A favorable regulatory environment can attract crypto businesses and foster innovation, contrasting with more restrictive measures in other regions. We will cover the latest cryptocurrency regulation changes that are relevant for US and EU residents while also touching upon some important shifts in legislation in South-East Asia and Africa. Can you engage in crypto arbitrage trading or stake coins in niche DeFi protocols? How can an investor make sure that they are earning money in a fashion that is not frowned upon by policymakers? You will find answers to these questions and many others in our article!
Introduction to Digital Assets
Digital assets, including cryptocurrencies and other virtual currencies, have gained significant attention in recent years due to their potential to transform the way we think about money and financial transactions. A digital asset is a digital representation of value that can be traded, stored, or used as a medium of exchange, utilizing cryptographic protocols to secure and verify transactions.
The growth of digital assets has led to the development of new markets, investment opportunities, and financial products, such as crypto asset funds and digital currency exchanges. These innovations have attracted the attention of both investors and regulators, leading to a dynamic and rapidly evolving landscape.
In the United States, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are two primary regulatory bodies overseeing digital assets. The CFTC focuses on regulating commodity futures and options markets, while the SEC oversees securities markets, including those involving digital assets that qualify as securities.
The Responsible Financial Innovation Act (RFIA) aims to provide regulatory clarity for digital asset markets. This legislation seeks to integrate digital assets into existing tax and banking laws, promoting financial innovation while ensuring that these new financial instruments are subject to appropriate oversight. By establishing clear guidelines, the RFIA aims to foster a more stable and transparent environment for digital currency and other virtual currencies.
What is happening to crypto trading laws?
The European Union is making its position clear and wants to regulate the circulation of digital assets within its borders. The most important event is the recent application of the Markets in Crypto-Assets (MiCA) regulation to exchanging and swapping coins. Another hugely important rule is the Transfer of Funds (TFR) which makes it necessary to disclose cross-border remittances in digital assets.
Despite MiCA’s launch on June 30, 2024, it will be slowly implemented in several phases with different member states deciding how and when to enforce certain parts of the new regulation. Many companies that have been operating in accordance with KYC and AML practices will receive an opportunity to keep working without abiding by the new MiCA regulation for quite some time. It is still unknown which countries will decide to allow their local companies to use this loophole. Different EU member states might implement MiCA and TFR in relation to their own state securities laws, creating a varied regulatory landscape.
Lawmakers in the EU are also interested in creating several new alterations to the current set of AML guidelines to ensure that funds are not easy to transfer across borders and to unknown entities. Below are some important changes that you should be aware of:
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The new AMLR ruleset is increasing the scope of individuals and organized entities that now have to abide by AML practices. Most service providers defined as CASPs that operate under the new MiCA framework will have to comply and conduct due diligence on their clients if they want to make a transaction above €1,000.
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New due diligence measures will be implemented for all international transactions that use CASPs and their services to move digital assets around. New procedures and requirements for providers have already been adopted.
One of the biggest developments in the EU that will affect the local crypto market is the next phase of the ECB’s initiative to roll out the digital euro. As of the time of writing, it is still in development and won’t appear until at least 2026 even as a beta. However, the intention itself can have a profound effect on the market and the way policymakers approach digital currency regulations. The appearance of a new form of money in the EU region will surely make state members a little bit more proactive and address the uncertain status of coins like Bitcoin.
Cryptocurrency regulatory landscape: national breakdown
The Dutch authority AFM is preparing for the implementation of MiCA on the national level and will be issuing updated licenses to CASPs. The website of the government agency says that companies must prepare for new inspections and be ready to comply with security requirements of the DORA act which outlines practices that all fintech providers must adopt to keep the personal information of users safe. Countries like the Netherlands are creating favorable regulatory frameworks to attract crypto companies.
The important estimate from the AFM is that the registration and issuance of a license will take at least five months effectively freezing some operations if violations are found during inspections. It can affect users living in the Netherlands. This national agency was one of the first to announce its plans and reveal the framework that providers must follow. Pennsylvania's regulatory environment is favorable for digital asset companies, emphasizing its hands-off approach and the absence of a requirement for a Money Transmitter License.
This haste is completely justifiable considering the fact that the country wants to be recognized as the next best hub for AI, fintech, and blockchain companies.
