Last year, 2022, started on a promising note for the crypto industry, with a total market cap of $2.2 trillion by January 1. At the time of writing, global market cap is about $800 billion, representing a drop of over $1.4 trillion. This is huge. And this perhaps demonstrates why some stakeholders have been harping on the need for crypto regulation. Consumer protection and investor safety are vital, particularly in a highly volatile market.
Though there was a relatively high rate of regulatory activities in 2021, 2022 probably turned out to be a year of crypto regulation. Against the background of the recent FTX collapse, many followers believe that this new year, 2023, will be a bigger year for regulation; although no one knows exactly the shape and size regulation will take in each jurisdiction. Here is a rundown of crypto regulations around the world in 2022.
The Monetary Authority of Singapore (MAS) on 17 January 2022 issued guidelines to the effect that Digital Payment Token (DPT)—also called cryptocurrency—service providers should not promote their services to the public in Singapore, because “the DPT is highly risky and not suitable for the general public”. The MAS also noted that service providers are regulated “primarily for money laundering and terrorism financing risk, as well as technology risk”. The guidelines will continue to be reviewed and updated, according to the MAS. DPT service providers include payment institutions, banks, and other financial institutions, as well as applicants under the Payment Services Act (PS Act). They are also warned not to promote Payment token derivatives (PTDs)— “derivatives contracts that reference DPTs as underlying assets”.
India proposed a 30% tax on crypto assets. The Finance Minister, Nirmala Sitharaman in her Budget speech noted that India witnessed a phenomenal increase in transactions in virtual digital assets, which made it imperative to provide for a specific tax regime. She also disclosed that the Reserve Bank of India would introduce a central bank digital currency (CBDC) noting that, “[i]ntroduction of a central bank digital currency will give a big boost to a digital economy. Digital currency will also lead to a more efficient and cheaper currency management system.”
In Dubai, on 28 February 2022, the Emirate of Dubai passed its first law on cryptocurrency, Law No. 4 of 2022 on the Regulation of Virtual Assets (VAL) establishing the Dubai Virtual Assets Regulatory Authority (VARA). UAE now has its Blockchain Strategy 2022 to move most of its transactions to blockchain. By this legal framework, regulating crypto assets and non-fungible tokens (NFTs), this reflects Dubai’s vision to become one of the leading jurisdictions for entrepreneurs to invest in blockchain technology. The VAL became effective on March 11, 2022, while the VARA launched its operations officially on 25 August 2022.
The US President Joe Biden, in March signed an executive order calling on the government to assess the risks and benefits of cryptocurrencies, and to adopt a unified approach to the regulation of digital assets in the US. The focus of this order is on six key areas: consumer protection, financial stability, illicit activity, US competitiveness, financial inclusion, and responsible innovation. The Biden administration also wants to explore a digital version of the dollar.
The Central African Republic (CAR) took the entire world by surprise, becoming the second country in the world, after El-Salvador, and the first in Africa to adopt bitcoin as legal tender. This move, however, was widely criticized as unsafe for CAR’s economy. The governor of the Bank of Central African States—Banque des États de l’Afrique Centrale (BEAC), after the adoption in April 2022, wrote the CAR government, describing it, and the potential move away from the CFA franc, as “problematic”, noting that crypto puts monetary stability at risk.
The Securities and Exchange Commission (SEC) Nigeria on Friday 12 May 2022 released new rules for the regulation of digital assets in the country: the Securities and Exchange Commission (Capital Market Operators Anti-Money Laundering and Combating the Financing of Terrorism) Regulations. The new SEC Rules apply to VASPs, including digital asset offering platform (DAOP), digital asset custodian (DAC), and digital asset exchange (DAX). It also governs the issuance of digital assets in Nigeria. This, by implication, officially legalizes crypto assets and other virtual assets in Nigeria, despite the Central Bank of Nigeria’s restriction on banks and other financial institutions from facilitating cryptocurrency transactions. Similarly, in May, the Securities and Exchange Commission (Capital Market Operators Anti-Money Laundering and Combating the Financing of Terrorism) Regulations was introduced in Nigeria to apply to the activities of money laundering, terrorism and proliferation financing in the Nigeria capital market operations and related matters. This regulation captured VASPs as well as capital market operators.
Also in May, Nigeria passed the Money Laundering Act 2022, which amongst other things, include the regulation of virtual assets and virtual assets providers (VASPs) for the purpose of AML/CFT compliance. The Act defines cryptocurrencies as “digital or virtual currencies issued by largely anonymous entities and secured by cryptography,” and financial institutions (FIs) under the Act include VASPs. Similarly, the Nigerian Financial Intelligence Unit (NFIU) is looking to introduce and implement the Travel Rule on VASPs in Nigeria.
