The State of Crypto Regulation in 2023

The year 2023 is drawing to a close, and it has been exceedingly challenging for the crypto market. It commenced in an atmosphere tainted by the collapse of FTX, resulting in the BTC price plummeting to its lowest level since 2020, settling at $16,800 per 1 BTC. Consequently, this year witnessed a recovery cycle in the market, primarily attributed to advancements in crypto regulation. As a result, cryptocurrency prices are now even more susceptible to its influence.

The trend has been evident for some time, especially when examining the major news stories within Web 3 this year, which increasingly revolve around regulation—a trend anticipated to persist in the long term. Presently, market dynamics are being steered by the hopeful anticipation of the SEC's approval of a Bitcoin ETF. Furthermore, the Federal Reserve, also a regulatory body, has wielded considerable influence over the crypto market for an extended period. Perhaps in the upcoming year, if the Fed begins to reduce interest rates, it may further impact the market. Crypto regulation is expanding its reach into various sectors, encompassing areas such as stablecoins, DeFi taxation, the Travel Rule, and crypto derivatives. In this article, I aim to outline the significant aspects of crypto regulation in 2023.

The United States

This year, US legislators and the crypto community took a step towards implementing a clear crypto regulation framework. This led to the introduction of the first federal law in the US for crypto regulation - the Financial Innovation and Technology for the 21st Century Act. It is the first bill of its kind that has undergone preliminary hearings, and both key congressional committees have approved it. The act spans 212 pages.

It begins by focusing on the existing regulations applicable to digital assets in US law, as well as those by the SEC and CFTC. The bill generally aligns with a liberal spirit for the crypto industry and opposes the SEC's repressive approach. Approximately 70% of digital assets must be recognized as commodities and regulated by the CFTC, rather than the SEC. The CFTC would be empowered to regulate the spot trading of digital commodities and their secondary trading. According to the bill's authors, nearly 20% of Americans already own digital assets, and more than 67% want to use them on "trusted, secure platforms." However, the Senate holds a slightly different position on crypto regulation. Hence, the discussion of crypto regulation in the US is not finished and is set to continue next year. One reason the bill has not passed yet is the SEC's position, which, in the absence of transparent regulation, concentrates unnecessary powers on itself.

In the absence of a federal crypto bill in the US, cryptocurrency regulation is taking shape due to regulators' lawsuits against major cryptocurrency companies. Several major events in this field this year can be highlighted:

• CFTC and SEC lawsuits against Binance and the exchange's subsequent deal with US regulators

• Court decision in favor of Grayscale in the case against the SEC

• Ripple's victory in its legal battle with the SEC

• Confrontation between the SEC and Coinbase and the launch of the "Stand with crypto" campaign

  
  

The SEC may be doing something to protect investors, but the agency's policy is primarily driven by a desire to assume as much authority as possible to regulate the market from other regulators - the CFTC and FINCEN. However, this has had the opposite effect. As Gary Gensler recently admitted, it was the court decision in favor of Grayscale that finally led the commission to consider applications for Bitcoin ETFs on their merit.

In any case, in the absence of a federal law, lawsuits help in the development of a legislative framework. Additionally, some influence was exerted by pressure from legislators - four congressmen, including Republican Majority Leader Tom Emmer, wrote a letter to Gary Gensler demanding the immediate launch of a Bitcoin ETF.

This year, the IRS published its 300-page proposal for crypto taxation framework. It contains the first legal US definition of a crypto broker, which defines all VASPs and active individuals as crypto brokers. DeFi and DEXes may also qualify as brokers and would have to transmit customer data. However, it’s not a law yet.

The IRS also published a clarification about PoS staking taxation, stating that staking rewards received are included in the taxpayer's gross income. This means that staking rewards must be declared for personal income tax, with a tax rate ranging from 10% to 37%.

International organizations

Regulation of cryptocurrencies at the level of international organizations is also being discussed, but there is little involvement of crypto business representatives, and a conservative approach prevails for the most part.

The Financial Stability Board (FSB) and the International Monetary Fund (IMF) issued a policy paper on global crypto regulation. This 53-page document was commissioned by the G20 intergovernmental forum under India’s leadership. The document provides for the harmonization of regulations and data exchange between countries on stablecoins, operating crypto entities, DeFi, crypto taxation, and capital outflow. The document shows that the FSB and IMF have decided to abandon the idea of a complete ban on cryptocurrencies and move towards their legalization. On the other hand, they aim to introduce rather strict regulation.

Finance ministers and heads of central banks at the G20 summit in Morocco approved the roadmap for cryptocurrency regulation prepared by the IMF and FSB. The plan includes the unification of regulations and combating money laundering and capital flight.

Europe

On April 20 of this year, the European Parliament adopted a new legislative framework to regulate cryptocurrencies - MiCA. The legislation will come into force in phases between 2024 and 2025. Several key provisions of this 150-page document can be highlighted. It is important to note that NFTs and cryptocurrency derivatives are not subject to MiCA regulation.

MiCA establishes a licensing procedure for crypto exchanges and other cryptocurrency organizations - CASPs. They will now only need one license in any EU country to operate in the rest of the EU jurisdictions.