UK’s crypto trading regulations in 2024
One of the hotly discussed topics inside the halls of FCA and BoE (Bank of England) is how the country should approach handling stablecoins. The proposal from the government was made public closer to the end of 2023. To this day, the FCA and BoE are discussing the best way to implement proposed changes to the local regulation which will be different from the framework currently being implemented in the EU. New frameworks will be really late with many businesses still waiting to be told their status in the juridical landscape of the UK.
The UK is also considering the classification of certain digital assets as investment contracts, similar to the SEC's approach in the US.
Among other important topics is the current situation with completely unregistered ATMs used to buy coins using debit cards or even cash. Whether providers operating these vending machines should register with the FCA and follow strict AML rules is something that policymakers are not sure of. Since the blockchain industry and its financial instruments are subjected to automation more than tradfi assets, the AI-related regulations in the fintech sector are also of interest.
Many contemporary automation vendors like WunderTrading are strongly focused on delivering products enhanced with AI and machine learning. The AI-assisted statistical arbitrage bot is not breaking any laws right now but might become a subject of the new initiative by PRA (Prudential Regulation Authority).
The Digital Securities Sandbox proposal is also something that should be on your radar as we are nearing the time when FSMA (Financial Services and Markets Act) will finally affect transactions in the DeFi ecosystem and may even force some providers to completely remove themselves from the UK national market.
United Arab Emirates and new digital asset compliance guidelines
The UAE is one of the most forward-thinking countries when it comes to embracing blockchain in fintech. DFSA, the local authority, recently revealed its Consultation Paper #153 which outlines the rules governing various tokens that are traded within the national borders. New changes are mostly positive and make it easier for consumers to purchase and sell their digital assets. One example of new positive rules is the ability to offer staking to their clients afforded to providers and allowed as a staple service in the Dubai International Financial Centre (DIFC).
The UAE is also recognizing and providing legal frameworks for decentralized autonomous organizations (DAOs), similar to recent developments in Tennessee and Wyoming. These frameworks establish registration and governance for DAOs, aligning their status with that of limited liability companies, which encourages innovation and offers a supportive legal environment for blockchain technologies.
The VARA authority that governs operation with virtual assets is now in full and issues operational licenses without any delays. The number of registered providers is already growing and many experts believe that it will increase by several folds by the Q1 of 2025. Abu Dhabi is still slightly ahead thanks to its earlier adoption of practices allowing providers and even new developers to come and work on decentralized systems while abiding by official rules.
Regional crypto regulations in Turkey
One of the reasons this particular country is pushing for the adoption of cryptocurrencies, albeit with a very cautious attitude, is the large share of unbanked youth that may prefer using decentralized finance as an alternative to tradfi financial services. Over the last five years, the national segment of digital asset trading has been experiencing a massive spur of growth which was noticed by the government that plans to introduce new Capital Markets Law 6362 by 2025. This new law will align with state law requirements, impacting the regulatory landscape for digital assets by determining licensing requirements and recognizing blockchain technology.
Half of the adult population in the country owns coins of all sorts. With the rapid inflation and unreliable fiat currency, the desire of the population to use something that appears to be more consistent than the Lira is understandable. The absence of juridical guardrails can be extremely dangerous.
New crypto regulations in 2024: the biggest player
The US is at the forefront of the blockchain industry as it is the largest market with the highest capitalization and the strictest in terms of regulating providers. Regular clashes between the SEC and various projects like Tether, FTX, Ripple, and others have been dominating the news cycle in the community of blockchain enthusiasts.
Various countries, including the US, are exploring central bank digital currencies (CBDCs) as part of their regulatory frameworks. These initiatives aim to manage the risks and benefits associated with digital currencies, with central banks playing a crucial role in issuing and regulating CBDCs.
The country has already implemented a warmly welcomed taxation framework allowing investors to contribute to the national economy without knowing how to calculate gains and losses. However, just forcing users to pay taxes is not enough. Let’s talk about some important changes and potential new rules in the fintech sector of the biggest economy in the world.
AI and gamification
Artificial intelligence is the loudest buzzword in all sectors with physical retailers saying that they are going to use the technology to transform the customer experience. AI is something that all crypto projects are experimenting with. Even DeFi protocols like 1inch are announcing about the implementation of new AI agents to verify code and writing strategies for staking. We have already mentioned vendors like WunderTrading with their strong push to implement AI capabilities into existing and new products.
Crypto trading platforms must navigate regulatory requirements, particularly in Canada where they must register with provincial regulators. This structured approach aims to govern cryptocurrency activities amid ongoing discussions around consumer protection and anti-fraud measures globally.
