2021 was a busy year in terms of regulating the cryptocurrency industry.
Some countries have also noticeably stepped up the development of central bank digital currencies (CBDCs).
Cryplogger took a detailed look at how the regulatory landscape for digital assets has changed.
Global Regulation
FATF Guidelines
One of the most important events of 2021 was the publication by the Financial Action Task Force (FATF) of a revised and revised version of the guidelines for the cryptocurrency industry. The organization has set standards for the DeFi and NFT sectors.
The document recommended that supervised countries be flexible at the initial stage of implementation of the requirements. The organization recognized that VASP and other market players are experiencing certain difficulties in integrating the new systems necessary to ensure legal compliance.
The FATF stressed that government regulators should broadly interpret the definitions used by companies and classify them on the basis of the services offered.
The group defined a “virtual asset” and explained how NFT relates to it.
It excluded decentralized applications from the VASP category. However, according to experts, developers, owners, operators or other persons who retain “control or sufficient influence on DeFi mechanisms” are likely to be such.
BIS Recommendations
The Bank for International Settlements (BIS) noted that CBDCs are moving from conceptual projects to the stage of practical implementation. During the year, the organization actively participated in testing these tools, including in cross-border settlements.
In the autumn, the BIS presented recommendations for the regulation of stablecoins. The experts decided that the Principles of Financial Markets Infrastructure are applicable to these assets.
ISDA Standards
In December, the International Swaps and Derivatives Association (ISDA) began developing global standards for derivatives related to digital assets. The organization recognized cryptocurrencies as a unique class of products.
ISDA highlighted the potential risks of the crypto derivatives market, among which it indicated forks, cyber attacks, airdrops, changes in legislation, unreliability of infrastructure solution providers, as well as a weak connection of derivative products with underlying assets.
North America
UNITED STATES
In January 2021, the Office of the Comptroller of the Currency within the US Treasury(OCC) allowed national banks and federal savings associations to use public blockchains and stablecoins for settlements on behalf of customers.
In the same month, the agency approved the first license of the nationwide “bank of digital assets” – its owner was the custodial service Anchorage.
In May, the OCC reported that it would revise the guidelines regarding cryptocurrencies. Most of these provisions were issued by the agency under the leadership of Brian Brooks, who left the post in January.
At the beginning of the year, President Joe Biden froze FinCEN’s proposed rules for the cryptocurrency industry, which involved the collection of personal information about parties to transactions and transactions of customers of industry companies. Earlier, experts criticized these norms.
In April, former CFTC Chairman Gary Gensler was appointed the new head of the US Securities and Exchange Commission (SEC).
Already in the first months in office, the official made it clear that he puts the interests of users at the forefront. In July, he called for the expansion of investor protection rules to cryptocurrency exchanges and warned that issuers of tokens based on shares are required to report to the department.
Gensler also drew attention to decentralized finance. According to him, the structure of these products does not give immunity from SEC supervision.
Despite a rather tough approach to regulation, Gensler said that the SEC has no plans to ban cryptocurrencies. Later, the agency confirmed the position, approving the first bitcoin futuresETF from ProShares.
Fed Chairman Jerome Powell said that his agency does not intend to ban digital assets. We can expect that the Fed will not change opinions – Biden plans to keep Powell as chairman.
In March, the IRS explained that U.S. residents do not need to report on the acquisition of cryptocurrency on the first page of a Form 1040 declaration if they are supported by a HODLstrategy. Later, the service clarified that it was only interested in taxable transactions.
One of the most discussed topics of 2021 was the US infrastructure plan for $ 1.2 trillion, agreed by senators on July 28.
The document contains an extended definition of the concept of “broker”. Depending on the interpretation, miners and operators of nodes in blockchains, wallet developers, liquidity providers in DeFi protocols and other non-custodial players may be obliged to report to the IRS on the activities of their users.
At the stage of the bill, the initiative was criticized by industry representatives and experts, as well as some politicians. The latter proposed amendments, but could not come to a consensus, so on November 16, Biden signed the document without changes in this part.
In November, the US Treasury issued instructions on compliance with sanctions by participants in the crypto industry, and also published a report on the risks of stablecoins, which it considers a threat to financial stability.
Canada
In February 2021, the Ontario Securities Commission registered North America’s first bitcoin ETF. Purpose Investments received approval, and the units of the structure were listed on the Toronto Stock Exchange.
Two months later, Canadian regulators approved the launch of several Ethereum-based spot ETFs.
In April, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Authority of Canada (IIROC) published a regulatory framework for crypto companies’ compliance with regulatory requirements.
In June, the Center for Analysis of Financial Transactions and Reporting of Canada tightened the rules for verifying clients of companies associated with digital assets.
In September, the CSA and IIROC issued guidelines on social media use, advertising, and marketing for cryptocurrency exchanges.
