Bitcoin, the world's most prominent digital currency, came into existence in early 2009. While the digital currency went largely unnoticed by global authorities in its early years, it has since drawn significant attention from regulators and lawmakers. Combined with its complex nature, this has resulted in a regulatory landscape that is both complex and constantly changing.
Many nations have weighed in on Bitcoin's legal status, with some providing outright bans. Instead of reviewing the decisions of every nation that has taken action on this matter, this article will delve into Bitcoin's legal status in the world's five largest economies, as ranked by the International Monetary Fund.
1. The U.S.
The United States, the world's largest economy in terms of GDP, allows Bitcoin, but does so with specific restrictions. More specifically, several different government entities have weighed in on the matter. The Commodity Futures Trading Commission (CFTC), which is responsible for regulating both derivatives and commodities, claimed in 2013 that it had authority over digital currencies, maintaining that they were commodities covered under the Commodity Exchange Act.
In 2015, the CFTC confirmed its ability to regulate digital currencies when it took action against Coinflip Inc., which ran a platform for trading Bitcoin options without registering with the regulator.
A few years later, in 2018, the CFTC's ability to regulate digital currencies gained additional confirmation, when a federal judge ruled that the government agency has the jurisdiction to prosecute fraud involving virtual currencies.
U.S. Senior Judge Rya W. Zobel provided this ruling after the CFTC alleged that "My Big Coin" qualified as a commodity under the Commodity Exchange Act, and was therefore subject to the regulator's jurisdiction. My Big Coin was a virtual currency that was charged by the CFTC with both misappropriation and fraud.
The U.S. Securities and Exchange Commission (SEC) has taken a different tack, as one of its division heads clarified during a 2018 speech that Bitcoin is not a security. As a result, the government agency lacks jurisdiction over the digital currency.
When explaining the rationale behind this, William H. Hinman, director of the Division of Corporation Finance, pointed to Bitcoin's decentralised nature. "Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value," he stated.
The Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury Department, provided guidance surrounding virtual currencies in 2013. More specifically, the bureau noted that people and individuals involved in the exchange and/or use of virtual currencies may qualify as money services businesses (MSBs) under its rules, which would require them to fulfill certain requirements involving reporting and anti-money laundering. In addition, MSBs must adhere to specific registration requirements.
FinCEN issued additional guidance in 2019, which included information designed to help institutions identify and then report suspicious activities involving convertible virtual currencies.
China, the world's second-largest economy when ranked by GDP, has taken several steps to address digital currency activity. This nation has taken a rather proactive approach, with its government officials cracking down on cryptocurrencies at some points and lauding the possibilities inherent to the blockchain at others.
In 2017, the Asian nation instructed crypto exchanges based in Beijing to halt trading activities, and the next year, the nation's central bank reported that the renminbi was being used for under 1% of all global crypto trading.
The country also prohibited participation in initial coin offerings (sales of newly created digital tokens) in 2017, also known as ICOs, specifically banning companies from raising funds this particular method. Seven separate government entities, including the People's Bank of China (PBOC), China Insurance Regulatory Commission and the China Securities Regulatory Commission released a joint statement stressing that ICOs are not a legal means of raising money. In early 2018, the PBOC announced further measures, revealing that it planned to prevent domestic investors from accessing any websites involving digital currency trading and ICOs.
Further, the Leading Group of Internet Financial Risks Remediation, an internet regulator, requested in January 2018 that local governments work with businesses involved in Bitcoin mining operations to help them withdraw from such activities, according to a leaked document. The document specifically stated that these mining operations "have consumed huge amounts of resources and stoked speculation of 'virtual currencies.'"
In July 2018, it was reported that all sizable cryptocurrency mining companies had relocated from China to other nations.
While Chinese authorities and regulators took significant action to crack down on various Bitcoin-related activities, one of the nation's courts gave the digital currency a little bit of flexibility in July 2019, when it ruled that Bitcoin is virtual property.
Jehan Chu, co-founder of Kenetic Capital, weighed in on this situation. "While exchanges and companies that are trading Bitcoin have been banned in China personal ownership and exchange has not been ruled illegal," he told Cointelegraph. "This has left space for individual ownership while institutional Chinese trade has moved offshore, but intact." In addition, individuals have the ability to exchange Bitcoin between each other, said Chu.
