Cryptocurrency is a virtual currency that is designed to work as a medium of exchange, using cryptography to secure the processes involved in generating units, conducting transactions and verifying the exchange of currency ownership. Simply put, “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, hashing functions and public-private key pairs.
Understanding cryptocurrency
Cryptocurrency is a digital payment system that does not rely on banks but rather encryption to verify and secure transactions. This simply means that advanced coding is involved in storing and transmitting cryptocurrency data between digital wallets and public ledgers known as blockchain, a digital system that keeps track of cryptographic hash blocks.
Unlike the traditional fiat currencies which are regulated and produced by government entities, cryptocurrency is without a central issuing and regulating authority, and therefore uses a decentralized system to record transactions and issue new units.
Units of crypto are created through a process called mining, which entails using computer tech to solve complicated mathematical problems that generate coins. Other users buy crypto from brokers, then store, spend and keep track of them using cryptographic wallets.
Although cryptocurrency is not a physical asset, what you own is a key that allows you to move a record or a unit of measure from one person to another without the interference of a third party. Today, cryptocurrency holds the attention of major financial institutions and although some investors have made losses as a result of scams and hacking, others view it as a better investment opportunity outside of stocks, forex and even bonds.
Lately, some crypto users purchase insurance from organisations like Swiss insurer AXA, luxury goods, cars and technology products using different cryptocurrency. Some of the companies that sell tech products and allow the use of Bitcoin on their websites include: AT&T, Microsoft, Shopify, newegg.com, Overstock, Home Depot and Rakuten.
The pros to crypto include; cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure whereas some of the cons include; price volatility, hacking and scams, high energy consumption, and use in criminal activities.
Examples of cryptocurrency
Just like different fiat currencies are issued by govts worldwide, there are also many different types of cryptocurrency worldwide. While Bitcoin is the most valuable and commonly known on a global scale since it was first released in 2009 by Satashi Nakamoto, many other cryptocurrencies have emerged over the years. Some of the other cryptocurrency types include: Dogecoin, Litecoin, Ethereum, Monero, Stellar, Cardano, Ripple to mention but a few.
Cryptocurrency regulations around the world
The increased usage of virtual currency has resulted in the worldwide enactment of laws to govern the same. As digital currency evolves from speculative investment to a new asset class, govts have been prompted to come up with the necessary cryptocurrency legislation. Below is a summary of the current digital currency regulatory landscape in different countries.
United States of America
In 2022, the US announced a framework that has as a result paved the way for further crypto regulations. This directive has given power to market regulators like the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commision (SEC).
Furthermore, the U.S administration’s new framework also foresees significant benefits that will come from creating a central bank digital currency (CBDC) or a digital form of the U.S. dollar. Although cryptocurrency exchange is legal in the United states, legislation varies by state. And while it is difficult to find a consistent legal approach at the state level, the United States continues to move forward in developing federal cryptocurrency legislation.
It is important to note however, that neither the Financial Crimes Enforcement Network (FinCEN) nor the Internal Revenue Service (IRS) consider cryptocurrency to be legal tender.
Canada
Although crypto is not considered legal tender in Canada, the virtual currency can be used to buy goods and services online and in stores that accept them. Canada has been more proactive than other countries about crypto legislation, primarily regulating them under provincial securities laws. As early as 2014, Canada had brought entities dealing in crypto under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
In 2017 the British Columbia Securities Commission registered the first cryptocurrency-only investment fund and in August 2017, the Canadian Securities Administrators (CSA) issued a notice on the applicability of securities laws to crypto. In 2021, the Canadian Securities Administrators (CSA) published guidance for crypto issuers that own or hold crypto assets.
The document set out regulatory expectations for disclosures that all crypto issuers must provide about how they protect their assets against loss and theft, including the need to disclose relevant risk factors. Furthermore, the Canada Revenue Agency has taxed cryptocurrencies since 2013 and Canadian tax laws apply to cryptocurrency transactions.
Canada also became the first country to approve a Bitcoin exchange-traded fund (ETF), with several of them now trading on the Toronto Stock Exchange. Regarding crypto trading platforms, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) requires that crypto trading platforms and dealers register with provincial regulators.
United Kingdom
It is important to note that although there are no crypto-specific laws in the UK, the country considers cryptocurrency as property and not legal tender. All crypto exchanges must register with the U.K. Financial Conduct Authority (FCA) and crypto derivatives trading is banned in the U.K. Investors still pay capital gains tax on cryptocurrency trading profits, however, taxability depends on the crypto activities undertaken and who engages in the transaction.
By 30 August 2022, crypto exchange and digital wallet providers were to comply with the reporting obligations of the Office of Financial Sanctions Implementation (OFSI). Crypto firms are required to notify OFSI as soon as possible if they know or have reasonable suspicion a person or entity has committed a financial sanctions offense. The lower house of the British parliament in October 2022, recognised crypto assets as regulated financial instruments.
China
In China, cryptocurrencies are classified as property only for purposes of determining inheritance. Crypto exchanges are also banned from operating in the country by the People’s Bank of China (PBOC), stating that they facilitate public financing without approval.
Furthermore, the ban placed on bitcoin mining in May 2021 by China, forced many engaging in the activity to close operations entirely or relocate to jurisdictions with a more favorable regulatory environment. Although in September of 2021 cryptocurrencies were banned outright, China has been working on developing the digital yuan (e-CNY).
European Union
Crypto is legal throughout most of the EU, although exchange governance and taxation depends on individual member states. Recently, the EU’s 5th and 6th Anti-Money Laundering Directives have come into effect tightening obligations and standard reporting requirements.
It is also worth noting that in 2022, the European Union passed a law enforcing the Markets in Crypto-Assets Regulation (MiCA)—a framework that increases consumer protections, establishes clear crypto industry conduct, and introduces new licensing requirements.
In conclusion
With the cryptocurrency landscape constantly evolving, cryptocurrency regulations are put in place all over the world to govern the virtual currency.
Gerald Ainomugisha is a freelance Content Solutions Provider (CSP) offering both content and copy writing services for businesses of all kinds, especially in the niches of management, marketing and technology.