Central America
El Salvador
In early June, President Nayib Bukele spoke at the Bitcoin 2021 conference, where he announced his intention to legalize digital gold. A few days later, the parliament adopted the relevant law, and on September 7 it entered into force.
To maintain liquidity, the government of the country approved a bitcoin fund in the amount of $ 150 million On the balance sheet of the structure there are 1220 BTC.
To attract additional capital, the government decided to exempt foreign investors from capital gains tax and approach tax on transactions with bitcoin.
Mexico
In June, the Bank of Mexico, the Ministry of Finance and the National Commission on Banks and Securities issued a joint statement in which they recalled that cryptocurrencies are not legal tender in the country.
South America
Brazil
The Brazilian Securities Commission (CVM) has approved Latin America’s first bitcoin ETF. Shares of a fund owned by the asset manager QR Asset Management.
In July, CVM registered the second exchange-traded fund from QR Asset Management – this time based on Ethereum.
A month earlier, the Bank of Brazil postponed the launch of the digital real, the completion of the development of which was planned for the end of 2022.
Venezuela
In the fall, the Bank of Venezuela launched a digital bolivar. After the release of the CBDC, some experts noted “the lack of digital components that would distinguish it from fiat currency.”
Paraguay
In June, a bill aimed at developing a regulatory framework for the regulation of cryptocurrencies was introduced in the Paraguayan parliament.
The author of the document, Carlos Rejala, clarified that there is no question of legalizing bitcoin following the example of El Salvador.
Uruguay
In August, the Uruguayan Senate introduced a bill regulating cryptocurrencies and allowing payments to be accepted in digital assets, including companies. The document assumes that their use will become legal in any business.
Eu
In 2021, European regulators paid great attention to the development of CBDCs. Several countries have conducted pilot tests, and international regulators have noted a number of initiatives focused on the digitalization of the euro.
In January, the European Central Bank (ECB) concluded a public consultation on the digital euro. The majority of respondents cited data privacy as the most important characteristic of a CBDC.
In the spring, the head of the regulator, Christine Lagarde, said that a digital currency in the euro area could appear in four years if politicians approve the project.
In July, the ECB began a phase of CBDC research. In the fall, the regulator named the members of the advisory group on the potential development and distribution of CBDC.
Despite the focus on CBDCs, the private market has also not gone unnoticed.
The European Commission has introduced a bill that would ban anonymous transactions with digital assets.
In November, the ECB’s Governing Council approved a new regulatory framework for the supervision of electronic payments, which included an assessment of the efficiency and security of cryptocurrency-related wallets and services.
France
In January, the Bank of France tested the CBDC in a pilot project with the placement of tokenized shares of the currency fund. For the first time in the country, a private blockchain platform was used for this.
In the summer, the regulator, together with the Swiss crypto bank SEBA, completed testing of operations with securities based on CBDC.
Following this, the Bank of France and the Monetary Authority of Singapore (MAS) conducted a successful experiment in the field of cross-border settlements.
In November, the French regulator tested the digital euro in transactions with government bonds. Together with a group of dealers, he conducted 500 operations in the primary and secondary markets.
Germany
In July, German funds for institutional clients were able to invest up to 20% of assets in cryptocurrencies. In April, the Bundestag approved a bill, which was subsequently approved by the Bundesrat.
At the end of the year, the parties that formed the new government of Germany signed a coalition agreement in which cryptocurrencies and blockchain technology are listed among the main directions of the country’s development for the next four years.
Denmark
In June, Denmark announced its intention to change the tax code in force since 1922 to correctly reflect operations with digital assets by residents. The authorities concluded that the existing rules lead to errors in the calculation of the taxable base and risks of tax fraud.
Ireland
In April, the Central Bank of Ireland extended the law on combating money laundering and terrorist financing to the cryptocurrency industry.
Netherlands
The Central Bank of the Netherlands canceled the decision taken in 2020 to introduce stricter requirements for cryptocurrency service providers. The regulator acknowledged that tightening the rules “is not fair enough.”
Portugal
In June, the Central Bank of Portugal issued the first licenses to two bitcoin exchanges – Criptoloja and Mind the Coin. Trading platforms were recognized as “virtual asset service providers.”
Asia
China
In 2021, China began another “crusade” against the cryptocurrency industry, which ended with a ban on mining and any operations with digital assets.
In May, China’s CITIC Bank banned individuals and businesses from using accounts to buy and trade digital assets. In the same month, the media reported on a notice issued by three associations at the People’s Bank of China (PBOC). The document prohibits local companies from supporting cryptocurrency-related businesses.
At the same time, the authorities of Inner Mongolia began to combat the illegal mining of cryptocurrencies, and Vice Premier of the State Council of the People’s Republic of China Liu He announced his intention to take measures regarding the mining and trading of bitcoin.