It also categorizes three main types of cryptoassets: Asset Referenced Tokens (ART), Electronic Money Tokens (EMT), and utility tokens. EMTs have a functionality similar to electronic money, and ARTs may be backed by fiat assets, derivatives, or commodities.

Operations with ARTs and EMTs are strictly regulated. MiCA introduces the concept of the Travel Rule, and from 2025 CASPs will be obliged to report all EMT and ART transactions over €1,000. It also introduces licensing procedures for stablecoins.

Also, according to some reports, this regulation will, for now, only apply to large crypto exchanges that have more than 15 million users (such as Binance or Coinbase), while smaller platforms will have several exceptions.

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) will ensure that crypto platforms comply with the rules and utilize necessary risk management processes.

Another important event for EU crypto regulation occurred in September in France. Legislators of the European Parliament voted overwhelmingly in support of the eighth version of the Directive on Administrative Cooperation (DAC8), the rules for reporting taxes on cryptocurrencies.

The UK also plays a vital role in the regulation of cryptocurrencies worldwide. This is also because it owns many offshore jurisdictions. This year, the UK finally adopted regulation of cryptocurrencies through a law - The Financial Services and Markets Bill (FSMB). It brings stablecoins and other crypto-assets into the legal realm.

The Internal Revenue Service (HMRC) updated taxation requirements this spring. DeFi taxation from this year will be streamlined on a "no gain, no loss" basis; certain types of transactions are no longer taxed if they do not generate a profit for the taxpayer.

HM Treasury has published its roadmap for stablecoin regulation - to do this, the Payment Services Regulations 2017 (PSRs 2017) will be amended next year. The changes include licensing for stablecoins issued in the UK and special procedures for fiat stablecoins from other countries to enter the market. Also, the House of Lords clarified the status of illicit crypto transactions - money fraud and financial crime.

Asia

New cryptocurrency regulation has been introduced in landmark jurisdictions in Asia, such as Hong Kong and the UAE. On June 1 in Hong Kong, new regulations were implemented, and the local regulator SFC has allowed retail consumers to access crypto services. This news had good feedback from the market. New regulations defend investors' interests and require licensed companies to maintain significant capital reserves and strict accounting/AML policies. According to insiders, the total cost of HK’s license is between $12,000,000 and $20,000,000.

In the United Arab Emirates, a separate crypto regulator, the Virtual Asset Authority (VARA), was created under new law No. 111/2022. A VARA license is required for legal entities that operate with UAE residents. In late April, the SCA (securities regulator) also stated that a separate license must be obtained from them to operate in the country. However, so far, such information has not been confirmed. During the year, crypto entities continued to get licenses in the UAE from VARA, as well as for international operations in the free zones of DMCC, ADGM, and other UAE regulators. On the contrary, Qatar and Kuwait have banned operations with cryptocurrencies.

Japan and South Korea continued to modernize their legislation. On July 1, the Korean parliament passed 19 legislative changes to protect the interests of crypto investors. The new legislation includes the obligation to keep user and exchange funds separate and store clients’ assets in cold wallets. The new SFC (Korea security regulator) bill amended in 2023 also requires all legal entities that issue or hold cryptocurrencies to disclose it.

The Japanese government has implemented a crypto tax reform. From April 2024, it will cancel tax on crypto holdings for companies, and they will pay only on realized crypto profits. The country is also introducing new regulations for stablecoins, and Japan Prime Minister Fumio Kishida stated that "Web3 is a new form of capitalism" during the conference Web3X Asia.

Latin America and Africa

2023 may be called the crypto regulation year in Latin America. After the new law was passed, dozens of crypto exchanges entered the Brazilian market this year, and local legislators published an investigation against Binance.

In Chile, a new fintech bill was enacted in February 2023, allowing crypto operations for licensed fintech companies. Also, for the first time in the history of Peru, crypto AML regulations were implemented by the President’s decree. All VASPs operating in Peru must be registered with the local Financial Intelligence Unit (UIF).

The new government of Argentina's libertarian Javier Milay has authorized cryptocurrency payments in contract settlements, an unprecedented and historic development for the country. Argentinian National Securities Commission (CNV) has suggested a new crypto regulation framework.

Ricardo Bonilla, Minister of Finance and Public Credit of Colombia, has announced a federal crypto bill for the next year. Also, the country is working to create a CBDC, the digital peso.

African countries are still a bit behind but are also actively implementing crypto regulation. A historic event was lifting the Central Bank of Nigeria's ban on cryptocurrency transactions in December this year. Botswana, Kenya, and Namibia adopted new regulations in 2023.

Conclusion

More and more countries worldwide are legalizing cryptocurrencies, which will only increase demand for them and access to capital in the market. Also, many countries where cryptocurrencies were previously banned or operating under restrictions - for example, China, Vietnam, Russia, Morocco, and Saudi Arabia - are considering lifting bans or restrictions.

At the same time, crypto regulation in critical countries such as the USA and others is increasingly influencing cryptocurrency prices. Next year, we can expect clarification of regulation in the US, approval of ETFs there, and the legalization of cryptocurrencies in more and more countries. This should have a beneficial effect on the capitalization of the crypto market and on protecting the interests of investors.

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