Cryptocurrencies have made moneymaking opportunities, on the one hand, safer, inclusive, more efficient, and innovative, while, on the other hand, augmenting potential challenges and risks that have given way to some criminal activity.
Optimally, good players on the scene use cryptocurrencies to replace fiat money while constantly expanding the digital economy, while, adversely, bad players on the scene are using the new tool for illegal practices.
Among the examples of illicit behaviours involving cryptocurrencies, you’ll find market abuses, scams, ransomware attacks, thefts by exchanges, terrorist financing and dark market transactions. Because cryptocurrencies often are not properly taxed or regulated, these have also become a favourite tool for tax evaders.
Are Global Regulations On the Way?
Global regulators agree a harmonized approach in regulating cryptocurrencies is needed, and though compliance talk of this kind is definitely in the headlines, nothing concrete on a global level has been undertaken, yet.
The call to have compliance programmes cover cryptocurrencies is one that would, doubtlessly, address new challenges and risks, the kind that requires innovative, out-of-the-box thinking.
Crypto technology would indeed require a new kind of compliance thinking, one that covers anti-money-laundering (AML), risk management, and counter financial terrorism (CFT) practices to clean up the activity. Blockchain technology would be a place to start as it provides an immutable audit trail wherein some unethical behavioural patterns could be defined.
How Three Asian Economies Are Approaching the Cryptocurrency Phenomenon
The regulatory regime in Japan regarding cryptocurrencies is one of the world’s most developed and progressive.
Cryptocurrency exchanges are registered with and regulated by the Payment Services Act (PSA), which implements CFT, AML, and other regulations. The PSA defines both “cryptocurrencies” as property values and not legal tender, and “crypto-assets,” in turn, are methods of payment that are not fiat-currency-denominated, these can be relied upon to pay other individuals.
In late 2017, Japan’s National Tax Agency announced that cryptocurrency gains would be viewed as “miscellaneous income” and, henceforward, taxed. The PSA and the Financial Instruments and Exchange Act (FIEA) are regularly updated via amendments and new regulations, with the latter Act better defining the term “crypto-asset” and specifically regulating crypto derivatives trading. The PSA, in turn, regulates cryptocurrency custody service providers who do not buy or sell crypto-assets.
In April 2020, the world saw the first governmental self-regulatory bodies set up in Japan. These, known as the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan STO Association, promote best regulatory compliance practices within the cryptocurrencies world.
In the East Asian nation, tax rates on crypto gains largely depend on individual income, with rates reaching as high as 55 per cent.
In 2013, the People’s Bank of China (PBOC) banned financial entities from being able to deal in cryptocurrencies with this ban later covering ICOs and crypto exchanges. China was the world’s most coveted region to undertake mining due to low electricity costs, with more than 65 per cent of Bitcoin mining taking place there at its peak.
Although the Chinese government considered banning crypto mining, in 2019, it announced that it would not do so. However, in May 2021, the Chinese Financial Stability and Development Committee, the agency regulating the financial sector under Vice-Premier Liu He, stated the government would ban bitcoin mining and trading so as to cut down on “individual risks to society.”
Chinese mining, as a result, is at a near zero, say the experts.
The PBOC, though, embraces blockchain technology and is striving to innovatively develop the central bank’s digital currency, the digital yuan.
The people of South Korea have embraced Bitcoin from the near beginning and are avid investors and traders in cryptocurrencies.
In 2021, total trading volumes for cryptocurrencies in South Korea exceeded that of the domestic equities market. Regulators in the country, however, treat crypto exchanges and businesses cautiously. These, like other financial entities, must pay taxes and are under compliance programmes, such as AML and corporate governance regulations.
In the wake of several large hacks on crypto exchanges, the East Asian nation passed the “Act on Reporting and Using Specified Financial Transaction Information,” also known as the Financial Transaction Reports Act (FTRA), which requires crypto businesses and exchanges to register and be aligned with AML and other compliance regulations.
South Korean regulators have emphasized they work for safe trading platforms of cryptocurrencies. To this end, crypto trading platforms must obtain an Information Security Management System (ISMS) certificate issued by the Korea Internet and Security Agency (KISA). Moreover, new 2021 laws mandate that all crypto service providers register with the Korean Financial Services Commission.
Tax-wise, South Korean virtual assets are classified as “other income.” In late 2020, South Korean political leaders approved taxing crypto trading profits in 2022 at a rate of 20 per cent. This new crypto tax law was later expanded by Korea’s National Tax Service to cover foreign crypto exchanges and businesses.
The updated law now officially taxes 20 per cent of crypto transactions profit that surpasses 2.5 million Korean won, or USD 2,200.
Still Too Early to Tell
As can be understood by the above East Asian example cases, cryptocurrencies are still in an early stage of development, not having globalized standards, regulations, taxonomies, or even harmonized definitions. If a globalized compliance programme is to exist, one that takes into account the very complex nature of cryptocurrencies, a versatile exploration and analysis of the tool is needed in order to effectively gauge their true potential, possible risks and, ultimately, further potential for innovation.