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This note discusses three categories of countries on the basis of their approach to regulating cryptocurrency- (a) countries that have legalized cryptocurrency by regulating it; (b) countries that have proposed to regulate it, and (c) countries that have banned cryptocurrency. It discusses a few examples of countries for each category to demonstrate that most progressive jurisdictions fall in the first two categories. The countries that have banned cryptocurrency are generally discussed for their regressive economic and social policies, and India may not want to be a part of that club. In tables A and B to this blogpost, we place many other jurisdictions across the abovementioned three categories.

The Central Bank of the Bahamas (CBOB) circulated draft Sand Dollar regulations for for public consultation on February 15. They are intended to enhance the existing legislative framework governing Payment Services Providers (PSPs), specific to their provision of central bank digital currency (CBDC) linked services. The consultation period closes on March 31 and the regulations will be finalized for issuance by May 1, 2021. Also, all wallet providers are expected to achieve full interoperability by March 31.

"As policymakers and regulators develop regulations to oversee DeFi markets, they must balance the need to support financial services innovation with the need to protect consumers, fight crime, and preserve financial stability. Doing so may not be as straightforward as it was for the initial wave of cryptocurrency activities. Regulators may require more policy and legal innovation to address DeFi's trend toward disintermediation and to support a more open, interoperable, and competitive financial infrastructure."

The European Securities and Markets Authority (ESMA) launched a consultation on draft technical standards on crowdfunding under the European crowdfunding service providers regulation (ECSPR). The new Regulation on crowdfunding regulates for the first time at the EU level lending-based and equity-based crowdfunding services. It introduces a single set of requirements applicable to crowdfunding service providers (CSPs) across the EU, including strict rules to protect investors.

Ant Group and Chinese regulators have reportedly agreed on a restructuring plan that will turn Ant into a financial holding company, making it subject to capital requirements similar to those for banks. The plan calls for putting all of Ant's businesses into the holding company, including its technology offerings in areas like blockchain and food delivery. One of Ant's early proposals to regulators had envisioned putting only financial operations into the new structure.

The Estonian Ministry of Finance published a consultation paper on how to regulate cryptographic assets. One key question is whether the Financial Supervision Authority should regulate virtual assets. Currently virtual currency service providers must obtain a license from the Financial Intelligence Unit, but supervision over the business activities of such entities is excercised in a limited capacity.

The U.S. Financial Crimes Enforcement Network (FinCEN) announcied its intention to propose a change in the Bank Secrecy Act, regarding reporting of foreign financial accounts holding virtual currency. Currently, digital assets are not covered by the Foreign Bank and Financial Accounts regulations. However, the notice indicates that FinCEN wishes to amend these regulations to require the reporting of virtual asset accounts of more than $10,000 held with foreign institutions by all U.S. citizens, residents, corporations, partnerships, limited liability companies, trusts and estates. https://www.fincen.gov/sites/default/files/shared/Notice-Virtual%20Currency%20Reporting%20on%20the%20FBAR%20123020.pdf

The default of Wirecard highlights several problems in the regulation and supervision of Fintech companies, with regulatory holes in investor protection, customer protection, and financial stability. This column argues that since Fintech companies can be very complex, their oversight requires understanding their business model and combining regulation and supervision based on both entities and activities. The global reach of Fintechs also calls for better coordination at the European level and beyond, but the authors do not see the need for new regulatory body to oversee Fintechs in Europe.

The Financial Action Task Force (FATF) has identified certain behaviors and characteristics that serve as red flags for regulators trying to detect illegal or illicit transactions. One of the primary methods is to compare a user's transaction activity with that of their profile. This can include instances where a deposit or transaction amount is inconsistent with a user's available wealth or historical financial activity, perhaps signaling money laundering, a scam or a money mule. Other red flags include whether the person in question is much older than the average age of a crypto user, as well as if they have a criminal record or have been active on websites and public forums associated with illicit activity. Other red flags include instances where users send crypto to exchanges with no known KYC/AML checks, or where they are sending transactions that are just below the Travel Rule threshold. Regulators might also look at users who exchange digital assets on public and transparent blockchains (such as Bitcoin or Ethereum) for privacy coins, like monero or zcash, which obfuscate or withhold transaction activity from third parties. http://www.fatf-gafi.org/publications/methodsandtrends/documents/virtual-assets-red-flag-indicators.html

Respondents to the Monetary Authority of Singapore's November 2019 consulation were broadly supportive of its proposals as to how to regulate payment token derivatives offered by an "Approved Exchange" as well as to not regulate at non-approved exchanges. The MAS agreed and said regulating non-approved exchanges would confer "misplaced confidence" - especially for retail investors. https://www.mas.gov.sg/publications/consultations/2019/consultation-paper-on-proposed-regulatory-approach-for-derivatives-contracts-on-payment-tokens

In light of their cross-border nature, stablecoin projects must work with regulators around the world to determine the appropriate regulatory treatment of this relatively new asset class.  With this in mind, this article seeks to provide an overview of how U.S. regulators are approaching the evolving world of stablecoins.

