted efforts of the Justice Department, Commodity Futures Trading Commission, Securities and Exchange Commission, and Senate Banking Committee among others, a comprehensive legislation could be passed to effectively regulate activities of the virtual currency markets.
However, users of bitcoin and other cryptocurrencies in the United States have consistently urged government to stay clear of the digital currency systems, so the virtual financial markets in the country could flourish (Bitcoin Magazine, 2018; Nelson, 2018; Reutzel et al., 2018; Romm, 2018).
As of 2018, some academic researchers in the United States had affirmed crypto-assets including bitcoin are endowed with innovative potentials; and that any attempt by the authorities to impose burdensome regulations on their usage in the country could push the trade outside the country’s borders.
Some financial pundits believed bitcoin and altcoins are on a powerful upward trajectory; and any attempt to derail their forward movement in the global virtual financial space may be an exercise in futility. What’s required are security measures to effectively protect individual, corporate and national investments from predatory and sophisticated hackers; and regulatory measures to devoid the digital currencies of harmful socio-economic effects at the hands of virtual exchange operators (Ashley, 2018).
In September 2013, the United States government shut down an online market called Silk Road for trading in drugs and other illicit products. During the shutdown, the Federal Bureau of Investigations (FBI) seized 170,000 bitcoins valued at US$101million. This virtual financial firm was believed to be encouraging anonymity through the use of bitcoins in its transactions.
However, several other virtual firms emerged after the closure of Silk Road by the United States government; and transactions in bitcoins were carried out using coded wallets and special keys. No real names were required in bitcoin transactions. This guaranteed substantial privacy to the detriment of security agencies’ ability to fight crime within and across borders (Ashley, 2018).
In 2018, a major DeFi project in New Jersey in the United States failed – and whopping sum of US$133million was returned to investors because DeFi could not work within rules of the Securities and Exchange Commission (Cheah, 2020).
During financial year 2020, owners of BitMex – one of the leading derivatives exchanges in the cryptocurrency industry – were indicted by regulatory authorities in the United States for operating without being duly registered in the country, and allegedly flouting anti-money laundering rules.
Reports indicated the indictment led to panic-withdrawals by its investors; about 30% of investors’ funds were withdrawn after authorities in the United States issued charges against BitMex. This liquidity crisis notwithstanding, BitMex noted it was still open for business to serve existing and potential investors (Brown, 2020).
In spite of the hard stance on private operators, plans were underway for the Federal Reserve and other members of the G5 banks including the Bank of England, Swiss National Bank, European Central Bank and Bank of Japan to develop their unique digital currencies called ‘central bank digital currencies or CBDCs’ (Potts & Rennie, 2020).
As stated in the preceding section, China had already taken bold steps to circulate its own digital currency known as ‘digital renminbi’ on a pilot basis. In a related development, the Financial Crimes Enforcement Network (FinCEN) has proposed regulations to control cryptocurrencies and their related activities in the United States.
The proposed law calls for the collection of names and addresses of persons engaging in cryptocurrency transactions in excess of US$3,000. The overarching idea is to facilitate tracking of illicit transactions by law enforcement officials and agencies (Hamilton, 2021).
Although outright acceptance of trading in bitcoin and altcoins is perceived by some analysts as a recipe for disaster for traditional financial institutions, including mainstream banks, Cheah (2020) argued exigencies of the time call for change in the financial markets’ status quo – key actors in the global financial space such as regulators and multinationals who influence nation-states (Brown & Whittle, 2020) must be ready to accept change to address teething-problems in the industry.
That is, they must be ready to replace age-old or antiquated financial system perceived as anti-progress and anti-growth with one that is characteristically contemporaneous. Demonstrably, in July 2020 the financial regulator in the United States, the Securities and Exchange Commission, took a bold step in this regard; for the first time, the SEC embraced DeFi by approving Arca – an ethereum-based fund (Cheah, 2020).
It is hoped careful observation and audit of operations of other virtual exchanges in subsequent periods will lead to their approval in the United States and other jurisdictions. The initiatives to introduce unique bitcoins were found not to be limited to national governments; there were some developments at the institutional level.
As at January 2020, JP Morgan was reported to have already launched a digital coin (JPM coin) for its major institutional clients, while many other major banks were ready to follow suit. As part of measures to speed-up bank transactions and payments, seventy-five of the world’s largest banks were implementing blockchain technology on trial-basis during the research period.
These banks are members of the Interbank Information Network, which is led by JP Morgan, ANZ and Royal Bank of Canada (Cheah, 2020). Technology giants such as Apple, Amazon and Google were speculated to have taken steps to launch their respective rival digital tokens, in spite of the setbacks to Facebook’s attempts in recent years (Brown & Whittle, 2020).
In December 2020, financial regulators in the United States proposed the US Stable Bill for adoption and implementation to regulate bitcoin and altcoins trading in the country (Urquhart, 2020).
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.
