This article will briefly discuss the current cryptocurrency regulations and the expected legislative prospects for 2024 from a geographical perspective.
Author: Julius Mutunkei
Translation: TaxDAO
In the new year, it is expected that the regulatory efforts in the cryptocurrency field will increase significantly. These rules will expand to cover anti-money laundering and counter-terrorism financing risks, the behavior of cryptocurrency operating companies, and regulatory actions related to token sales.
In the United States, there is no sign of slowing down in regulatory actions. Similarly, the UK has introduced a set of rules that equate the sale of crypto tokens with the sale of traditional financial products. Likewise, the EU is set to become the first major jurisdiction to formally enact a series of comprehensive cryptocurrency industry laws and regulations in 2024. The Markets in Crypto-Assets Regulation (MiCA) aims to establish a unified EU crypto regulation and provide legal certainty for digital assets beyond the scope of current EU financial services legislation.
Overall, analysts expect that the focus areas for 2024 will go beyond the overall trend of increasing regulatory efforts. They predict that financial institutions will establish more robust risk management frameworks and increase capital and liquidity requirements to reflect the current economic environment. Additionally, the importance of data and artificial intelligence in traditional finance and the cryptocurrency field continues to rise, leading to an expected increase in the demand for data governance and model risk management in global cryptocurrency regulation. Analysts also anticipate that sustainability and Environmental, Social, and Governance (ESG) factors will play a larger role in international cryptocurrency regulation, while cybersecurity remains a top priority as digital asset platforms continue to be targeted by hackers and fraudsters.
Let's briefly discuss the current cryptocurrency regulations and the expected legislative prospects for 2024 from a geographical perspective.
Cryptocurrency Regulation in the United States
Cryptocurrency regulation in the United States is a combination of state and federal regulation, allowing multiple agencies to participate in controlling the industry. These agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), largely utilize existing legal structures to regulate digital asset activities.
In 2023, the SEC and CFTC initiated over 200 enforcement actions against cryptocurrency companies. The increased regulatory activity in the United States is driven by the industry's prevalence of bankruptcies, fraud, deceptive operations, and illicit fund flows.
As 2023 came to a close, some participants in the cryptocurrency field criticized regulatory agencies, particularly the SEC, for their approach to regulating the industry. They once again called for policymakers and regulatory agencies to clarify cryptocurrency laws and adopt a more comprehensive rule-making approach.
However, these requests were largely ignored. By the end of the year, the SEC faced multiple setbacks in court, particularly in cases against Ripple (XRP) and Grayscale. But it did have the last laugh. On December 15, the regulatory agency rejected Coinbase's petition to establish new rules for the cryptocurrency industry.
Anton Titov, CEO of fiat-to-crypto payment processor Archway Finance, told crypto.news that he believes the SEC's decision is reasonable. As he explained, the agency's duty is to protect investors, maintain market integrity, and promote capital formation. Therefore, he believes that rejecting Coinbase's petition is entirely in the interest of investors. "Because most people who come into contact with cryptocurrencies this year and next year are doing so for speculative purposes. Even for utility tokens, speculation equals the ambition to make money, which equals investment. So, the actions of the U.S. Securities and Exchange Commission are entirely in the interest of investors and are trying hard to maintain market integrity."
However, Titov pointed out that this decision also highlights the SEC's reluctance to fully embrace cryptocurrencies. He believes that the agency sees Bitcoin and stablecoins as threats to established and controllable currency flows. Furthermore, in his view, U.S. regulatory agencies are not aiming to be the "innovation center" for new technologies such as blockchain and digital tokens, indicating a fundamental disconnect between their mission and the goals of the cryptocurrency industry.
However, the market size of certain cryptocurrencies continues to grow, especially dollar-backed stablecoins, which have exceeded the $500 billion systemic importance threshold, drawing the attention of U.S. lawmakers and leading them to draft more legislative proposals to regulate cryptocurrency activities.
One of the proposals is the bipartisan "Responsible Financial Innovation Act" (RFIA), which aims to classify most digital assets as commodities. It would shift primary oversight responsibility to the CFTC and establish regulatory requirements for stablecoins.
The Biden administration also issued an executive order outlining the U.S. government's approach to cryptocurrency regulation. Additionally, a bill passed by Congress in 2021 requires new reporting requirements for individuals involved in large-scale cryptocurrency transactions, which will take effect in January 2024.
According to the cryptocurrency advocacy organization CoinCenter, the "Infrastructure Investment and Jobs Act" mandates that entities receiving $10,000 or more in cryptocurrency in the course of their regular business operations report the transaction to the IRS. Failure to report within 15 days of the transaction could result in felony charges. This legislation is self-executing, meaning that no additional regulatory measures or enforcement actions by government agencies are required for its implementation. Once signed into law, it takes immediate effect and is enforceable. Therefore, all U.S. citizens dealing with cryptocurrency are now bound by this law.
Looking ahead to 2024, many predict that U.S. efforts in cryptocurrency legislation will primarily focus on two bills: one seeking to regulate stablecoins at the federal level, and the other proposing a comprehensive approach to the overall cryptocurrency market structure.
