The first Bitcoin was mined on January 3, 2009. Five years later, the Ethereum Initial Coin Offering (ICO) occurred from July to September 2014. One year later, the Ethereum blockchain eventually launched in July 2015. In total, the cryptocurrency industry is only a little more than a dozen years old. Yet many things have already happened in that space.
In the early years, governments mostly ignored the digital asset space. Cryptocurrencies represented so little value that it did not make any sense to regulate them. This changed in 2021 when the total cryptocurrency market capitalization for the first time surpassed 2 trillion USD and almost reached 3 trillion. Policymakers around the world could no longer ignore cryptocurrencies since the asset class became too significant to just overlook it. In the following, we take a look at the legal recognition of cryptocurrencies on an international basis.
The US market is the most significant market for cryptocurrencies since the vast majority of the trading volume occurs in Dollars or Dollar dominated stable coins.
In the United States, the Securities and Exchange Commission (SEC) is responsible for protecting investors and regulating public markets. According to the SEC, Bitcoin is predominantly classified as a commodity that would place Bitcoin outside of the SEC’s responsibility. There are indications that the SEC believes the same about Ethereum, but it is not yet clear how the SEC will classify several other cryptocurrency tokens. Due to concerns over security laws in the US, some projects chose not to distribute their token to US-based users or don’t allow them to purchase tokens in a crowd sale.
Besides trading and investing purposes, cryptocurrencies are also used as a payment channel. However, research by the Federal Reserve Bank showed that the use of cryptocurrencies as a means of payment is still very low, but significantly higher among the population that does not have a bank account.
Mining of Bitcoin is also legal in the United States, and some states like Texas are actively seeking to build up mining capacities. Bitcoin mining in the United States became more profitable and popular after China decided to ban mining.
So far, there is no Bitcoin spot ETF approved in the United States. In Canada, on the other hand, a Bitcoin spot ETF was approved on February 18, 2021, and quickly became very popular in the country.
It is legal to purchase and store cryptocurrencies in all countries of the European Union. However, when it comes to taxation and the legal classification of digital assets, the laws are different from country to country.
Since July 2021, institutional investment funds in Germany have been allowed to invest in cryptocurrencies. Furthermore, investors in Germany and other European countries can access a Bitcoin ETF.
In terms of retail investors, the Netherlands is among the countries with the highest percentage of cryptocurrency investors. According to data from the European Central bank, around 10% of European households own cryptocurrencies. For the Netherlands, this percentage was 16%.
Cryptocurrencies are legal to purchase, store, and trade in most Central American countries, such as Mexico. However, laws in El Salvador go far beyond that and make the country one of the most pro-cryptocurrency jurisdictions in the world.
El Salvador recognized Bitcoin as legal tender in September 2021. Furthermore, El Salvador repeatedly bought Bitcoin as a reserve asset. Additionally, the country rolled out a Bitcoin wallet called Chivo directed at the local population. So far, the wallet has failed to gain significant traction among its intended user base. Overall the country is very active in promoting cryptocurrencies and even hosts conferences educating central bankers of other countries.
People in Africa are adopting cryptocurrencies for very different reasons than people in the Western world. Their local fiat currencies are extremely unstable in value, and therefore it is useful for them to save in assets such as Bitcoin. Bitcoin, despite its volatility, still represents a relatively stable store of value for many people in Africa. Nigeria, for example, has one of the highest Bitcoin adoption rates in the world. More than a third of adults in Nigeria are invested in cryptocurrencies despite many people there not having access to the internet yet.
Several North African countries such as Morocco, Egypt, and Algeria are hostile toward cryptocurrencies, whereas the southern countries such as South Africa and Namibia allow the use of cryptocurrencies.
The use of cryptocurrencies is not restricted in Argentina. Due to the high local inflation rate, many Argentinians are acquiring cryptocurrencies to protect their assets from currency debasement. The situation is similar in Venezuela, where the inflation rate is completely out of control. Also, in Venezuela, the use of cryptocurrencies is not prohibited.
Brazil, which is the largest South American country, counts with very favorable laws toward cryptocurrencies. It regards Bitcoin as an asset that is subject to capital gains taxes. Furthermore, there are several cryptocurrency ETFs available for investors to purchase.
Japan and South Korea are among the most embracing cryptocurrency jurisdictions. Both countries have passed legislation regarding cryptocurrencies and enforce standards among exchanges. In South Korea, the cryptocurrency trading volume is already higher than the national equity market volume.
Singapore is another Asian nation that is open to cryptocurrencies and is positioning itself toward becoming a global crypto hub. Vietnam is the country with the highest degree of adoption of cryptocurrencies based on research by Chainalysis. Thailand also ranks relatively high in the comparison. The country allows trading and investing in cryptocurrencies. However, Thailand regulates the space with anti-money laundering (AML) laws and restrictions for cryptocurrency payments.
In Russia, on the contrary, digital assets were previously banned, and even today, they are not allowed to be used for payments. However, investors can purchase cryptocurrencies, and it is estimated that Russians own significant amounts of cryptocurrencies in relation to their population and GDP.
China is among the most hostile countries towards cryptocurrencies. The authoritarian country banned cryptocurrency exchanges in 2017 and went on to ban the mining of cryptocurrencies in 2021. The mining ban led to a shift of mining operations to other countries, mainly the United States.
As layer two scaling solutions are implemented and it becomes cheaper to engage with cryptocurrencies, we can expect that more people will interact with digital assets. Users will get exposure to digital assets through games, DeFi, digital art & communities. They will increasingly transfer value and NFTs over the blockchain. As the complexity and use cases of the industry increase, regulators will need to find a balance between regulating the space and, at the same time, enabling the innovation that is about to happen.