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INTRODUCTION
The cryptocurrency use, regulations and the problems attached with it are very much in limelight these days. The recent order[1] of Hon’ble Supreme Court of India removing the ban on the use of the cryptocurrency is being seen as a landmark judgement in the growth and use of the cryptocurrency in India. However, the stand of the government of not having the decentralized cryptocurrency is still the same, though they are thinking about having a centralized cryptocurrency for the country. The cryptocurrency since its invention drew the attention of people towards it. If we see one facet of it, we find that it is giving the transparent method of finding out the chain of transactions undertaken by a person, but on the other hand, it is being used as a platform for making illegal transactions. The use of cryptocurrency in terrorism activities, drugs, money laundering and other illegal works are not a hidden fact. Even the sovereign authorities of all the countries are aware about it and therefore, concerned about the regulation of it. In this article, we will try to find out the measures adopted by different countries regarding the regulation of this cryptocurrency and also the way forward.
WHAT IS CRYPTOCURRENCY
Cryptocurrency is a type of digital currency which has all its functions online. There are miners who invest their time as well as money to generate cryptocurrency through computer applications and that cryptocurrency is then brought online by the people.
Cryptocurrency works on a technology named blockchain. Blockchain is a decentralized technology where with every transaction using cryptocurrency, a block gets attached with your earlier transactions making it transparent to know the details of all your transactions carried out using cryptocurrency.The anonymity is also provided in the cryptocurrency which gives the edge to the terrorist organizations to go for illicit drug trafficking using this medium.
RELATION BETWEEN CRYPTOCURRENCY AND ILLEGAL ACTIVITIES
In India, the anti-narcotics agencies have found many cases of use of bitcoins( it is a form of cryptocurrency) in drugs transactions.In 2016,for the first time, the Narcotics Control Bureau of India[2] detected the use of darknet and Bitcoins by the drug traffickers for carrying the illegal drug racket in India. The limited and conditional access of the darknet is opening a new door for a hidden drug trafficking in the country. How cryptocurrency is used in the drugs related transactions is shown clearly by the above given example only. However, this was the story of using the darknet and
bitcoin together for the drug trafficking, there are simple cases as well where Cryptocurrency have grown rapidly in terms of price, popularity and its adoption in the mainstream. As per the data, the market capitalization of the bitcoin alone has exceeded $250 billion, and in case of other cryptocurrencies, it has been of $400 billion. The Central banks of many countries showed concern over the use of cryptocurrency.
On one hand cryptocurrency has benefits of being faster and more efficient, on the other hand there are regulatory concerns attached with their use in illegal trade and that trade includes drugs, thefts, illegal pornography and murder-for-hire as well. This is also beneficial for the funding to terrorism,money laundering and avoiding of capital controls.
The FBI[3] seized over $4 million bitcoin from a darknet market place named “Silk Road ”. This shows how much regulatory issue is being faced by even technological advanced countries in dealing with the problems related to cryptocurrency. This illegal use of cryptocurrency and difficulty in its regulations making the government of the countries to put a restrictive approach towards adopting the cryptocurrencies.
China earlier has banned the use of cryptocurrency by the residents of its country and also declared initial coin offerings(ICOs) as illegal.
WHY IT IS REQUIRED TO REGULATE CRYPTOCURRENCY
The relationship between the illegal activities and the cryptocurrency described above shows the importance of regulation of the cryptocurrency in the world. Now we will try to find the other facets related to this as well. As per the research conducted in 2018 related to the use of cryptocurrency in the working of the illegal ecosystem, these data came into picture:-
- Illegal systems account for a substantial proportion of users and trading in cryptocurrency. Approximately one-quarter of all users, i.e. 25% and almost one half of bitcoin transactions are found associated with the illegal activity.
- Transactions of approximately 1/2 of the total bitcoin holdings are associated with the illegal activity.
- There are almost 24 million bitcoin market participants that make the use of bitcoin primarily for illegal purposes.These users annually execute around 36 million transactions which values around $72 billion.
- The darknet is the marketplace for the illegal traders and this opens the possibilities of trading with unregulated money termed as cryptocurrency. A user is most likely to be involved in the illegal activity if he trades when there are many darknets in operation.
- The cash is also largely anonymous, but what brings the difference between the transactions in cryptocurrencies and the cash is cryptocurrency enables the digital transactions and this thereby leads to e-commerce. By combining anonymity with digitization, cryptocurrencies enabled anonymous online and cross-border commerce.