The "Clairity for Payment Stablecoins Act," initiated by Patrick McHenry, Chairman of the House Financial Services Committee, may be one of the first legislative projects to be addressed in 2024. Although the White House and several influential Democrats have expressed concerns about allowing regulatory agencies to approve stablecoin issuance without the involvement of the Federal Reserve, the bill passed the committee stage in July. However, SEC Chairman Gary Gensler compared stablecoins to money market funds and suggested that funds pegged to the dollar should fall under the jurisdiction of his agency, which observers believe could pose an obstacle to the smooth passage of the stablecoin bill.
The second bill, the "21st Century Financial Innovation and Technology Act," may also face challenges as it proposes to shift more responsibility to the CFTC and requires regulatory agencies to establish a clear path for digital assets to transition from securities investment to commodities.
Similarly, the potential approval of Bitcoin ETFs could enhance the legitimacy of the cryptocurrency industry. Several asset management companies, including BlackRock, Fidelity, and WisdomTree, are vying for spot Bitcoin ETFs, which require approval from the U.S. Securities and Exchange Commission (SEC) but have not yet been approved.
Finally, the 2024 elections may have a significant impact on digital asset legislation, as lawmakers' attention may shift from cryptocurrency regulation to reelection campaigns.
Cryptocurrency Regulation in the UK
Since 2020, UK law has required cryptocurrency companies to register with the Financial Conduct Authority (FCA) and comply with the 2017 regulations on anti-money laundering, counter-terrorism financing, and fund transfers.
However, in October 2022, as part of a broader strategy by the UK government to make the country a global center for crypto technology and investment and enable regulatory agencies to respond more quickly to developments in the field, the House of Commons voted to allow the Treasury to regulate cryptocurrencies as financial instruments under the Financial Services and Markets Act 2000.
Additionally, the government released a consultation paper in early 2023 seeking advice on regulating the cryptocurrency industry. Following this work, the Treasury indicated its intention to place various digital assets (including utility tokens and unbacked exchange tokens) under similar regulation to traditional financial assets.
The rules governing cryptocurrency advertising and sales in the UK are also changing, as the Treasury is combining cryptocurrency promotions with other types of financial advertising. Furthermore, the FCA has imposed further restrictions on the sale, marketing, and distribution of cryptocurrency derivatives (excluding security tokens).
In addition, just like in the United States, stablecoins are expected to face stricter regulatory scrutiny in the UK. The government plans to make them a recognized form of payment. Observers predict that this can largely be achieved by extending existing e-money and payment legislation.
Nathan Catania, a partner at XReg, stated in an interview with crypto.news that the UK's approach to stablecoin regulation will play a crucial role in the country's financial future. Catania emphasized the proactive measures the UK has taken to address key regulatory risks and stated that the country is ensuring issuers maintain reserves of low-risk, liquid, and secure assets. "Overall, the major regulatory risks have been addressed. This includes ensuring that issuers maintain reserve assets and ensuring that these assets are low-risk, liquid, and secure instruments. Safeguards around protecting customer assets and other prudential requirements will ensure that stablecoins issued in the UK are safer for consumers to use."
However, Catania also noted potential obstacles in the overseas stablecoin regulatory approach. Most stablecoin activities in the UK involve assets issued by foreign entities, particularly Tether (USDT) and USD Coin (USDC). He stated that even as we enter 2024, the impact of the regulatory framework on the listing and trading of these stablecoins on UK cryptocurrency exchanges remains unclear.
Furthermore, the analyst expressed concerns about the potential inability of the stablecoin regime to extend to peer-to-peer payments. He believes this could impact the cryptocurrency market and exchanges in the UK, potentially limiting consumer choice while protecting consumer interests. Therefore, he believes the UK must maintain a cautious balance in formulating future cryptocurrency legislation.
Cryptocurrency Regulation in Europe
With the implementation of MiCA, there has been a significant leap in the cryptocurrency legislative landscape in Europe. This regulatory framework represents the first attempt to coordinate cross-jurisdictional regulation of digital assets and related activities within the EU. MiCA is a key part of the EU Commission's broader strategy to integrate cryptocurrencies and blockchain technology into the financial services industry. MiCA forms the basis of EU cryptocurrency regulation, aiming to synchronize different laws across member states and strike a delicate balance between encouraging financial innovation and mitigating the unique risks posed by various digital assets.
By 2024, cryptocurrency asset service providers (CASP) and cryptocurrency asset issuers (CAI) operating within the EU or across the entire EU will have to comply with a unified rulebook, replacing the previously disjointed national frameworks.
As the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) develop regulatory technical standards (RTS), implement technical standards (ITS), and guidelines, the application of MiCA is expected to be further refined in the new year. Meanwhile, EU member states will also deploy their own legislative tools to support the rollout of MiCAR, RTS, ITS, and guidelines.
The outlook for 2024 in Europe is that national competent authorities (NCA) of EU member states will intensify their efforts to provide regulatory guidance and expectations for CASPs, CAIs, and traditional financial service providers engaging in MiCAR-regulated activities.