Gamification is another important avenue pursued by some DeFi protocols and blockchain casinos. The problem is that even brokerage service providers do not shy away from using some elements of gambling while offering strictly financial products. One of the reasons why the SEC is so enthusiastic and fierce with the call to implement new rules to the Digital Engagement Practices list is the proliferation of brokers blatantly using gamification techniques to lure in customers. Robinhood is a good example of an app that had to be sued by the Massachusetts state to stop using digital engagement tricks to validate users’ participation in trading.
It seems that DEPs and the new push toward limiting the use of AI in financial markets which was supported by the Chairman of the SEC Gary Gensler are two main topics for the fintech community.
Enforcing crypto regulation
The SEC has been at the center of public attention thanks to its strong, often heavy-handed, enforcement of rules that may not be even applicable to certain situations. The authority wants to stop unregistered trading of digital assets with obscure status. NFTs and marketplaces that are not registered with the SEC are under heavy fire from the agency that has comprehensive plans, as they put it, to bring order to the whole blockchain industry.
The SEC enforces federal securities laws in relation to digital assets, including recent actions against companies like Ripple and Kik for unregistered securities offerings and failure to comply with securities regulations.
The recent revival of the NFT market has inspired many enthusiasts by bringing them hope that this niche sector has a chance at survival. However, the upcoming regulatory frameworks may completely kill what’s left of this segment of the blockchain industry with the SEC proposing to subject tiny marketplaces to the same requirements as exchanges by classifying NFTs as securities.
Anti-Money Laundering Measures
Anti-money laundering (AML) measures are crucial in preventing the use of digital assets for illicit activities, such as money laundering and terrorist financing. The Financial Crimes Enforcement Network (FinCEN) requires virtual currency exchanges and administrators to implement AML programs, including customer identification and verification procedures. These measures help ensure that digital asset transactions are conducted transparently and legally.
The Internal Revenue Service (IRS) treats digital assets as property for tax purposes, subjecting them to capital gains taxes. This means that any gains or losses from the sale or exchange of digital assets must be reported on tax returns, similar to other forms of property. Compliance with these tax rules is essential for individuals and businesses involved in digital asset transactions.
The Foreign Assets Control (FAC) regulations prohibit U.S. persons from engaging in transactions involving digital assets with sanctioned countries or entities. These regulations are designed to prevent the use of digital assets to circumvent economic sanctions and support illicit activities.
The Financial Action Task Force (FATF) has issued guidance on AML and combating the financing of terrorism (CFT) in the context of virtual assets. FATF emphasizes the need for robust regulations and international cooperation to address the risks associated with digital assets. By implementing these guidelines, countries can better protect their financial systems from abuse and ensure that digital asset markets operate with integrity.
Cryptocurrency Regulations and Taxation
Cryptocurrency regulations vary across jurisdictions, with some countries imposing strict regulations, while others have more favorable regulatory environments. In the United States, the SEC and CFTC have primary jurisdiction over digital assets, with the IRS responsible for taxation.
The Tax Cuts and Jobs Act (TCJA) introduced changes to the tax treatment of digital assets, including the taxation of cryptocurrency transactions as capital gains. This means that individuals and businesses must report gains or losses from digital asset transactions on their tax returns, similar to other capital assets.
The House Financial Services Committee has held hearings on cryptocurrency regulation, exploring the need for clear and comprehensive regulations to protect investors and promote innovation. These discussions aim to balance the benefits of digital assets with the need for regulatory oversight to prevent fraud and market manipulation.
The New York State Department of Financial Services (NYSDFS) has established a regulatory framework for virtual currency businesses, requiring them to obtain a BitLicense to operate in the state. This framework aims to ensure that virtual currency businesses operate transparently and comply with existing financial regulations, such as the Bank Secrecy Act (BSA) and anti-money laundering laws.
The digital asset market is subject to various tax rules, including capital gains taxes, and businesses must comply with existing financial regulations. The crypto industry is rapidly evolving, with new products and services emerging, such as decentralized finance (DeFi) platforms and non-fungible tokens (NFTs), which pose significant challenges for regulators and tax authorities. As the market continues to grow, it is essential for regulators to adapt and develop frameworks that address these new developments while fostering innovation.
