Vlad Totia
Last week El Salvador officially adopted bitcoin as legal tender, thus becoming the first country in history to start using a purely digital and decentralised form of currency. Salvadorans can now pay taxes, take loans, and use bitcoin for the exact same purposes as they use the US Dollar, the country’s only other official currency.
The adoption of bitcoin as a national currency is a monumental milestone for digital assets. For now, the experiment raises more questions than answers, with concerns such as initial protests against the measure and the disrupted launch of the government-issued wallets. However, this is not the only significant change to happen in the regulatory landscape regarding cryptocurrencies. These past few months have been filled to the brim with regulatory changes in every corner of the world.
Another sizeable leap forward for digital assets has been the US Senate’s vote on the Infrastructure Bill and its definition of the ways in which cryptocurrencies can be taxed and reported. It shows that the US Government is moving on from a previously sceptical and even adversarial attitude. There is now a legislative package to shape a more predictable and regulated environment in which these assets and services can grow. Moreover, it has recognised cryptocurrencies as an asset class that should eventually have the same legitimacy as fiat currency.
While some countries are optimistic and friendly towards cryptocurrency acceptance, others have outright banned its use. It is likely that we will continue to see differing attitudes and approaches to the regulation of digital assets more broadly. However, while all eyes are on El Salvador and its leap into cryptocurrency adoption, it is worth taking a step back to look at the larger picture with regard to crypto regulation worldwide.
The opposers
Although governments are becoming more comfortable with digital assets, there remain some areas of the world that continue to treat them with varying degrees of scepticism. China cracked down on crypto-exchanges and miners in the country in July, contributing to the 20% drop that bitcoin experienced – part of a trend down to a level less than half its April peak value. This move was the latest and most significant in a series of periodic shake-ups of the sector, with the declared purpose of guarding against financial risk. Where exactly cryptocurrency regulation is heading in China remains to be seen, but the shorter-term impact is that the country’s dominance over the Bitcoin network and other blockchains by means of controlling mining or ‘hashing’ power is dropping rapidly. The miner exodus and an increase in mining in other regions of the world have caused the Chinese share of Bitcoin mining to drop 55% since the beginning of the year. These events have led to a more even share of blockchain responsibility and have potentially thereby strengthened network governance.
Turkey is another example of a country that does not look kindly on widespread use of cryptocurrencies as it has banned paying for goods and services with them. The central bank cited concerns such as anonymity, protecting existing payment systems (a further step beyond its long-standing ban on PayPal), illegal activity, and the potential for retail investors to lose money. The ban does not extend to the ownership or purchase of cryptocurrencies via a personal bank account, potentially leaving the door open for regulated investment use cases in the future. This has interesting implications for a population that has already demonstrated its keenness to hedge against high inflation and the devaluation of the Turkish lira.
Similarly to Turkey and China, India is another country that has considered banning digital assets in one form or another. The latest digital currency bill proposal is under review. The legislative package mostly targets how exchanges operate and what the regulatory landscape they fall under should look like. This potentially presages a ban on the ownership of private cryptocurrencies while paving the way for an official Indian central bank digital currency (CBDC).
While these countries may not be seriously considering an outright ban of blockchain technology or cryptocurrencies, these regions are likely to see significant regulatory restrictions on digital assets for a long time.
The cautious
Despite pushback from some countries, most are not opposed to blockchain adoption, and maintain a cautiously positive outlook on the emerging digital asset ecosystem. The European Union is actively interested in blockchain technology and has set up and funded a variety of initiatives to encourage its advancement while working on its proposed Markets in Crypto-assets Regulation, or MiCA. Arguably the most encouraging development is its own push for a CBDC, also referred to as the digital euro. The initiative was initially announced with a planned rollout in 2025, but the European Central Bank has expedited the timeline and launched a two-year investigation phase in July. It is encouraging that even a massively bureaucratic organisation such as the European Union senses the urgency in moving forward with digital money.
Despite the positives, the aforementioned US Infrastructure Bill passed by the Senate last month caused the cryptocurrency community concern. The bill’s most controversial elements see legislators taking a tough stance by potentially classifying most entities that are involved with cryptocurrency-related transactions – even tangentially – as ‘brokers’ that must be tightly regulated. While its intentions have not yet been clarified, the United States has clearly begun to catch up when it comes to defining its stance towards digital assets. This is a key precursor to the clear regulatory environment demanded by investors. As a whole, regions such as the United States and the European Union are approaching digital assets at a more methodical pace but are certainly not opposed to them.
The optimists
While only official legal tender in one country thus far, cryptocurrencies like bitcoin are slowly starting to be legalised and accepted as a payment method in various parts of the world. One of the most recent countries to authorise a slew of cryptocurrencies for merchant payments is Cuba. The resolution, which came into force on 15 September, regulates "the use of certain virtual assets in commercial transactions" in "operations related to financial, exchange and collection or payment activities" in or from Cuban territory. Digital assets, and more specifically cryptocurrencies, are already quite popular in the Caribbean Island, with an estimated 10,000 Cubans using them to transfer money.
Germany is another example of a country moving forward positively in the regulatory space. Earlier this year, it passed legislation allowing investment funds to allocate up to 20% of their value to cryptocurrencies under a provision called ‘spezialfonds’ or special funds. On a similar note, France has also ramped up its regulatory programme, proposing EU-wide regulations for cryptocurrencies. The proposal’s language is positive as it recognises the potential benefits in terms of market efficiency and economies of scale enabled by digital assets. Countries such as Germany and Cuba are examples of an understanding of the benefits that blockchain technology can bring to help meet demand and solve inefficiencies specific to their own socio-economic landscapes.
The pioneers
There still remain few countries in the world that have taken the initiative when it comes to regulating such a new technology. Switzerland has a reputation as a pioneer in banking and financial services, and it has no intention of missing the digital asset boat. Just last month, payments via cryptocurrencies started to be offered within the country through a partnership between Worldline and Bitcoin Suisse, and several cantons accept payment of local taxes in cryptocurrency. Switzerland has also consistently allowed the many financial institutions that it harbours to experiment with digital assets through permissive legislation. This has cemented the country’s status as a hub for a variety of crypto-asset companies.
As of 7 September 2021, El Salvador became the first country to accept bitcoin as legal tender, putting it on par with the United States Dollar, the official fiat currency of the state. While there are many questions to be answered regarding how or if the central bank will be able to exert any form of monetary policy on a currency which it cannot control, El Salvador has started one of the most interesting economic experiments of the century. How international financial institutions, banks and corporations will support bitcoin use within the country is yet to be seen. Several other Latin American countries and Ukraine are observing closely as they consider their own plans to follow El Salvador’s lead.
Countries like Switzerland or El Salvador have taken the first bold steps in approaching a wide range of questions from regulation to the taxation of digital assets. They have secured their places in the history books by creating templates for other countries to follow when it comes to architecting the digital asset ecosystem. The potential to attract innovation and growth this early on in a strategically competitive new field is significant.