The year 2021 witnessed a tremendous rise in cryptocurrency adoption around the world. At the close of the year, the total market cap of cryptocurrency hit $3.3 trillion. From a policy and regulatory angle, a number of governments across the world showed more concern in the crypto market in 2021. From El Salvador adopting bitcoin as one of the country’s legal tenders to China outrightly banning cryptocurrencies, different countries took different approaches towards the cryptocurrency regulation. What follows below is a rundown of some of the notable cryptocurrency regulations in the year 2021.
January 2021 was greeted with the news of Singapore’s Payment Services Act (PSA), which came into effect on January 28. The Act mandated Virtual Assets Service Providers to obtain a license to operate within the country. Since then, the Monetary Authority of Singapore (MAS) received not less than 480 applications for a license to offer crypto services.
While the MAS was reviewing the requests, 90 companies continued operating under temporary exemptions. Binance was among the 170 applicants out of the 480 who requested to provide digital payment token (DPT) services in the country, before it eventually pulled out in September 2021.
In February, the Central Bank of Nigeria (CBN), vide a “Letter to All Deposit Money Banks, Non-Bank Financial Institutions and Other Financial Institutions (BSD/DIR/GEN/LAB/14/001)” dated 5 February 2021, restricted all deposit banks and other financial service providers from facilitating all crypto-related transactions, and to close all customers’ accounts being used for the same purpose. This directive, according to the CBN, was by virtue of its earlier “Circular to Banks and Other Financial Institutions on Virtual Currency Operations in Nigeria (FPR/DIR/GEN/CIR/06/010)” of 12 January 2017. However, industry stakeholders continue to maintain that the 5 February circular is a complete departure from the earlier circular. This is because while the earlier circular required AML/CFT compliance for provision of banking and financial services for cryptocurrency transactions, the latter circular shut the door completely.
In the same month of February, the Constitution Committee in Israel approved the Order to Apply Money Laundering Regime to Financial Asset Service Providers, including those involved in “Virtual Currencies” and Money Changing (2 February 2021) which came into effect in November 2021. The Anti-Money Laundering Order (AMLO) defines “a provider of financial services” as “a person who is required to have a license to provide a service regarding financial assets in accordance with the Supervision of Regulated Financial Services Law, except for those who provide ATM services”. In sections 11 & 12 of the Financial Services Supervision (Regulated Financial Services) Law, a “financial asset” includes “a virtual currency.” The law provides detailed information regarding the identity of service providers and recipients, including particulars of transactions that involve cryptocurrency service.
The month of March seemed to be relatively quiet as players in the industry were adjusting to the new directives/orders.
Then in April, the United Kingdom released the HMRC’s Cryptoassets Manual—last updated on 8 April 2021—in which the HMRC states that “[t]he tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used”. This statement is to the effect that the taxing of crypto currency transactions on both individuals and businesses will depend on the type of the asset. Details on the classification and taxation can be found here.
In June, the 2021 G7 Summit, held in Cornwall. The United Kingdom did not bring any new material proposals for the regulating of digital assets. It emphasized on regulatory consistency by copying the text from the previous Summit of October 2020, hinting about future papers which would be released in the second half of 2021. A Communique from the Finance Ministers and Central Bank Governors revealed interests in both Central Bank Digital Currencies (CBDC) and stablecoins. On CBDC, the G7 Summit considered that “innovation in digital money and payments has the potential to bring significant benefits but also raise public policy and regulatory issues”. It came up with a timeline of later in the same year of 2021 to publish further common principles and conclusion. On Stablecoins, the G7 Summit emphasized that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards”. As the G7 Summit plans to do, “[c]ommon standards would be maintained through international cooperation, as well as, standards from the Financial Standards Board.”
In the month of July, the European Central Bank (ECB) launched the ‘digital euro’ project to work on a CBDC which was said to be at “the phase of investigating ‘what it might look like’. This investigation was estimated to take 2 years. The President of the ECB emphasized that the digital euro would not replace fiat money.
On 10 August 2021, the US Senate passed a $1 trillion Bill with the aim of increasing infrastructure funding for the next eight years. In order to help cover the expenses, the Senate proposed a provision imposing reporting requirements on cryptocurrency “brokers,” which according to projections would enable the Internal Revenue Service (IRS) to collect an additional $28 billion in tax revenue over 10 years.
In other news relating to the US’ regulation of cryptocurrency, Forbes reported that “In 2021, Congress Has Introduced 35 Bills Focused On U.S. Crypto Policy”. Some of these include the Central Bank Digital Currency Study Act of 2021, the Blockchain Regulatory Certainty Act, the Blockchain Technology Coordination Act of 2021, the Token Taxonomy Act of 2021, the Digital Asset Market Structure and Investor Protection Act, the Eliminate Barriers To Innovation Act, and the Blockchain Innovation Act.
On 1 September 2021, the US Securities and Exchange Commission (SEC) sent a “Wells notice” to cryptocurrency exchange Coinbase, threatening to sue if the company proceeded to launch its Lend product. The Lend product allows consumers to earn interest on cryptocurrency holdings. Responding to SEC’s threat, Coinbase’s chief legal officer expressed surprise (in a blog post), pointing out that Coinbase had in fact engaged with the SEC regarding Lend for some six months. Coinbase also argued that Lend does not fall under the SEC’s regulatory purview, since it is not security.