Following the region, restrictive campaigns were launched by the provinces of Xinjiang, Qinghai, Yunnan, Sichuan and Hebei.
In July, the State Grid Corporation of China sent a notice to all regions of the country demanding to stop mining cryptocurrencies.
In June, the PBOC held a meeting with representatives of five Chinese banks and the Alipay payment system. They were asked not to participate in transactions with digital currencies.
Representatives of the judicial system also spoke out against cryptocurrencies. The highest court of Shandong Province, in public comments on its decision, explained that investing or trading in digital assets is not protected by Chinese law.
In the autumn, the State Commission for Development and Reform of the PEOPLE’s Republic of China published a document according to which the suppression of enterprises engaged in the production of cryptocurrencies became part of the indicator of the effectiveness of municipal authorities.
The PBOC, in turn, recognized the activities of platforms that ensure the exchange of digital assets among themselves or for fiat illegal. The position of the regulator made it impossible for over-the-counter platforms that allowed the Chinese to participate in the industry.
Probably, the measures taken by the PRC are related to the imminent launch of the digital yuan (e-CNY), which the PBOC has been actively testing for a year. The authorities are also concerned about the environmental component of mining – Beijing aims to achieve carbon neutrality by 2060.
Another possible motive is to prevent capital flight. In 2020, residents of the country withdrew more than $ 17.5 billion in cryptocurrencies outside its borders.
In July, the PBOC published the first white paper of the digital yuan. The regulator said that e-CNY supports smart contracts, provides for several types of wallets, and also allows you to conduct anonymous transactions, provided that their volume is small.
Hong Kong S.A.R
In February, Hong Kong authorities put forward a legislative proposal to ban retail investors from trading bitcoin and other cryptocurrencies.
In the spring, the Bureau of Financial Services and the Treasury began drafting a bill that would require the licensing of platforms for trading digital assets.
In the autumn, the Hong Kong Monetary Authority published a white paper of the retail CBDC. The document discloses potential options for the technical implementation, release and distribution of the tool, as well as its architecture.
India
In the spring, the country’s authorities demanded that companies related to cryptocurrencies disclose their assets. The relevant amendments to the legislation were made by the Ministry of Corporate Affairs.
In November, the provisional agenda for the winter session of Parliament was published. Within its framework, the bill “On cryptocurrencies and the regulation of official digital currencies”should be considered. His description reads:
“To create a favorable basis for the development of an official digital currency, which will be issued by the Reserve Bank of India. The bill also aims to ban all private cryptocurrencies in India, however allows for certain exceptions to promote the underlying technology and its use.”
As a result, the document was withdrawn for revision. Reportedly, it can be presented in 2022.
South Korea
In the spring, south Korea’s Financial Services Commission (FSC) proposed a new supervisory regulation for VASP in connection with the entry into force on March 25, 2021, of the revised law on the use of information on financial transactions.
In April, the country’s regulators announced a joint initiative aimed at combating illegal transactions in digital assets.
The following month, it became known that the state is modernizing the system for monitoring phishing activity related to cryptocurrencies.
In the summer, residents of South Korea were obliged to disclose data on accounts on foreign bitcoin exchanges as part of the fulfillment of tax law requirements. Earlier, the Ministry of Economy and Finance introduced a capital gains tax on operations with cryptocurrencies – the changes will come into force on January 1, 2023.
Until September 24, bitcoin exchanges operating in the country had to register with the FSC. According to the statement of the regulator, out of 66 platforms, 42 VASPs sent the necessary documents. The rest of the operators closed the business.
In the fall, the FSC ruled out regulating NFT as a cryptocurrency. The agency noted that non-fungible tokens do not fall under the definition of virtual assets, which correlates with the position of the FATF.
Singapore
In November, MAS initiated a project to explore the technical aspects of retail CBDC development. The head of the department, Ravi Menon, stressed that the Office recognizes the potential of the digital currency, but does not consider the arguments in favor of its launch “convincing enough.”
Earlier, MAS became a member of the Dunbar project of the Bank for International Settlements. The latter aims to develop prototypes of common systems for international translations using multiple CBDCs.
Thailand
In June, Thailand’s Securities and Exchange Commission banned local trading platforms from offering meme cryptocurrencies like Dogecoin (DOGE) and NFT to clients.
In August, the Commission opened a public hearing on proposed amendments to the rules for the work of custodians of digital assets. The new norms touched upon the issues of storing fiat currencies, crypto-landing operations, as well as receiving interest on deposits in digital assets.
United Arab Emirates (UAE)
In January, the Dubai Financial Services Authority presented a business plan for 2021-2022. According to the document, the agency will create a regulatory framework for digital assets by expanding the authority of the agency in relation to issuers of cryptocurrencies and related trading platforms.
