When a pseudonymous coder called Satoshi Nakomoto launched the Bitcoin blockchain in early 2009, the cryptocurrency market was entirely unregulated. But by the mid-2010s, Bitcoin and the sprawling economy of cryptocurrencies it inspired had become too large to ignore, and regulators decided to step in. In the 2020s, regulators are taking huge steps to implement blockchain regulation, and their decisions move markets. In this piece, we’ll give you the lowdown on the major developments within crypto regulation, plus information about its legal status worldwide.
Global regulation
Although cryptocurrencies operate in global 24/7 markets, one of the first lessons that any budding Web3 trader will learn is that cryptocurrencies are disproportionately influenced by regulation from two major economies: the United States and China. More than any other region, regulators from these two countries shape how cryptocurrencies are developed and where infrastructure gets built—their regulatory decisions are worth unpacking before drilling down into news from smaller economies, like Canada.
China
Regulation in China has had a profound effect on the crypto market since the country started to crack down on the industry in 2017. In that year, it barred cryptocurrency exchanges, the main venues for crypto trading, from operating in the country. That was a huge decision because the major exchanges at the time—and the market leaders that still dominate today—were based in China. Exchanges like Binance, Huobi, and OKEx had to move overseas, creating a huge gray market for crypto trading in China. Some Chinese investors used OTC desks in places like Hong Kong and Singapore to keep trading Bitcoin.
Over the next few years, China appeared to go back and forth on its approach to crypto. In late 2020, the country’s president, Xi Jinping, even praised Bitcoin’s technological innovation—causing the price of the coin to rise. But in mid-2021, after Bitcoin had risen in value to highs of over $60,000, China unsettled the market by cracking down on cryptocurrency mining outfits. This was a huge shift since the vast majority of the world’s Bitcoin mining industry was located in China, taking advantage of cheap electricity—much of it green. The decision destroyed China’s Bitcoin mining industry, and Bitcoin’s price took months to recover. In October 2021, China declared that all cryptocurrencies were “illegal.” This was just a clarification of existing regulations, but the official statements dashed hopes of positive policy developments in the future.
China’s official line on its anti-crypto stance is that the country wants to protect financial stability and help its populace stay away from Ponzi schemes and scammers. More broadly, part of the reason is that China is a centrally-controlled economy, and decentralized cryptocurrencies like Bitcoin and Ethereum, as well as US dollar stablecoins like Tether, are outside the control of its economic planners. In addition, China is one of the pioneers of a new type of digital cash called a central bank digital currency—and it doesn’t want any more currency competition.
The United States
The United States has taken a different approach to regulating cryptocurrencies. Instead of banning them, financial regulators like the U.S. Securities and Exchange Commission have regulated through litigation. A lot of these lawsuits, whether in relation to EOS, Telegram’s attempt at a cryptocurrency (called TON) or XRP, center around unregistered securities sales. A security is an “investment product”—and if the SEC can determine that crypto companies are selling investments through initial coin offerings (ICOs) or similarly structured sales, they can chase after the company.
Although specific cryptocurrency laws by state differ, the SEC’s securities lawsuits have shaped the cryptocurrency industry. Telegram, for instance, returned funds from its $1.7 billion ICO after it settled a nine-month lawsuit with the SEC in 2020. Even though the cryptocurrency was coded by Russians and its ICO banned US investors, the SEC claimed that it was trivial for US investors to bypass geoblockers and buy into the project, and so it still had authority. Although most of these lawsuits result in settlements, meaning legal precedents are rarely set, they are laborious enough to dissuade developers from running the risk of a securities lawsuit. Messenger app Kik, for instance, almost collapsed after its Kin ICO led to an expensive lawsuit.
Cryptocurrency developers claim that, in the absence of clear guidelines about which cryptocurrencies constitute securities, decentralized finance developers have taken to pursuing a safer policy of decentralization. Decentralization involves the devolution of power over a cryptocurrency protocol to token holders. The idea is that, if a cryptocurrency protocol is “sufficiently decentralized,” to quote a 2018 speech from then-SEC regulator William Hinman, the SEC cannot chase after its founders. If token holders make the decisions, the protocol’s tokens do not look like securities.