Also in September, the People’s Bank of China issued a Circular on Further Preventing and Disposing of Speculative Risks in Virtual Currency Trading (Sept. 15, 2021). Following this circular, China’s central bank outrightly banned cryptocurrency on September 24, saying that “Virtual currency-related business activities are illegal financial activities,” and also warned that it “seriously endangers the safety of people’s assets.”
The People’s Bank of China promised to (and did) stop crypto mining and trade, even though China was one of the largest cryptocurrency markets at that time. China housed up to 53% of Bitcoin miners globally as at January 2021, which declined to zero by September 2021. The Chinese government gave several reasons to justify the crypto ban, including “[t]he need to save the electricity used by Bitcoin miners [and] the importance of China remaining in control of its financial system.”
Still in September, precisely 7 September, El Salvador set a record by becoming the first country in the world to adopt a cryptocurrency, bitcoin, as a legal tender. This was after the El Salvador’s legislature vote to grant bitcoin the status of the country’s legal tender on June 9. El Salvador’s move surprised the whole world, especially as its President, Nayib Bukele, was solidly in support, despite street protests, and the International Monetary Fund (IMF)’s warnings against such a move. Consequent to making bitcoin a legal tender in the country, its citizens are able to use bitcoin to make payments—”whether it’s to buy groceries from the neighborhood shop or pay up on bank loans”, said the President.
Another development in September was the Ukrainian Parliament passing, almost unanimously, a law to regulate the trading of cryptocurrency. Ukraine needed to make some amendments to the bill. If passed by Parliament, the law will become effective in 2022. Ukraine’s Deputy Minister for Digital Transformation, Oleksandr Bornyakov, pointed out that “many Ukrainians use crypto, so we need to find a way to regulate the sector and make it prosper.” It is important to note that the bill does not make any cryptocurrency a legal tender in the country. The bill only takes cryptocurrency out of the “unregulated zone” by bringing it under a regulatory framework, particularly how it can be traded, and how banks can engage in it. In the implementation of the law—as is claimed—in order to enable trust in the system, anti-money laundering measures will be taken to protect customers against fraud.
October recorded some development from the African crypto space as the South African Revenue Service, in line with its Income Tax Act 58 of 1962, released the Tax Practitioners’ Connect Issue 26 on 25 October 2021, introducing crypto taxes. According to the Issue, “[T]he income Tax Act defines crypto assets as a ‘financial instrument’. Consequently, transactions or speculation in crypto assets is deemed a taxable event, subject to the general principles of South African tax law. Depending on the facts and circumstances of a case, capital gains tax or normal tax may apply”. On the same day, the Central Bank of Nigeria (CBN) officially launched “eNaira”—a CBDC. eNaira is reportedly the first CBDC in Africa. eNaira is currently in its pilot stage.
In November, India introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (the “Bill”) to the Lok Sabha. As stated in the Lok Sabha bulletin of 23 November 2021, “[t]he Bill seeks to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India”. Although this prohibition may not extend to cryptocurrency investment but affect cryptocurrency as a means of payment. The Bill also allows for certain exceptions in order to promote the underlying technology of cryptocurrency and its uses, blockchain.
Also in November, a European Union (EU) expert council moved its proposal to regulate crypto-assets, including stablecoins, in its 27 member-states territory. At the moment, the union is currently discussing a “Markets in Crypto-Assets” (MiCA) framework for Crypto Assets Service Providers (and Issuers) for uniform rules in the entire continent. The Rules are still being negotiated, starting with trying to define what it will regulate to distinguishing asset risks.
As the eventful year 2021 drew to a close, Japan proposed rules in December with respect to stablecoin. The central idea is to regulate who is allowed to issue stablecoins in the country. The Financial Services Agency (FSA) of Japan moves to restrict the scope to only banks and wire-transfer services. The final decision however remains pending.
In the UK, the financial regulator told lawmakers earlier in December that “investors who lose money on crypto should get no compensation from government schemes”, stating categorically that consumers should be aware of this risk when they invest as prices often fall in the crypto market. According to the Financial Conduct Authority (FCA) head, Nikhil Rathi, crypto exchanges operating in the UK must obtain a license from the FCA as a regulatory requirement.
Also in December, the Chairman of Russia’s Financial Markets Commission, Anatoly Aksakov, said that there is need for regulations to make taxing of cryptocurrency transactions easier. According to him, regulating cryptocurrency mining is necessary to make it legal, transparent, and taxable; and to avoid crypto being banned. The country’s central bank is currently preparing an advisory report in this regard. Meanwhile, Russia’s President, Vladimir Putin, has warned that at the moment, investing in cryptocurrency is “very risky”.
The regulatory moves highlighted above, amongst others, reveal a number of governments’ commitment to ensuring the financial and economic stability of their countries. Although there is yet to be a uniform approach, countries that are concerned about the industry have shown readiness to introduce meaningful regulation. While the various approaches in 2021 so far have left significant impacts on the industry, players in the space hope that in 2022, regulators will engage more openly and innovatively in order to ensure that regulation does not stifle Innovation.