Whether a stablecoin needs dollar reserves depends on its actual or potential use in the conventional payments system. A stablecoin used only within the crypto ecosystem wouldn't need 100% dollar reserves. It would only need sufficient dollar liquidity to maintain its peg - and if exchanges are compliant and redemptions restricted, that might not be very much. However, stablecoins could replace conventional rails for international payments, potentially making them faster, cheaper and available 24/7. Stablecoins used for this purpose would need to be fully exchangeable for U.S. dollars or other fiat currencies on demand 24/7, and would therefore either need 100% dollar reserves or access to central bank liquidity. [Hence,] rather than wasting time and energy trying to regulate crypto-only stablecoins as if they are banks or money market funds, regulators should concentrate on ensuring that stablecoins that are, or show signs of becoming, payment media within the conventional financial system have 100% reserves and/or are licensed banks.

According to a new IMF Fintech Note, the rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks. To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed. Home supervisors should establish an entity-based approach to cover the global activities of a BigTech group, while host supervisors could in principle address local risks and concerns mainly through activity-based regulations. Cross-sector and cross-border cooperation are key in determining the future of the regulatory architecture. However, it can take several years before regulators have achieved a sufficiently robust legal and regulatory framework to address all risks arising from BigTech in financial services, and short-term solutions may be needed. In the interim, regulatory authorities should actively use all existing regulatory powers to manage risks, while BigTech should adopt and improve governance frameworks through industry codes of conduct and enhanced disclosures. Options should be explored to promote global consistency in the treatment of BigTechs, through existing or new global bodies with a broad mandate. The note recommends that the Joint Forum's 2012 Principles for the Supervision of Financial Conglomerates be reviewed to address regulatory gaps.

The Australian government will announce major reform to payment systems, including broadening the definition of services and products that can be regulated. Crypto exchanges will be brought within the regulatory perimeter, and the treasury will be working on a CBDC with the Reserve Bank. The proposed regulation will also take aim at "buy now, pay later" services.

On June 22, Namibia's lower house of parliament passed legislation to regulate digital assets, cryptocurrencies and virtual asset service providers (VASPs) in the country. It aims to establish a framework for licensing and regulating VASPs, and appoint a regulatory authority responsible for supervising these providers and their activities. The bill is now awaiting official publication before coming into effect.

The World Economic Forum (WEF) published a paper that highlight the needs and challenges in developing a global approach to crypto-asset regulation. In doing so, it delves into the various regulatory approaches being adopted by different jurisdictions. The result of multistakeholder consultations with experts from the Digital Currency Governance Consortium, comprising experts from public authorities, regulators, policy-making bodies, industry and academia, the paper explores pathways to creating a responsible crypto-asset ecosystem globally.

"DeFi has many benefits, but it can also facilitate excessive risk-taking, regulatory arbitrage, and money laundering. The question now isn't whether to regulate DeFi or centralized exchanges; it's how to ensure the major objectives of financial regulation-investor protection, illicit finance interdiction, and systemic risk moderation-are met in the multi-faceted and fast-changing digital asset world." [Kevin Werbach]

"The Regulated Liability Network (RLN) is a contribution to the global debate on the future of money offered by a group of industry participants. It explores the technical, legal and business characteristics necessary to provide on-chain, 24*7 programmable, final settlement in sovereign currencies, consisting of the liabilities of both public and private regulated financial institutions. These activities could enable a more functionally rich financial system that is compliant with all existing laws and regulations."

The Biden administration published a statement urging Congress to "step up its efforts" with respect to regulating the cryptocurrency market. Other suggestions included strengthening transparency and disclosure requirements for crypto companies, strengthening penalties for violations of illicit-finance rules, and working more closely with international law enforcement partners. The officials also made suggestions about what Congress should not do in terms of crafting new crypto regulation, including "greenlight[ing] mainstream institutions, like pension funds, to dive headlong into cryptocurrency markets." https://www.whitehouse.gov/nec/briefing-room/2023/01/27/the-administrations-roadmap-to-mitigate-cryptocurrencies-risks

The IMF published a blog on African countries' approaches to regulating crypto-assets, finding that only one-quarter of countries in sub-Saharan Africa formally regulate crypto. However, two-thirds have implemented some restrictions and six countries-Cameroon, Ethiopia, Lesotho, Sierra Leone, Tanzania, and the Republic of Congo-have banned crypto. Zimbabwe has ordered all banks to stop processing transactions and Liberia directed a local crypto startup to cease operations (implicit bans). The blog also warned that public finances could be put at risk if crypto-assets are adopted as legal tender, as the Central African Republic recently did.