- Cryptocurrencies brought an important structural shift in the operation of illegal or black market.The black market has adopted the cryptocurrencies in its process in a successful way.
REGULATION BY DIFFERENT GOVERNMENTS
In this section, we will try to find the regulation mechanisms of different countries across the world:-
- UNITED STATES:- In the U.S., cryptocurrency is not considered as a legal tender but the exchanges of cryptocurrencies are considered legal and its regulation varies state by state. The U.S. continues to make development in creating a federal-level legislation related to the cryptocurrency.
The Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrency to be a legal tender, however, it considers cryptocurrency exchanges to be the money transmitters on the ground that the cryptocurrency tokens are other value which can be substituted for the currency.
Cryptocurrency is not considered to be legal tender by the Internal Revenue Service (IRS) , but it is considered as a digital representation of value that functions as a medium of exchange, a store of value and a unit of account. On the basis of that consideration, the IRS has issued tax guidelines.
Exchanges of Cryptocurrency in U.S.:- The exchanges of cryptocurrencies are legal in United States and it is regulated by the Bank Secrecy Act. This Act provides that the cryptocurrency providers must obtain the license required for it from the FINCEN; implement an AML/CFT[4] and sanctions program, maintain the appropriate records and it must also submit the reports to the authorities.
The U.S. Securities and Exchange Commission considers cryptocurrencies as securities and therefore applies securities laws to digital wallets comprehensively with a perspective to affect both exchanges and investors alike.
Bitcoin and Ethereum have been considered as commodities by the Commodities Futures Trading Commission and allowed other virtual and derivatives of cryptocurrency to trade publicly on the exchanges which are regulated or supervised by it.
FinCEN has made it clear that the exchanges of the cryptocurrency should comply with record-keeping requirements and the Travel Rule by sharing the details about the originators as well as the beneficiaries of the transactions of the cryptocurrency.
There has been emphasis by the US Treasury for the urgent need of the regulations of the cryptocurrency to combat the global as well as the domestic criminal activities. Fin CEN has even proposed a new data collection method which is required for the persons responsible for managing the exchanges of the cryptocurrency, digital assets, DTLs[5], payments of cryptocurrency and on specific private owned digital wallets.
Despite the setbacks came with the covid-19 crisis, the U.S. is still keen to bring
the cryptocurrencies under the regulatory supervision due to their anticipation of
the potential of the cryptocurrency to create a destabilizing effect on the US dollar.
- CANADA:- In Canada, cryptocurrencies are not legal tenders. However the exchanges of cryptocurrency are considered to be legal and just require the registration with the FinTRAC[6] after 1st June,2020. The cryptocurrencies can be used to buy goods and services online or in certain stores where they accept the cryptocurrency in Canada, but the cryptocurrencies are not legal tender there.
Canada was the first country to approve AML[7]-related regulation of service providers of the cryptocurrency. Canada has brought the entities dealing with the virtual currencies under the ambit of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in 2014.
In 2017, the British Columbia Securities Commission of Canada registered the first cryptocurrency-only investment fund.
In August 2017, the Canadian Securities Administrators issued a notice which was related to the applicability of existing securities laws to cryptocurrencies.
In 2018, the head of the Central Bank of Canada has characterized the cryptocurrency as “securities” technically The Canadian tax laws apply to transactions of cryptocurrencies since 2013.
Exchanges:- In Canada, the exchanges of cryptocurrency is regulated in the same manner as the money service businesses and are subject to the same obligations which a money service business dealing with fiat currencies has. In February 2020, Canada brought the Virtual Currency Travel Rule which requires all the financial institutions and money service businesses to keep a record of all transactions of cryptocurrency which are happening cross-border.
While the regulations on the cryptocurrencies exchanges are being evolved constantly, there are no signs found that there would be additional significant legislation in Canada related to it. Canada is dealing with it in a better way and in the move as well to go ahead with the existing regulations rather than going for the new ones and making it more complex to work in.
- SINGAPORE:- Cryptocurrencies are not legal tenders in Singapore as well. Though here too, the cryptocurrency exchanges are legal requiring registration with the Monetary Authority of Singapore. Here, the trading and exchanges of the cryptocurrencies are considered as legal.
Exchange:- The Payment Services Act,2019 brought exchanges and other cryptocurrency businesses under the regulation of Monetary Authority of Singapore from January 2020 and this made the businesses related to cryptocurrency to require a MAS[8] operating license.