Shortly after this ruling, it was reported that Chinese digital currency enthusiasts were achieving even greater flexibility by using virtual private networks and stablecoin tether (USDT) to take part in crypto trading.
Later in 2019, Chinese authorities began taking a more aggressive approach to digital currencies and the blockchain. Xi Jinping, the president of China, stated that the nation should leverage the potential that exists in blockchain technology. After this speech, the value of many altcoins, or alternative protocol assets, rose sharply. In addition, the shares of many companies related to blockchain technology experienced notable gains.
Following this strong market reaction, Chinese regulators began to monitor digital currency trading more closely. Market supervisors cautioned traders, and regulators instructed digital currency related firms to shut their doors.
In November 2019, Bloomberg reported that as a result of these moves, no less than five cryptocurrency exchanges declared that they would either stop working with domestic investors or halt operations entirely.
Japan, the world's third-largest economy, made headlines when it enacted legislation that recognised Bitcoin as a legal payment method as of 1 April 2017. The same law that identified the cryptocurrency in this way applied anti-money laundering/know-your-customer rules to exchanges.
Starting 1 April 2017, exchanges operating in Japan became subject to the regulatory authority of the Payment Services Act. In addition to satisfying AML/KYC requirements, they were obligated to maintain records, be registered and take specific actions to maintain security and protect customers.
In May 2019, the nation's government provided further clarity when it approved a bill that made it so cryptocurrencies, which were previously referred to as "virtual currencies," would now legally be called "crypto assets." This change came after Taro Aso, Japan's deputy prime minister and minister of finance, implored reporters to embrace the term "crypto assets" during a press conference. He urged them to leverage that specific term instead of "virtual currency."
Japan's Financial Services Agency has noted that industry participants are not obligated to use the term "crypto assets," meaning there are no legal repercussions for using a different description. Exchanges operating in Japan also encountered additional restrictions starting 1 May 2019, in that they were now required to segregate client funds and their own cash flows.
The Finance Ministry of Germany, the world's fourth-largest economy, first recognised Bitcoin as a unit of account in 2013 that could be thought of as "private money." As a result, people and businesses that use Bitcoin for commercial purposes will not receive a tax exemption.
In November 2019, the Western European nation's lawmakers approved legislation that would allow banks to both sell and store cryptocurrencies beginning at the start of 2020. German lawmakers specifically passed this law in order to provide the nation's banks with an exemption from the European Union Fourth Anti-Money Laundering Directive, allowing them to deal with cryptocurrency. Under the law, crypto exchanges and custodians doing business in the country were required to apply for a license from German regulator the Federal Financial Supervisory Authority (BaFin) before 2020 began to continue operating.
In March 2020, BaFin took action against KKT UG, a company that runs cryptocurrency ATMs, providing it with a cease and desist order on the basis that it had not obtained a license from BaFin under the German Banking Act. Previously, the legal status of cryptocurrency ATMs had not been clarified under German law.
At the time of this writing (5 June 2020), Bitcoin is legal in India, a development that materialised after the nation's Supreme Court handed down a verdict eliminating a prior ban on cryptocurrencies. In April 2018, the Reserve Bank of India (RBI) stated that "entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling" virtual currencies.
"Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies,
including Bitcoins, regarding various risks associated in dealing with such virtual currencies," the central bank noted.
The announcement by the RBI gave Indian financial institutions a period of three months to disentangle their relationships with exchanges. The RBI announced its cryptocurrency ban a few months after Arun Jaitley, India's Minister of Finance, started during his budget speech that the nation's government did not recognise digital currencies as legal tender and use any and all means necessary to prevent them from being used.
While the Indian government had consistently shown its desire to ban cryptocurrency trading, industry group the Internet and Mobile Association of India challenged this prohibition, claiming that no specific laws prevented such activity, so it was "legitimate." India's Supreme Court consequently struck down the trading ban.
Bitcoin is legal in several countries, including many of the world's largest economies. Government officials in these jurisdictions have provided clarity for industry participants surrounding various Bitcoin-related activities, including trading of the cryptocurrency and simply holding it.
It is important to keep in mind that the regulatory landscape for Bitcoin, as well as other digital currencies, is constantly changing. At the time of this writing, Bitcoin has been in existence for 10 years. Should the digital currency experience more widespread adoption, it could spur the creation of new laws and regulations in the world's largest economies.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…