Cryptocurrency Regulation in Asia
While China completely banned the use of cryptocurrencies in 2021, several of its neighboring countries have embraced the industry, shifting their regulatory focus towards consumer protection and transparency in the region.
Singapore led this trend in 2023, with the Monetary Authority of Singapore (MAS) announcing new rules aimed at protecting individual traders, set to take effect in mid-2024. These rules include limiting credit access for cryptocurrency trading, prohibiting incentivized trading, and banning the use of locally issued credit cards to purchase cryptocurrencies.
Meanwhile, Hong Kong has taken a more liberal approach, welcoming cryptocurrency companies and launching its own cryptocurrency licensing regime. By implementing a comprehensive regulatory framework, Hong Kong aims to position itself as a global virtual asset hub, with more work expected to be completed in 2024. Currently, Hong Kong regulatory authorities classify cryptocurrencies into security tokens and utility tokens, with the former falling under the jurisdiction of the Securities and Futures Commission (SFC).
Japan has been laying the groundwork for the growth of its crypto economy, even considering web3 as a key pillar of its economic roadmap. From a regulatory perspective, cryptocurrencies in Japan are categorized into several types: cryptocurrencies, stablecoins, security tokens, and other categories such as NFTs, each subject to different legislative jurisdictions. The holding and sale of cryptocurrencies are regulated under the Payment Services Act (PSA), with no specific prudential requirements for digital assets. However, service providers must maintain a specific proportion of customer funds in a highly secure manner (e.g., cold wallets). A June 2023 amendment to the PSA further clarified the status of fiat-denominated stablecoins, distinguishing them from other digital assets. Currently, regulations limit stablecoin issuers to banks, money transfer operators, and trust companies, with intermediaries required to register with regulatory authorities and adhere to strict AML/KYC guidelines.
The expectations for 2024 indicate that as regulatory clarity and enforcement in the cryptocurrency space continue to strengthen, creating a safer and more conducive environment for cryptocurrency-related activities, the cryptocurrency industry will continue to grow.
Global Cryptocurrency Regulation
Other regions around the world have not lagged behind in cryptocurrency legislation. PwC's "2024 Global Cryptocurrency Regulation Review" lists over 40 jurisdictions with some form of cryptocurrency rules.
Looking at cryptocurrency regulations in various countries, outside the EU, only the Bahamas, the Cayman Islands, Japan, Mauritius, Singapore, and the United Arab Emirates have comprehensive cryptocurrency legislation covering everything from licensing, registration, and travel rules to stablecoin handling.
Many other countries are still in the process of developing frameworks to bring them into the cryptocurrency regulatory map. Countries like Qatar, South Africa, Taiwan, and Canada are engaged in ongoing regulatory activities of varying degrees, including discussions, consultations, and pending implementations of cryptocurrency laws.
Australia has been actively developing a regulatory framework for the cryptocurrency industry. As part of a multi-stage reform agenda, the Australian government released a token mapping consultation paper in February, laying the groundwork for subsequent regulatory measures.
In addition to Australia, the UAE has made significant progress in cryptocurrency regulation, becoming one of the first jurisdictions to have comprehensive cryptocurrency laws. With the rapid expansion of the virtual asset ecosystem, the UAE government has delegated regulatory authority to the Securities and Commodities Authority (SCA) and the Central Bank (CBUAE), creating an environment conducive to the development of the cryptocurrency industry.
Meanwhile, New Zealand has taken a more cautious approach, focusing on how existing regulations apply to cryptocurrencies and crypto service providers before formulating new specific legislation.
The New Zealand government recognizes that the cryptocurrency industry is still in its infancy, emphasizing the importance of adaptive rules that can evolve with the industry and remain consistent with global cryptocurrency regulation.
On the other hand, South Africa is planning its cryptocurrency regulatory journey. Observers in the country state that South Africa is keen on learning from the experiences and models of other jurisdictions, including those outside Europe and the United States, as it seeks to understand the complexities of cryptocurrency regulation.
Expert Outlook
This "Cryptocurrency Regulation Map" highlights the global trend of developing tailored regulatory measures for the cryptocurrency industry.
The upcoming cryptocurrency regulations are expected to further refine and strengthen these measures, nurturing a stronger and sustainable cryptocurrency market, allowing innovation to thrive under the supervision of regulatory authorities.
Industry analyst Anton Titov predicted in sharing the outlook for 2024 that MiCAR will be implemented across the entire EU, achieving unified anti-money laundering policies in all member states. He also believes that non-EU countries such as the UK, Switzerland, and the US may comply with these standards. In addition to the EU and the US, he predicts a shift in the views of other regions around the world towards cryptocurrencies. He anticipates a potential new president in Indonesia may be more open to cryptocurrencies and envisions India welcoming more foreign companies into the local market. This would involve establishing a framework consistent with banking policies, guiding people on domestic and cross-border investments and transactions. However, he also expects continued prohibition and negative attitudes towards privacy on the blockchain, even in commercial transactions. Nevertheless, he believes the emergence of the first central bank digital currencies (CBDCs) in the market, while not fully realizing Satoshi Nakamoto's vision of financial sovereignty, will send a strong message about the inevitability of blockchain technology and regulatory approval.
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