The problem with this method is that it is difficult for a decentralized project to get off the ground with a decentralized team. For this reason, plenty of cryptocurrency developers have pushed for the idea of a “safe harbor”. The idea, first proposed by crypto-friendly SEC Commissioner Hester Peirce, would give developers a few years to decentralize before the SEC could chase after them. Incumbent SEC chair Gary Gensler has taken a harsher stance on DeFi, considering many efforts to decentralize as nothing more than decentralization theater.
More recently, the Biden administration has pledged to regulate the stablecoin. This is because US dollar stablecoins are issued by private companies like Tether, whom some regulators consider to withhold information about, and even lie about, their vast reserves of real US dollar bills and cash equivalents. In a statement following the New York Attorney General’s investigation into Tether, Attorney General Letitia James concluded that Tether’s claim “that its virtual currency was fully backed by U.S. dollars at all times was a lie.” A Biden working group advised in November 2021 that stablecoins should be issued only by insured banks. The future of such regulation will determine the freedom with which traders can trade synthetic US dollars, making it more or less difficult to switch between the crypto and traditional economies.
Indeed, concern from regulators worldwide about the Facebook stablecoin project, Libra (now Diem), all but demolished the project shortly after it was announced in 2019. After regulators said the stablecoin project, which originally would have been run by a consortium of major global companies such as Uber, PayPal, and Visa, would undermine global economic stability, several companies dropped out of the project. As of January 2022, the project still hasn’t been launched.
Cryptocurrency regulation elsewhere
Every country’s stance on crypto regulation is unique. Some countries like crypto, others detest the stuff. China isn’t the only country whose regulators have dunked on crypto. Algeria, Bangladesh, Egypt, Nepal, Qatar, Tunisia, and Morocco have also banned crypto outright.
Although many major economies have implemented strict Bitcoin regulation, some countries have opened their doors to the technology. In 2021, El Salvador became the first country to declare Bitcoin as legal tender. Although some critics said this Bitcoin legislation was at odds with Bitcoin’s principle of democratic finance, and instead seemed like an authoritarian imposition, the country’s president, Nayib Bukele, has taken steps to welcome Bitcoiners to his country. Investors in his Bitcoin bond, for instance, earn citizenship in his country.
Financial regulators in the UK, Canada and Singapore have been open to letting crypto companies play in “regulatory sandboxes.” Other countries, like Portugal, Belarus, and Malta, offer low or no tax regimes on Bitcoin gains.
Canada’s crypto regulation
Cryptocurrency in Canada is legal, but securities regulators have heavily moderated how exchanges can operate in the country and what products they can offer.
Although the question of whether a new cryptocurrency constitutes a security is a hot topic in the United States, Canadian regulators have assumed that when you trade a token on an exchange, you are trading the claim to that token. Even if the token is not a security, this “contractual right”, known as a “crypto contract,” is.
In March 2021, the Canadian Securities Administrators said that cryptocurrency exchanges that sell “crypto contracts” have to register with a securities regulator. The notice, really a clarification rather than the introduction of a new new rule, laid out the requirements for crypto exchanges. Exchanges must abide by strict guidelines that aim to protect investors against trading manipulations, “front running,” and more.
Ryan Clements, of the University of Calgary Faculty of Law, said in an August 2021 paper that Canada’s approach to regulating cryptocurrency exchanges is “a position that no other international securities regulator has yet taken." For some exchanges, these requirements were too much. Huobi, one of the largest exchanges, no longer serves Canadians.
The biggest securities agency within the CSA is the Ontario Securities Regulation. Its stringent regulations, plus a crackdown in mid-2021, have caused several exchanges to back out of the province.
In 2020, Wealthsimple became Canada’s first regulated crypto platform through the CSA’s regulatory sandbox.
Aside from exchanges, Canada’s securities regulators are ahead of the curve in one other respect: the Bitcoin ETF. Canada was the first country in North America to offer a Bitcoin spot ETF. The OSC approved Canada’s first Bitcoin ETF, the Purpose Bitcoin ETF, in February 2021. According to Bloomberg ETF reporter Eric Balchunas, it was one of the most successful ETF launches of all time. More companies have launched Bitcoin ETFs in Canada since, including US investment stalwart Fidelity, which launched a spot ETF in December 2021.
