The Banking Executive Magazine - March 2021

Cryptocurrency dreds of millions of dollars world- wide. This type of risk also includes the risks of human errors that might lead to sudden loss of huge amounts of money. However, natural devaluation tech- nical glitches, despite their enormity, are not the only risks nor the main ones. In fact, the greatest risk with cryptocurrency is in the nature of the currency as a decentralized currency with no central authority like central banks or governments’ interference to control or even regulate its use. To this, more than 130 countries as well as international organizations have recently issued laws and policies to regulate cryptocurrencies. These country regulations can be catego- rized into different groups based on the governments’ approach. Not only did the regulations differ, but also the definition of cryptocurrencies them- selves, which includes digital cur- rency (Argentina, Thailand, and Australia), virtual commodity (Canada, China, Taiwan), crypto- token (Germany), payment token (Switzerland), cyber currency (Italy and Lebanon), electronic currency (Colombia and Lebanon), and virtual asset (Honduras and Mexico). More- over, while governments have issued certain regulations, they still warn their citizens that using these curren- cies are done at the citizens’ own re- sponsibility, which indirectly raises awareness on the potential risks as- sociated with such business. The first category of countries is one that goes beyond raising awareness on the risks of cryptocurrencies, but also warns against the use of such currencies for money laundering and financing terrorism. These countries include Australia, Canada and the Isle of Man, which recently enacted laws to bring cryptocurrency transac- tions and institutions that facilitate them under the ambit of money laun- dering and counter-terrorist financing laws. The second category of countries went further in limiting the use of cryptocurrencies by restricting in- vestments. Several subcategories can be found within this category: i) countries banning any and all activi- ties involving cryptocurrencies, like Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam; ii) countries that ban their citizens to invest in cryptocurrencies domestically, but allow them to do so abroad, like Qatar and Bahrain; and iii) countries with less strict measures on citizens, but with restrictions on domestic fi- nancial institutions to facilitate the transactions in cryptocurrencies. These countries include Bangladesh, Iran, Thailand, Lithuania, Lesotho, China, and Colombia. The third category of countries regu- late initial coin offerings (ICOs), which use cryptocurrencies as a mechanism to raise funds. While some are less strict in their ICO reg- ulations, others like China, Macau, and Pakistan ban them completely. On the other hand, New Zealand and the Netherlands are more flexi- ble and depend on whether the cur- rency is debt security, equity security, derivative, or if it is a collective in- vestment. While the above categories have “hostile” measures towards cryp- tocurrencies, the fourth category views cryptocurrencies as opportuni- ties if approached with “friendly” regulations. The purpose of such policies are to attract investment in technology. Countries in this group include Spain, Belarus, the Cayman Islands, and Luxemburg. The fifth category includes countries that have went further developed their own system of cryptocurren- cies. This list includes Marshall Is- lands, Venezuela, the Eastern Caribbean Central Bank (ECCB) member states, and Lithuania. This category also includes countries that had previously banned or restricted use of cryptocurrencies, like Bel- gium, South Africa, and the United Kingdom. For the countries that allow invest- ment in cryptocurrencies, taxation is one main concern. This requires the identification of how cryptocurren- cies are being used and whether they are considered income or capital gains. Countries that are have im- posed taxation on the use of cryp- tocurrencies include: Bulgaria, Switzerland, Argentina and Spain, Denmark, UK. Mining for cryptocur- rencies however is not being taxed anywhere, except in Russia if energy consumption exceeds a certain threshold. Some countries and jurisdictions have went a step further in allowing for the use of cryptocurrencies as means of payment. These include the Isle of Man, Mexico, Antigua and Barbuda and some Swiss Cantons. Lastly, a group of countries have launched their own cryptocurrencies or are planning to do so. In conclusion, while the popularity and demand for cryptocurrencies is increasing globally, the economic, fi- nancial and social threats increase with the lack of regulation of this uni- versal currency/commodity. Cryp- tocurrencies are criticized for allowing criminals to be involved in transactions and for tax evasion and money laundering through anony- mous transactions. Numerous hack- ing incidents, money laundering and fraud incidents have been recorded in the past years resulting in losses of hundreds of millions of dollars, with no regulatory framework to track and sanction the anonymous responsible parties. On the other hand, the op- portunities for countries to attract for- eign direct investment and to create revenues from regulating cryptocur- rencies are immense. Therefore, it is a responsibility for governments and central banks to be leading in the field of virtual currencies in order to regulate the market based on its terms and keep it a save platform for financial transactions. ISSUE 147 MARCH 2021 the BANKING EXECUTIVE 59