- AUSTRALIA:- In Australia, the cryptocurrencies for a change from the other countries we discussed above are considered to be legal and these are treated as properties. The cryptocurrency exchanges are also legal but they must register with AUSTRAC. Australia has been progressive in the regulations of the cryptocurrency. In 2017 only, Australia declared the cryptocurrencies as legal and therefore they came under the ambit of Section 5 of the Anti-Money Laundering and Counter-Terrorism Financing Act,2006 as well as the associated rules. Bitcoin is treated as a property there and therefore, subject to the Capital Gains Tax in Australia.The Australian government also brought the change in the tax treatment for the cryptocurrencies to remove them from double taxation under the GST of Australia.
Exchanges:- The exchanges are required to be registered with AUSTRAC (Australian Transaction Reports and Analysis Centre) in Australia as per the Part 6A- Digital Currency Exchange Register of the Anti-Money Laundering and Counter-Terrorism Financing Act,2006. The unregistered exchanges are subject to the criminal charges and penalties.
In 2019, the updated regulatory requirements for both ICOs[9] and cryptocurrency have been issued by the Australian Securities and Investments Commission.
- INDIA:- In India, how debatable issue cryptocurrency is, we all are aware of. That is the reason the country does not consider cryptocurrencies as legal tender and in India, even the exchanges of cryptocurrencies are illegal, though the regulations related to it are being considered. Though exchanges are legal in India, but due to the absence of a robust regulatory framework, protracted licensing steps make it very hard for the cryptocurrency services to operate in this. Though technically the exchanges are legal in India, but in 2018, the central bank of India, i.e. RBI banned banks and any regulated financial institution from dealing in the cryptocurrency. However, the Supreme Court, through its landmark judgement in March 2020 held that the ban imposed by the RBI is unconstitutional and allowed exchanges to reopen.
It is an important fact to note that Indian Government is drafting a new bill related to the cryptocurrency and India is exploring the possibilities related to the use of the cryptocurrency.
Among all the countries, except the ones we discussed, some have declared the cryptocurrencies illegal but considered the cryptocurrencies exchanges as legal under the regulatory framework, but there are other countries like China as well which does not consider either the cryptocurrency to its exchanges legal. Let’s look the table given below to have the idea about different countries stand on the cryptocurrency:-
| Sr. No. | Countries | Cryptocurrency | Exchanges |
| 1. | Japan | Legal, considered as property. | Legal, though requires the registration with the Financial Services Agency. |
| 2. | South Korea | Considered illegal | Legal, the exchanges must register themselves with Financial Supervisory Services. |
| 3. | China | Illegal tender | Illegal |
| 4. | United Kingdom | Not considered to be a legal tender. | Legal, requirement of registration with the Financial Conduct Authority. |
| 5. | Switzerland | Legal; even accepted as a mode of payment in some contexts. | Legal; It is regulated by the Swiss Federal Tax Administration and Swiss Financial Market Supervisory Authority. |
| 6. | European Union | Legal, though euro-backed member states may have restrictions on introducing their own currencies. | The regulations of exchanges vary by member-state and it goes by compliance with the European Bank Authority, European Commission, European Central Bank, European Insurance and Pension, European Supervisory Authority for Securities. |
CONCLUSION
Cryptocurrency regulation is considered to be a matter of global concern, where even if one country is regulating it, it is trying to bring best changes too in this so that this should not be used for illegal purposes globally. The need of this time is that we should appreciate this new invention and try to use it for our advantages by trying to minimize the wrong or illegal activities being carried out of it. Once it is regulated in the countries of the world, it will bring more opportunities and also discourage the way of using it illegally as well. Mostly, all the countries, especially the advanced economies are working towards bringing the cryptocurrencies into regulation, so that its far-reaching beneficial impacts can be touched upon and used for the benefits of the country. We all are aware about the negative impacts being conducted due to this, countries by using and regulating it trying to bring the other aspects of it as well.
[1] Internet and Mobile Association of India v. RBI [2020] 115 53 (SC).
[2] NCB, MoHA, GOI
[3] Federal Bureau of Investigation, U.S.A.
[4] Anti- Money Laundering/ Combating the Financing of Terrorism.
[5] Datagram Transport Layer Security.
[6] Financial Transactions and Report Analysis Centre of Canada.
[7] Anti-Money Laundering.
[8] Monetary Authority of Singapore.
[9] Initial Coin Offerings.