In the summer, the Central Bank of the UAE announced the development of CBDC. Earlier, the regulator joined the project “Bridge for digital currencies of central banks”, which also involves the central banks of Hong Kong, Thailand and China.
Japan
In January, Japan’s Financial Services Agency (FSA) announced that it would implement FATF guidelines on countering money laundering and terrorist financing for local cryptocurrency companies.
In the summer, it became known that the FSA created a unit for the supervision of digital assets. The motive was the authorities’ concern that the spread of “new forms of private money” could undermine Japan’s financial system.
Like many other countries, Japan developed the CBDC project in 2021. In April, the country’s central bank launched the first phase of testing the digital yen. A detailed plan for the initiative will be presented by the end of 2022.
Turkey
In April, the Turkish central bank banned payments in cryptocurrencies for goods and services. Among the reasons for the decision, the agency called the lack of regulation and a central governing body, volatility, use for illegal purposes and the risk of theft.
In July, the Ministry of Finance of the country reported on the completion of the development of rules for the regulation of digital assets. Parliament was supposed to consider the bill in October, but this never happened.
In May, the authorities obliged cryptocurrency exchanges to comply with the requirements for combating money laundering and terrorist financing. Under the decree of President Recep Tayyip Erdogan, 31 trading platforms fell.
The Financial Crimes Investigation Board,in turn, instructed exchanges to report on user transactions exceeding the limit of 10,000 lira (~$570).
Africa
Nigeria
In February, the Central Bank of Nigeria banned banks and other commercial financial institutions from providing services to cryptocurrency exchanges and companies working with digital assets.
The regulator could pursue the same goal as China – to “clear” the way for CBDC, the launch of a pilot project of which took place in October.
SOUTH AFRICA
In January, the Financial Sector Supervisory Authority of South Africa submitted a proposal to regulate cryptocurrencies, and in February, the Internal Revenue Service began sending taxpayers audit requests with requirements to disclose additional information about transactions with digital assets.
In the autumn, the government decided to prohibit pension funds from directly or indirectly investing in digital assets. Current rules allow attachments of up to 2.5% of AUM. Under the definition of cryptocurrencies in the country fall including NFT.
Other jurisdictions
United Kingdom
In 2021, the UK took a number of steps aimed at tightening the regulation of the cryptocurrency market and developing a digital pound. The Ministry of Finance of the country initiated appropriate consultations.
In the spring, the UK Internal Revenue Service (HMRC) published an updated guide to cryptocurrency transactions. The document combined the rules for business and individuals. The service for the first time touched upon issues related to crypto lending and staking.
Already in the summer, HMRC began to collect information about customers of foreign cryptocurrency exchanges from foreign fiscal authorities. We are talking about the names and addresses of both regular and one-time users of trading platforms.
In June, the UK Financial Conduct Authority (FCA) extended the temporary registration regime for cryptocurrency companies until March 31, 2022.
The UK has not yet made a final decision on the launch of the digital pound, but for a year it has been actively working in this direction.
In April, the country’s authorities created a working group that will consider the options for using CBDC and the risks associated with the instrument. After the announcement, the Bank of England posted seven relevant vacancies.
In the autumn, the Committee on Economic Affairs of the House of Lords also joined the study of the digital pound.
Australia
In February, the Australian Securities and Investments Commission (ASIC) approved the listing of a bitcoin ETF from Cosmos Capital on the country’s largest exchange, the ASX.
In the spring, the Australian Tax Service informed residents about the need to revise income data on operations with cryptocurrencies for 2020.
At the end of October, the Australian Senate Committee on the Study of the Regulation of the Cryptocurrency Industry presented regulatory recommendations. Among other things, experts proposed to introduce the concept of the corporate structure of the DAO and clarify the provisions on combating money laundering and terrorist financing.
Earlier, ASIC published a set of requirements for admission to trading on cryptocurrency-based ETP stock exchanges, including managed funds, ETFs and structured products.
Switzerland
In the autumn, the Swiss Financial Market Supervisory Authority approved the first crypto fund in accordance with the country’s legislation.
In November, the Swiss National Bank announced the completion of testing of the wholesale CBDC. According to board member Thomas Moser, if there is an appropriate political decision, the technical launch of the tool could take place as early as January 2022.
Findings
2021 showed that the cryptocurrency industry will not be able to avoid regulation. To varying degrees, the regulatory authorities of almost all leading countries have paid attention to the emerging market.
Monetary regulators are afraid of losing control over monetary policy and want to avoid the possible risks that, in their opinion, digital assets carry.
Countries also do not want to lose potential tax revenues from the cryptocurrency industry, which in some regions are estimated at tens of billions of dollars.
At the same time, it became clear that even a complete ban in a single jurisdiction like China will not be able to destroy the industry. Despite the sharp reaction of the market, in just a few months, the quotes updated the historical maximum, and the hash rate of the bitcoin network by the time of writing has already fully recovered.
