In this article, Joel Mathew, a student of School of Law, UPES discusses the regulations on cryptocurrencies in G7 Countries.

Introduction

The rising value and use of cryptocurrency has raised the requirement for the need of regulations in this sector in order to make the best use of it and at the same time to keep a check on the same so has to minimize money laundering and terror funding which is a major threat arising due to this. After the guidelines published by the Financial Action Task Force (FATF) at the 41st G7 summit at Elmau, Germany it was compulsory for its members to enact regulations in order to prevent such activities. Japan was the first country in the world to amend their existing laws and properly implement the same in order to prevent such cases. Below is the description of various Anti-Money Laundering and Counter-Terrorism financing (AML/CTF) regulations enacted by G7 countries over the time to prevent such activities.

Canada

The government of Canada first reviewed its Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in the year 2013 and proposed amendments which required the businesses dealing with the virtual currencies to register themselves with the Financial Transaction and Report Analysis Centre (FINTRAC) of Canada and implement an anti-money laundering complying system within the business. But what is important is that these amendments are still not in force. After the G7 summit held Elmau, the Canadian government is again reviewing PCMLTFA in order to update laws regarding money laundry and terror funding through cryptocurrencies. The process for amendment is still on the stage of drafting and will be up for public consultation once it is pre-published in the Canadian Gazette.

What should be noted is that the parliament of Canada was the first one to approve a national law on digital currency but due to its non-enforcement the country has lagged behind as compared to Japan who amended its laws after Canada as Japan has become the heaven for cryptocurrency trade.

France

In December 2013 Banque de France (central bank of France) published a report which stated that bitcoin and other cryptocurrencies cannot be considered as a real currency under the French law hence can not be used as means of payment.

As of now, France has stated to take steps forward to bring in a legal framework. The Finance Minister of France in the month of February 2018 stated that an ad-hoc committee has been asked to draft laws regarding the same. The said committee is to be lead by a former central bank official Pierre Landau.

Germany

As per the declaration made by BaFin, the German Federal Financial Supervisory Authority in the year 2013, the bitcoins are legally binding financial instruments that are within the meaning of units of account as per the Section 1(11) of the German Banking Act, but they are not expressly stated as legal tenders.

In February 2018 the ministry of finance stated that the German government won’t tax bitcoin transactions made for payments. However commercial handlings (such as the VC Exchange services) of the virtual currencies may require authorisation under KWG ( a guidance notice issued by the government on authorisation). Failure to obtain such authorisation amounts to a criminal offence.

Italy

The regulations in Italy are on the guidelines passed by the EU (European Union) which aims at harmonizing payment methods, increasing competition and facilitating market access.  On May 25, 2017, by passing legislative decree no.90 the government made necessary for the VC service providers to comply with the anti-money laundering laws. Earlier this year the official website of the Ministry of Economy and Finance announced that it is preparing a decree (law) with an aim to regularise crypto phenomenon in Italy. The draft defines the terms Virtual currency (VC) and VC Service Provider and which mainly is aimed to curb unlawful activities such as money laundering by defining when and how VC service providers should report their activity to the Ministry i.e. a proper report of the business of the firm in a financial year should be submitted to the ministry. Further the draft states that the data collected by the Ministry will be furnished to the Guardia di Finanza (Financial police) as well as to the Polizia Postale e Delle Comunicazioni (The Postal and Communication police) in order to make sure through proper investigation that the cryptocurrency transactions are not made for the activities such as money laundering and terrorist funding. The decree does not impose a tax on sellers and operators of the cryptocurrency, it just asks proper report to be sent to the ministry in order to tackle criminal activities. The draft is up for public consultation.

Japan

The land of the rising sun has now become the hub for cryptocurrencies. Since 2014 Japan has been a happening place for the virtual currencies. The famous MT GOX (first VC exchange of the world) collapse in the year 2014 made Japanese lawmakers implement the guidelines published in the 41st G7 summit at Germany. The Financial Service Agency of Japan amended the Payment Services Act and Prevention of Transfer of Criminal Proceeds Regarding VC Act. The main aim with which the mentioned Act was amended was to establish

1. Proper registration of VC Exchange business in Japan.
2. Prevention of the use of VCs for funding terrorist activities.
3. Prevention of the interest of the customers.
4. Prevention of money laundering.

This had a booming effect on the cryptocurrency in the country, Exchange services flourished which helped homegrown VC to flourish for example Monocoin, a popular VC among the gamers is in the top 35 cryptocurrencies in the world in terms of market cap. The taxes imposed on the BTC transactions are paying a hefty amount to the government of Japan (on every BTC investment USD 26 is received by the government). However, there is a risk of decline in the value of BTC if the transaction fee continues to be high.

United Kingdom

Till earlier this year there were no regulations regarding cryptocurrencies in the country but in March 2018, the Financial Conduct Authority (FCA) announced that it is working with the Bank of England and Treasury Department in order to frame laws to regularise cryptocurrencies in the UK. For the drafting, to meaningful, the Treasury Department previously launched an enquiry into blockchain and cryptocurrency technology, as the aim with which the regulations are formed is to provide adequate protection to the customers and businesses without killing innovation.

United States Of America

The Bank Secrecy Act puts an obligation on the financial institutions, MSBs,  to help the US government in detecting and preventing activities such as money laundering and terror funding. The help here means the institutions are required to keep the records of the transactions made by their customers and they are required to report any suspected activity which may be money laundering, terror funding and any other criminal activity. In the year 2013, the directions issued by the Financial Crime Enforcement Network (FinCEN) of the Department of Treasury made the virtual currencies to comply with the Bank Secrecy Act. FinCEN has described the individuals indulging in VC related activities as

1. Users
2. Exchangers
3. Administrators

After the amendment of the regulations of Money Services Businesses (an earlier amendment) by the FinCEN, the money transmitters were included in the Money Services Business (MSBs). Then in the amendment in the year 2013, Exchangers and Administrators were defined as money transmitters, so now the VC Exchange service providers will have to register themselves as Money Service Businesses (MSB) which implies that the Exchange should register, file and maintain reports. This was the first step of the United States to regularise the VC transactions in the country in order to curb the criminal activities.

The regulation of the FinCEN did not consider VC as currency as it does not have a legal tender. It basically divides VC into two categories i.e.

1. Convertible VC
2. Non-Convertible VC

Convertible VC are those which can be a substitute to the real currency, VC such as Bitcoins are convertible VCs.

After the regularization of this sector by the Asian countries such as Japan and a prohibitory regulation by China, the United States has taken steps to regularise it, as after Japan, the USA handles the second largest volume of bitcoin i.e. 26 per cent (according to Cryptocompare).

In the USA the Commodity Futures Trading Commission regulates the virtual currencies as commodities and the Security and Exchange Commission also requires registration of any VC traded in the U.S. as it classifies it as security. Hence for the prevention of crimes such as money laundering and terror funding as per the guidelines published in the 41st G7 summit, the Financial Crimes Enforcement Network (FinCen) made necessary that the VC Exchanges and administrators register themselves as Money Service Business (MSB) being subject to the Bank Secrecy Act.

The area where the so-called superpower of the world lags is the proper implementation of these regulations as there have been cases where companies have been found undertaking VC exchange services without registration.

The Future of Cryptocurrency

We have seen reasonable approach from the members of the G7 in order to create a solid foundation for the development of the industry in the future and at the same time to comply with the guidelines published by the FATF aiming to prevent Money Laundry and Terrorism Funding. These developed nations have taken a positive step which means the cryptocurrency in the near future could be the common currency for trade which would make the other developing countries such as India to keep reserves of the same to trade internationally.