As PMLA tightens grip on crypto, here’s how other nations regulate VDAs- QHN

The Ministry of Finance’s March 7 decision to place virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), under the purview of the Prevention of Money Laundering Act (PMLA) will introduce a layer of compliance for firms involved in the cryptocurrency industry.

Crypto entities will be obligated to record transaction and client data, monitor compliance, and report suspicious activities while empowering the Enforcement Directorate (ED) to investigate suspected crypto-related financial wrongdoings. Moreover, last year, Finance Minister Nirmala Sitharaman introduced a flat 30 per cent tax on profits from transferring crypto assets and NFTs.

As India strengthens the regulatory framework over the cryptocurrency sector, here is a list of countries that have taken a shot at addressing this complex issue.

Australia: With the market size of its crypto exchange industry pegged at reportedly $58.9 million, crypto assets, which are or form a chunk of an investment or exchange-traded product, require an Australian Financial Services Licence (AFSL) in view of the current financial services regime under the Corporations Act (2001). Firms involved with the crypto sector need to report suspicious transactions, comply with the anti-money laundering (AML) and counter-terrorism financing (CTF) regime to curb financial and terror crimes from the crypto industry,

Russia: In July 2020, Russian President Vladimir Putin issued a regulation on digital financial assets (DFA) that legalised cryptocurrency transactions. However, cryptocurrencies are barred from exchanging goods and services in the country. Last year, the Central Bank of Russia (CBR) reiterated its stance and recommended a ban on cryptocurrencies, citing them as risky. The Russian Ministry of Finance has pushed for crypto regulations.

China: The government of Asia’s largest economy has cracked down on cryptocurrencies and crypto mining in the past few years. In 2017, the country sanctioned crypto-trading and banned platforms from offering an ICO (Initial Coin Offering). Equivalent to an equity market’s initial public offering (IPO), an ICO enables a company to issue a cryptocurrency token representing a stake in a company or a project. In 2021, Chinese regulatory bodies banned all trading and transactions involving crypto. However, while the government outlawed forms of crypto trade, Chinese residents already holding forms of cryptocurrency, such as Bitcoin and Ethereum, among others, do not violate any existing laws.

United States: In the United States, agencies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), and the Comptroller of the Currency (OCC) engage with regulations concerned with the crypto industry. Regulating crypto-activities is a complex and tough nut to crack in the United States with multiple prevailing challenges. For instance, regulators such as the SEC and the CFTC have scrambled to categorise cryptocurrency jurisdiction as a security, commodity, or currency.

The SEC regulates the issuance or resale of any token and digital assets it considers security. Tokens issued in an ICO will be regulated under the Securities Act, which oversees the sale and distribution of securities in the market. Moreover, the Financial Crimes Enforcement Network (FinCEN) regulates money service businesses (MSBs) that are authorised to issue a token (administrator) or are engaged in the exchange of virtual currencies (exchangers) under the Banking Secrecy Act (BSA) and FinCEN regulations. This regulation tackles money laundering and financing of terrorist activities. Additionally, while balancing the opportunities and risks involved with the crypto industry, the Biden administration released an Executive order (EO) titled ‘Ensuring Responsible Development of Digital Assets’ in March 2022 that outlined strategies addressing the rise of digital assets in the country. The EO has emphasised the need to protect investors, combat illicit financing, achieve financial stability, and pursue responsible innovation in financial ventures.

United Kingdom: Following the implosion of FTX, a now-bankrupt cryptocurrency exchange, the UK’s Treasury presented a set of rules with a view to regulate the sector in February 2023. Crypto firms must be registered with the Financial Control Authority (FCA), United Kingdom’s financial regulatory body that oversees financial services, including crypto firms. UK-based crypto firms require a licence and minimum capital and liquidity requirements to function in the country. The latest regulation covers multiple crypto-related processes such as arranging deals, mining transactions, managing crypto platforms, and performing transactions. The government aims to protect the UK’s financial stability and market integrity, encourage growth and innovation in the sector, and caution investors about the risks involved with the industry. Crypto firms in the UK have to comply with the Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR”) while running businesses concerned with crypto-exchange and wallet services in the UK to prevent illicit activities such as money laundering and terror financing.

Brazil: In December 2022, former Brazilian President Jair Bolsonaro authorised a bill regulating crypto payments in the country. Classifying crypto-related financial offences as ‘fraud involving virtual assets, it has also mandated firms to have a ‘virtual service provider’ licence. According to the law, crypto is considered as a digital representation of an asset with the possibility of being traded or transferred electronically and used for payments or investments. Moreover, the law places crypto firms under the ambit of regulations aimed at curbing money laundering, terror financing, and the proliferation of WMDs (Weapons of Mass Destruction). Companies involved in the crypto industry will have 180 days to adapt to the law. The Securities and Exchange Commission of Brazil (CMV) will regulate crypto assets considered securities under the new law.

Kingdom of Saudi Arabia: One of the largest economies in West Asia, the Kingdom of Saudi Arabia (KSA) does not recognise cryptocurrencies as legal tender. In 2018, the country placed a ban on transactions involving cryptocurrencies. While the KSA has an ice-thin regulatory approach over these cryptocurrencies, the Saudi Central Bank and the Ministry of Finance have warned their citizens against engaging with or investing in virtual currencies. The country has maintained the nature of cryptocurrency-based transactions as illegal but has not set penalties for individuals trading in crypto. Despite similar warnings, small businesses and merchants continue to accept bitcoin.

Additionally, there is a religious influence on the Saudi Central Bank’s overall positioning regarding cryptocurrencies. Islamic scholars argue that trading in virtual currencies is akin to gambling and eventually is haram. However, to keep up with global crypto market trends, the country is also working with the United Arab Emirates (UAE) to attract crypto companies.

Nigeria: To legitimise operations in the country, crypto companies offering products and services need a virtual asset service provider (VASP) licence and a digital asset exchange licence that authorises the trading, exchange, and transfer of virtual assets. The Central Bank of Nigeria (CBN) and the SEC had differing views about crypto regulation in the African country. While the Central Bank of Nigeria sought to ban crypto-based transactions in the country’s financial institutions stating its unregulated and high-risk nature, the SEC moved to regulate it, underscoring that crypto investments qualify as transactions in securities. Moreover, the SEC can access an exchange’s records, including weekly and monthly transaction details and annual financial compliance reports. Crypto exchanges looking to raise funds via an ICO have to follow a measure of compliance set out by the digital assets offering platform (DAOP), which will ensure due diligence, provide investors with the latest information about projects, and track if projects use funds for purposes stated in their whitepaper. Despite being a lower middle-income country, Nigeria ranks 11th in the Global Crypto Adoption Index published by blockchain analytics organisation Chainalysis.

Germany: Germany’s market regulator, the Federal Financial Supervisory Authority (BaFin), classified crypto as ‘units of account.’ BaFIN authorised crypto exchanges and platforms with a licence to operate in the country. Bundestag, the German legislator, has reformed the national regulatory rules for crypto-related activities given the Fifth Anti-Money Laundering Directive (AMLD5). In Germany, crypto assets can be defined as the digital representations of value which are not guaranteed by a central bank or a public authority, which do not constitute the legality of a currency and are accepted as a means of payment, serve investment purposes, and can be stored or transferred electronically. Moreover, to operate in the country, firms engaged in the crypto market require a German licence with the BaFIN.