The government of Dominica approved of the Virtual Asset Business Bill (VABB), which was drafted with the help of the Eastern Caribbean Central Bank (ECCB), for adoption by countries in the Eastern Caribbean region. This was after the bill was defended before Parliament. The purpose of this VABB is “to provide for the [registration/licence] and supervision of virtual asset business in the Eastern Caribbean Currency Union (ECCU)”. It proposes to introduce a regime that will be overseen by the national regulators in the eight member countries of the region. Dr. Vince Henderson, Minister for Planning and Economic Development, told Parliament during the defense, “[a] virtual asset is a digital representation of value that can be traded or transferred digitally. Virtual assets can be used for making payments or investments.” Opposition legislator, Clement Marcellin, supporting the legislation, noted that it offers opportunities for Dominica and is in line with their goals towards a digital economy.
In other news, the European Union (EU) agreed on a provisional version of the Markets in Crypto Assets (MiCA) framework. The MiCA allows crypto services providers and exchanges to operate across the region if they are registered with national authorities and meet minimum requirements to protect investors and maintain stability.
The G20 announced through the Financial Stability Board (FSB), a global financial regulator including all G20 countries, plans to present global crypto rules for cryptocurrencies and stablecoins in October 2022. The FSB also mentioned submitting a public consultation report with proposed recommendations for promoting consistency in regulatory and supervisory approaches to other crypto assets, globally.
In California, the Senate passed a bill requiring new licensing for cryptocurrency companies that operate in California, reported Forbes Advisor. According to the report, “[d]ue to these licensing requirements, the bill prohibits California entities from trading in stablecoins that are not licensed either by a bank and fully backed by secure reserves or by the California Department of Financial Protection and Innovation.” The bill also requires any stablecoin not issued by a bank, without proven reserves, and yet to receive license from the State, cannot be traded in its jurisdiction.
The UK introduced new regulations—Sanctions (EU Exit) (Miscellaneous Amendments) Regulations 2022 and the Sanctions (EU Exit) (Miscellaneous Amendments) (No.2) Regulations 2022 UK—requiring crypto exchange and custodian wallet providers to comply with the reporting obligations implemented by the Office of Financial Sanctions Implementation (OFSI), of 30 August 2022; to notify the OFSI as soon as possible of any suspicion, a person subject to sanctions or who commits a financial sanctions offense.
In China, although the country’s crypto ban subsists, it announced in August, plans to introduce a digital currency: China officially started rolling out the next round of its central bank digital currency (CBDC) pilot test program. Guangzhou became the first city of its kind in China to launch a pilot function of digital RMB payment code to pay for public transportation.
The Japanese government will introduce remittance rules early 2023 spring in Japan, reported Nikkei Asia. The rules aim at preventing criminals from laundering money using cryptocurrency exchanges. The Prevention of Transfer of Criminal Proceeds Act will also be revised to require the compulsory sharing of customer information between exchange operators, to enable the tracking of money transfers by perpetrators of illegal activities.
On 16 September, the US released its “first ever comprehensive framework” outlining the regulation of digital assets, including cryptocurrency, leaning towards developing a digital currency—Central Bank Digital Currency (CBDC) for the US. The benefits of the potential US CBDC are highlighted to include enabling a more efficient payment system, providing a foundation for further technological innovation, facilitating faster cross-border transactions, being environmentally sustainable, promoting financial inclusion and equity by enabling access for a broad set of consumers, and, it could foster economic growth and stability, protect against cyber and operational risks, safeguard the privacy of sensitive data, and minimize risks of illicit financial transactions; it could also help preserve U.S. global financial leadership and support the effectiveness of sanctions. This follows the executive order issued in March by President Joe Biden.
In October 2022, the Council of the EU officially published the long-awaited compromise text or negotiated version of the proposed Markets in Crypto Assets (MiCA), a “landmark regulation” that, according to the Council, will “put an end to the crypto wild west”. Agreement was reached late June 2022, but discussions continued through the summer, resulting in several changes from the political agreement in the final compromise text. The European Parliament will vote on the text, February 2023, as against the originally expected date, December 2022. This will delay the entry into force of the MiCA, giving more time for studying the 380-page text.
In the US, the Financial Stability Oversight Council (Council) released its Report on Digital Asset Financial Stability Risks and Regulation. The Council approved the report in response to Section 6 of President Biden’s Executive Order 14067, “Ensuring Responsible Development of Digital Assets.” The report reviewed financial stability risks and regulatory gaps posed by several types of digital assets and provides recommendations to address such risks. A fact sheet summarizing the report’s key findings and recommendations can be accessed here.
