Crypto Regulations in U.S and Europe: Guide for a Novice Trader

As the conversation around blockchain technology and cryptocurrency shifts from an unreliably risky asset to a widespread payment and investment option, the regulations around crypto trading are also evolving. According to CoinMarketCap data, over 240 countries have legalized cryptocurrency as a legal tender. However, with more specialists involved in the making of the laws and regulations around this subject, the details might get messy. In this article, we will gather the latest information and provide the most important parts of the law that an average trader should know.

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Basic Regulations

U.S.

In the United States, cryptocurrencies are managed at the agency level and involve the Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), Department of Treasury, The Commodities Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN). 

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• U.S. Treasury Department has taken an aggressive stance on crypto in order to create transparency around crypto assets and minimize financial crime.
• The SEC views crypto assets just like any other stock or security. 
• The IRS, in the meantime, charges capital tax gains treating crypto holdings as property. 
• FinCEN recognizes cryptocurrency as a substitute for traditional money transmitters like fiat currency. The Bank Secrecy Act (BSA) has traditionally applied to these money transmitters.
• The Commodities Futures Trading Commission (CFTC) allows cryptocurrencies to be traded on a public market. Since crypto is classified as a commodity, CFTC has been taking measures against the illegal activity such as unregistered exchanges, wash trading, prearranged trading, and Ponzi Schemes. 

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As can be seen, the regulations in the U.S. involve several independent agencies. The most important thing for a trader to know is that cryptocurrency is taxed in a similar way to property taxes. If assets are held for less than a year, an ordinary tax rate is charged. For periods of more than a year, long-term capital gains taxes are applied. For other crypto operations, the tax will vary case by case as can be seen below:

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EU

The European Union’s approach to crypto regulation is slow but steady. Cryptocurrency providers fall under the 5th Anti-Money Laundering Directive (5AMLD) which includes the laws regarding documenting the identities and addresses of all digital asset owners. Most international laws in the EU revolve around Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) concerns. Digital exchanges will have to operate in accordance with one of the following depending on the state: the European Banking Authority (EBA), European Commission (EC), European Central Bank (ECB), European Insurance & Pension (EIOPA), European Supervisory Authority for Securities (ESMA). Taxes on crypto vary but many European countries' capital gains tax on cryptocurrency profits ranges between 0 and 50%.

Confidentiality Concerns

In the U.S., FinCEN requires crypto exchanges to comply with the FATF “Travel Rule” which means that they should request and keep information on the sender and the recipient of transactions with a value of $1,000 or more. While this is a good way to prevent the use of crypto for illicit purposes, it also defeats the idea behind crypto of traders having more privacy and autonomy. In the meantime, many U.S.-based traders opt to use decentralized exchanges that do not require identity verification.

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Another concern revolves around MedTech-related tokens. Containing medical information on the blockchain might create contradictions with HIPAA laws. As Masur Griffiths's attorney, Sarah Siege, explained: “HIPAA prohibits the use of mathematically-derived encryption of protected health information because the encrypted information can potentially be re-identifiable. This strict regulation would seemingly render the use of blockchain in the healthcare industry non-compliant with HIPAA."

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In Europe, the General Data Protection Regulation (GDPR) governs how the personal data of the EU residents may be processed and transferred. Recently the European Parliament voted to mandate all crypto transactions to include information on the parties involved. This means that anonymous coins like Monero are not legal to use. 

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Current Updates

Most recently, the SEC has produced an updated guideline that recommends recording all digital assets held by exchanges. This means that crypto companies will have to disclose the “nature and amount of crypto assets” on customers’ balances.

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Things are also getting more serious in Britain as the U.K. The Financial Conduct Authority (FCA) set out a deadline for companies that offer crypto-related products and services to acquire a license with requirements that won’t be easy to obtain for most companies. The British Treasury Department has also underlined its commitment to regulate stablecoins and giving people more confidence in using digital currencies in the aftermath of the LUNA collapse.

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In the meantime, as a part of the European Commission’s Digital Finance Strategy, the Economic and Monetary Affairs Committee (ECON) proposed a Markets in Crypto-assets (MiCA) Regulation. The initial draft presented in 2020 was heavily focused on energy consumption risk mitigation and would essentially ban the use of Bitcoin and other proof-of-work cryptocurrencies. It has since been reworked to an alternate legislative proposal “with a view to including in the EU sustainable finance taxonomy any crypto asset mining activities that contribute substantially to climate change mitigation and adaptation” which is set to be presented by January 2025.

According to Reuters' prediction, the LUNA crash might have an effect on all G7 countries. The world’s leading economies including Canada, France, Germany, Italy, Japan, the UK, the USA, and the EU might discuss imposing a stricter regulatory framework on crypto when they met in Germany this May. When discussing reserve assets backing stablecoins, the G7 counties “reaffirmed that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to applicable standards.”