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Cryptocurrency regulation

Cryptocurrencies – a regulatory snapshot

The regulatory status of virtual currencies across the world is constantly changing.

A snapshot from January 2018 is set out in tabular form below, but we certainly expect some changes (possibly even about-turns) in the next year.

If you have any questions on virtual currencies, please feel free to contact Adam or Claire.

JurisdictionAuthorityView of cryptocurrency (January 2018)
UK Bank of England The Bank does not yet consider cryptocurrencies systemically important but is keeping them under review. The Bank considers that bitcoin and other cryptocurrencies’ potential usefulness hinge on their function as a 'decentralised ledger'. The Bank is undertaking continued research into the implications of a central bank issuing a digital currency, although it does not currently have plans to do so.
  Financial Conduct Authority The FCA does not currently regulate bitcoin or other cryptocurrencies or exchanges. In late 2017 the FCA published consumer warnings about initial coin offerings (where the investor accepts a token representative of the project and pays with either legal tender or, more frequently, other cryptocurrency such as bitcoin or ethereum) and cryptocurrency CFDs (contracts for difference). In late 2017, the chief executive of the FCA spoke about buying bitcoin, stating that it was not a safe investment and that people should be ready to 'lose all their money'.

The FCA launched Project Innovate in 2014 – an initiative encouraging innovation in the financial sector – and in 2017 published a discussion paper and feedback report on distributed ledger technology (the technology underpinning cryptocurrency) and reports into its ‘regulatory sandbox’ for innovative firms who are ready to test products.

With the launch of bitcoin futures in the United States, the FCA may become more involved in cryptocurrency regulation as futures are an FCA regulated product.
  HMRC Bitcoin and other cryptocurrencies are treated as currencies, so are not within the scope of VAT – ie HMRC treats bitcoin as it does other currencies, rather than treating it as a voucher.

HMRC’s guidance suggests that cryptocurrency is an intangible asset for capital gains tax purposes.

Published a paper on cirtual currencies in February 2015, which stated that the ECB does not regard virtual currencies, such as bitcoin, as full forms of money as defined in economic literature. Mario Draghi, the head of the ECB stated in October 2017 that cryptocurrency was too immature to regulate.

The ECB has reiterated its view that regulation currently falls outside the scope of the Bank’s powers. However, comments in late 2017 and early 2018 suggest that the ECB and other European financial bodies are considering whether regulation may be necessary.

  EBA In July 2014, the EBA published a list of 70 risks (largely focusing on user risks) connected with investing in digital currencies and has advised that consumers should only buy virtual currencies if they are aware of the risks.

In 2016, the EBA proposed establishing a separate regulatory regime specific for cryptocurrency to support anti-money laundering efforts.
  ESMA Published a call for evidence on investment using virtual currency or distributed ledger technology in April 2015. ESMA stated that it intends to monitor the evolution of investments using virtual currencies or distributed ledger technology so as to ensure that regulators are aware of significant market developments.

In late 2017 ESMA published a similar warning to the FCA warning investors of the risks of ICOs.

The Joint Committee of the European Supervisory Authorities, of which ESMA is a member, is expected to issue new guidelines on virtual currency exchange platforms and amend other guidelines in light of the fifth Money Laundering Directive (which is expected to be adopted in 2018 and will bring virtual currency exchange platforms and custodian wallet providers into scope).
Germany Ministry of Finance Recognises bitcoin as a 'unit of account' and as a form of private money that can be used for private transactions. It is not classified as a foreign currency or as e-money. Companies intending to use it for commercial transactions would need permission from the Federal Financial Supervision Authority.
  BaFin In accordance with BaFin's decision on units of account within the meaning of section 1 (11) sentence 1 of the German Banking Act (or KWG), bitcoins and other virtual currencies that have similar characteristics are financial instruments. Consequentially, online exchanges for bitcoin and comparable cryptocurrencies would be subject to regulatory supervision.

Bitcoin and comparable decentralised cryptocurrencies are not legal tender and are not currency, foreign notes or coins. They are not e-money either within the meaning of the German Payment Services Supervision Act; they do not represent any claims on an issuer, as in their case there is no issuer. The situation is different for digital means of payment which are backed by a central entity that issues and manages the units. Such companies usually carry out e-money business.

In principle, BaFin has taken a critical approach towards crypto currencies, in particular in the context of initial coin offerings.
  Bundesbank In early 2018, a member of Germany’s Bundesbank said that any attempt to regulate cryptocurrency must be on a global level to be effective.

At the end of 2017, one member of the Bundesbank board ruled out the introduction of official digital money for the euro zone. He also warned of losses from investments in cryptocurrencies.
Japan Financial Services Agency (FSA) In April 2017, the National Diet amended the Banking Act via the Payment Services Act (informally titled the ‘Virtual Currency Act’). The amending legislation recognised bitcoin and other virtual currency as a legal “form of payment method”. At present, however, bitcoin will continue to be treated as an asset rather than a legally-recognised currency.

Under rules introduced in 2017 cryptocurrency exchanges that want to operate in Japan must now come under regulatory supervision of the Japan Financial Services Agency. The exchanges may be subject to annual audits and KYC checks in an attempt to bolster Japanese AML efforts.
USA Federal Reserve The Vice-Chair for Supervision at the Federal Reserve stated in 2017 that the central bank currently has no policy towards regulation of virtual currencies but that it is ‘worth thinking about’.
  New York Department of Financial Services

New York was the first state to propose regulation of bitcoin (July 2014) and released a comprehensive framework for regulating digital currency firms in the State of New York.

The framework contains consumer protection, anti-money laundering compliance and cyber security rules tailored for digital currency companies, as well as a requirement to apply for a licence.

Large cryptocurrency companies such as Ripple and Coinbase have been granted ‘BitLicences’ by the NYDFS including permission to trade ether and litecoin, signalling an increasing recognition of alternative cryptocurrencies.

  Internal Revenue Service

The IRS answered some common questions about the tax treatment of virtual currency transactions in a notice in 2014. This included confirming that for federal tax purposes, virtual currency is treated as property.

General tax principles applicable to property transactions apply to transactions using virtual currency.

The notice also set out that under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.

Russia Various In early 2018 the Russian President Vladimir Putin stated that legislative regulation will definitely be required in future. He also explained that the Russian central bank has sufficient authority to regulated cryptocurrency at present.

At the time of writing, it is expected that a bill regulating cryptocurrency and ICOs will be enacted by mid-2018.
South Korea Various In early 2018 the South Korean government stated that it is considering, among other options, banning all local virtual currency exchanges or banning cryptocurrency trading altogether in an effort to shield its citizens from ‘frenzied speculation’ and enhance AML efforts.