Following the FTX collapse, both regulators and players in the industry have been calling for stricter regulations for cryptocurrency. The US Federal Reserve urged Congress to pass legislation that would impose regulation on crypto currencies in the wake of such a collapse as FTX. The founder and CEO of Binance, Changpeng Zhao, also called for more regulatory clarity after the crypto market chaos that resulted in investors’ estimated lost of US$2 trillion (£1.7 trillion).
The South Africa Financial Sector Conduct Authority (FSCA) declared crypto assets as a financial product, bringing it under the FSCA’s regulation, based on the Financial Advisory and Intermediary Services Act (FAIS) which became effective 15 November 2022. The Act requires individuals providing advisory or intermediary services in relation to crypto assets, to obtain license to operate as a financial services provider or as representative of such a provider, with a deadline of 30 November 2023. The regulator also published a draft exemption which excludes designated “ecosystem participants” from the regulation of the Act, including crypto asset miners, node operators maintaining crypto-asset networks, and dealers in non-fungible tokens.
The Kenyan Parliament proposed the Capital Markets Amendment Bill 2022 which seeks to introduce taxation of crypto exchanges in Kenya. The Bill suggests capital gains tax (CGT) on the sale or use of crypto assets. Currently, banks are mandated to deduct 20% excise duty on fees charged on transactions. The proposed Bill will require, among other things, owners of digital currencies to furnish the regulator with information regarding the equivalent of the virtual currency in Kenya shillings (KES), type of currency transacted, date of purchase, and date of sale.
The Federal Government of Nigeria announced the plans to include capital gains tax (CGT) on cryptocurrencies and other digital assets in the proposed Finance Bill 2022 by the Ministry of Finance. This will treat digital assets as a form of chargeable asset which will attract 10% tax on the gains made from disposing such digital assets. According to the finance minister, Zainab Ahmed, the basis for taxing cryptocurrency and other digital assets aligns with the government’s policy drive to enhance cross-border and international taxation of e-commerce in emerging markets; taxing digital assets. This is expected to bring Nigeria into the league of countries that already do the same. On 28 December, the National Assembly passed the Finance Bill 2022. It is now awaiting the President’s assent. The proposed commencement date is 1 January 2023.
Brazil, on 21 December 2022, approved its law on cryptocurrencies, requiring exchanges and other VASPs subject to it to comply with its directives within 180 days. This approval makes licensing for VASPs mandatory. According to CoinTelegraph, the law includes a provision to penalize fraud involving virtual assets with a prison term of four to six years and a fine. The law clarifies that Brazil’s residents cannot use Bitcoin as legal tender in the country. The law also includes other assets under the definition of legal payment methods.
To close the year, Brazil imposed a 26% capital-gains tax on crypto trading, in a Bill approved by Parliament on 30 December 2022, along with its 2023 proposed budget. This capital-gains tax applies to gains exceeding €2,000 (Two Thousand Euros) per tax period, CoinDesk reported. There is, however, a “substitute income tax” for investors, an incentive for declaring crypto profits at 14% of the value of the assets held as of 1 January 2023, instead of the cost at the time of purchase.
Concluding thoughts: Crypto adoption and need for risk-based regulations
Globally, crypto adoption grew in 2022. From centralized finance (CeFi) to decentralized finance (DeFi), crypto adoption continues to grow, regardless of the high volatility in the market. The crypto market this year recorded its worst lows in recent history.
The rate of (proposed) regulation in 2022, as highlighted above, is higher compared to 2021. This is understandable as regulators are expected to continue to increasingly react to the risks and threats often associated with crypto adoption in various jurisdictions. More regulatory interventions are expected in 2023.
Last year, more countries, including African countries, introduced tax on crypto assets and exchanges. This is regardless of the lack of clarity or uncertainty surrounding the legality or acceptance of crypto in these countries, particularly by the central banks or reserve banks that control the banking and financial system. From an operator’s point of view, the development is not impressive.
It is believed in some quarters that the absence or near absence of regulation in many jurisdictions across the world is one of the reasons why the crypto industry has largely remained a self-regulated space at best, or a “wild wild west” at worst. Crypto, perhaps as with most disruptive innovations, attracts the good, the bad, and the ugly.
Regulators, therefore, cannot be seen to be cherry-picking the innovations they want or don’t want. Consumers and investors already decided what the market wants. With the Celsius, Voyager, and FTX implosions in 2022 and the contagion effect, one thing is clear: In 2023, regulators need to urgently approach the market with the aim to protect consumers and investors. In such regulated business climate, the government stands to benefit even more. This is because government control as well as revenue are better maximized in a regulated space. Governments, policymakers, regulators, and investors must therefore collaborate to ensure accountability, market integrity, and transparency in the crypto space.
A risk-based regulation is key.