General trends in the industry: central bank digital currency
We are watching how official authorities around the globe are finally taking the DeFi segment seriously and thinking about various ways to approach the issue of the inevitable integration of these unfamiliar financial instruments into national economies. The EU is certainly among the leaders in terms of adoption rate and many member states like the Netherlands are interested in establishing themselves as the next big tech hubs where developers and users can feel safe.
International standard-setting bodies like the Financial Action Task Force (FATF) are shaping regulations for the crypto sector, providing guidelines aimed at addressing financial risks within digital currencies.
In the Middle East and Northern Africa, the tendency to use Bitcoin, Tether, and Ethereum is much higher compared to other regions. Issues like the unbanked population and, in some cases, international sanctions are pushing businesses toward the adoption of Bitcoin as a universal exchange medium on the international level. At the same time, failing local economies and weakening fiat (looking at you, Turkey) also make tokens look far more appealing.
We can safely assume that some trends that were started at the end of 2023 are going to strengthen in 2024:
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The overall push toward legalization of cryptocurrency operations. With many countries within the EU already rolling out licensing frameworks under MiCA and the UAE making it easier for providers to obtain legal status, it seems that many governments are in a race to create a better environment for DeFi projects to flourish. It is a reasonable desire since some estimates say that the efficiency of local economies could be improved in many ways including lower remittances and faster payment processing if they adopt DeFi instruments.
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Tighter control over assets. The US is certainly among the strictest countries in the juridical sense. Yes, the Chinese People’s Republic is banning some instruments outright, but they are against many DeFi concepts in general. The SEC in America is a different story with its strong push toward classifying everything as security. There seems to be a significant pushback from users and companies, but the battle is far from over and we might see a day when an NFT is considered a real investment and must be approached as such.
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Focus on AML practices. Many centralized exchanges and even DEXes are abiding by the requirements of AML and KYC guidelines. In some cases, you have to disclose personal information and identity to conduct a transaction. The EU specifically wants to focus on the implementation of stricter anti-money laundering laws and prevent terrorist organizations and criminals from receiving financing through decentralized ledgers. This goes against the ideal version of DeFi imagined by enthusiasts who believe that this push will bring centralization and oversight to the world of blockchain.
These trends are very apparent in the current juridical landscape surrounding Bitcoin, Ethereum, and other prominent networks. While many governments are still lagging behind (i.e. the UK), the Middle East and EU are doing everything they can to expedite the introduction of novel digital assets into their economies. With many EU member states struggling to revitalize their financial sectors, it is completely understandable why the Netherlands and Nordic countries are pushing toward faster adoption of new types of securities.
What about service providers
One of the questions that many people have is where third-party vendors and developers stand in all this ongoing chaos. CASPs are specifically defined as companies offering financial services involving digital assets. The SEC is too busy trying to battle several large cases at once with each possibly taking years to sort out. The South-East Asia is legalizing everything, everywhere, all at once. It seems that only the UAE has some sort of framework to address the complexity of the blockchain industry.
Crypto firms have significant responsibilities in relation to regulatory compliance and oversight, particularly in the US and UK. These firms must navigate the evolving regulatory landscape and adhere to various legislative efforts aimed at providing clarity and protection for consumers in the digital asset market.
We have DeFi protocols that operate somewhere in the grey zone between exchanges and gambling sites. We have providers of specific services like auto-compounding which is not even close to offering financial advice or offering securities. Even companies that are focused on automating operations on centralized crypto exchanges are somewhere in the middle without a clear place in the regulatory frameworks currently designed by many countries. An automated crypto platform is also a part of the sector and yet we do not know if they are exempt from new cryptocurrency regulations or not.
We also must remember that blockchains exist outside of national borders. Even if one country finds a way to regulate some operations within the DeFi sector, they will still be operational and P2P networks won’t stop working just because a suited man said “no”. It is still a very complicated matter with many countries struggling to find a good answer to what is allowed and what is off the limits.
The main takeaway
2024 is an interesting year from the perspective of DeFi legalization. On one hand, we are seeing many initiatives proposed at the end of 2023 coming into full force like in the case of MiCA in the EU and the push to strengthen AML and KYC enforcement. On the other hand, the Middle East is making a notable jump toward faster adoption and favorable frameworks for developers and providers.
However, the absence of clear crypto-specific laws in regions like Idaho highlights the regulatory ambiguity that businesses face. Establishing clear crypto-specific laws would provide the necessary regulatory clarity and support the growth of the crypto industry.