[ELM] Are Crypto Tokens Legal?
This blog post shall review the crypto tokens under the lens of regulations, how the law affects crypto tokens’ use, the need for crypto-related laws, and the status of regulations in significant countries.
The first cryptocurrency, Bitcoin, was launched in 2009. The first paper on Bitcoin was authored by Satoshi Nakamoto and titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This simple event changed the course of financial history and became a foundation stone for decentralized finance. Bitcoin is built on blockchain technology. In addition, this technology leads to the creation of a virtual world, NFTs, decentralized finance, apps, autonomous organizations, and countless other innovations. Further, a decentralized ecosystem built on the blockchain facilitates peer-to-peer transactions and interactions. As of June 2022, more than 10000 crypto tokens are in the trade.
In continuation, traditional finance, organizations, and business interactions are governed by the regulations formulated by the governments. However, the ecosystem built on the blockchain defied all the restrictions and regulations set by the law. Further, with the innovations in blockchain technology and the emerging uses of the decentralized network, clashes with the law are bound to happen. Therefore, governments worldwide have started to pay heed to the subject. Hence, some have accepted the use of crypto tokens, some have regulated it, and some have outrightly banned it.
Are Crypto Tokens Legal?
Unfortunately, there is no black-and-white answer to this question. It depends upon the following aspects-
Type of Crypto Token
Purpose of Trade.
Let us quickly review each point for clarification and how they affect investors:
Country: Almost all the countries are sovereign, and many of them have democracy as well. Governments across the world make laws for their respective countries. The case is the same for the crypto token regulations as well. As mentioned earlier, the countries have behaved differently to the crypto tokes. Countries like El Salvador accepted Bitcoin with open arms as legal tender, while countries like China, Egypt, Iraq, Qatar, etc., entirely banned its trade.
Countries like the US, India, Britain, and the EU have taken a mid-route by recognizing the bitcoin and other crypto-assets and placing taxation on them.
Type of Crypto Token: As there are more than 10,000+ crypto tokens in trade, legalizing all the crypto tokens would mean there will be 10,000+ legal tenders. Also, anyone can create tokens and use them to purchase anything. This would result in chaos and the collapse of economies. Hence, the government may allow only a handful of crypto tokens to be used as legal tender.
For example, El Salvador only accepts bitcoin as legal tender and not another crypto token.
Purpose of Trade: There exist many types of crypto tokens, such as utility tokens, security tokens, payment tokens, exchange tokens, stablecoins, NFTs, asset-backed tokens, and privacy tokens. The different tokens may have different regulations in a country. For example, security tokens and payment tokens are traded under the law, while utility tokens, NFTs, and exchange tokens may or may not have regulations in the same country.
Why do Countries Have Regulations for Crypto Tokens?
The whole discussion aims to understand the necessity of regulations for crypto tokens. There are many reasons why governments are making laws regarding the subject.
One of the key reasons is to curb illegal trade. As blockchain is a decentralized network, people can transact securely without getting noticed. The trade can happen across boundaries without regulations and with a minimum fee. Therefore, there is a possibility of transactions for notorious causes like terrorism, political influence, bribery, corruption, etc.
The second biggest reason is the tax evasion by individuals and businesses using crypto tokens. Further, money laundering is also a severe threat due to unregulated crypto-currencies.
Country Wise Crypto Token Regulations
The US Treasury defines Bitcoin as a convertible currency. Also, the Internal Revenue Service treats bitcoin as property for taxation. Moreover, SEC is planning to get the exchanges registered as they trade securities.
The cryptocurrencies are not legal tender, but exchanges are legal and must register themselves with FCA. Crypto assets are considered property, but there is no law as of June 2022. Further, capital gains on crypto tokens are taxable.
Canada views Bitcoin as a commodity for income tax computation. Further, it treats exchanges as money service businesses.
The Australian regulations are similar to the Canadian regulations. Bitcoin is a financial asset; however, in some instances, if you own Bitcoin only for personal use, the capital gain on it may not attract tax. Crypto exchanges need to register and comply with AML/CTF obligations. Privacy coins are banned in Australia.
The EU recognizes crypto tokens as crypto assets. However, in 2020, it launched the process of legalizing the crypto regulation framework that will level the field for its members. As a result, the laws for exchanges vary across the states.
The use of crypto tokens for payment is banned; however, the same can be traded as a store of value. However, capital appreciation over crypto assets attracts 30% taxation. Further, the Reserve Bank of India announced a blockchain-based crypto asset that shall operate under the law.
There is an absolute ban on bitcoin in China, whereas NFTs can be traded.
Crypto coin Bitcoin is legal in Japan and can be traded in the market. This is because it recognizes crypto tokens as legal property. Also, the crypto exchanges must register with the government authority FSA and comply with the AML/CFT obligations.