Ch9. Crypto Regulation and Institutionalization — Global Approaches and Current Landscape

Why Regulation Matters

Regulation has two faces: investor protection and innovation restriction. Different countries strike this balance differently, and the regulatory direction shapes the entire crypto market.

The case for regulation:
- Growing consumer harm from scams and hacks
- Concerns about money laundering and terrorist financing
- Preventing tax evasion
- Protecting financial system stability

The downside of excessive regulation:
- Innovative companies and talent flee to friendlier jurisdictions
- Pushes activity underground, making it harder to control
- Weakens global competitiveness

United States: Securities vs. Commodity Debate

The SEC’s Approach

The SEC (Securities and Exchange Commission) seeks to classify most tokens as securities.

The Howey Test:
1. Is there an investment of money?
2. Is it in a common enterprise?
3. Is there an expectation of profits?
4. Are the profits derived from the efforts of others?
→ If all four apply, the asset is considered a security

BTC: Commodity (CFTC jurisdiction)
ETH: Commodity (debated after the PoS transition)
Most altcoins: SEC considers them securities

The Significance of ETF Approval

January 2024: Bitcoin spot ETF approved
May 2024: Ethereum spot ETF approved

Significance:
- Opens the door to large-scale institutional fund inflows
- Allows crypto exposure via 401(k) and other retirement accounts
- A major milestone in market maturation

European Union: MiCA Regulation

MiCA (Markets in Crypto-Assets Regulation) — the world’s first comprehensive crypto regulatory framework, fully in force as of 2024.

MiCA core provisions:
1. Asset-Referenced Tokens (ART): Stablecoins subject to strict requirements
2. E-Money Tokens (EMT): Single fiat-pegged stablecoins
3. Other crypto-assets: White paper disclosure obligation

CASP (Crypto-Asset Service Providers):
- Require authorization to operate within the EU
- A license from any one EU member state allows operation across all EU countries (passporting)

United Kingdom and Other Jurisdictions

UK

The FCA (Financial Conduct Authority) regulates crypto businesses.
- Cryptoasset promotions require FCA approval
- Registration required for crypto firms operating in the UK
- Approach: principles-based, targeting financial crime risks

Singapore

MAS (Monetary Authority of Singapore) license required
- Seen as a crypto-friendly hub in Asia
- Strict AML/KYC requirements still apply
- Clear framework attracts institutional players

China: Complete Ban

2021: Complete ban on cryptocurrency trading and mining
Reasons: Capital outflow prevention, energy consumption, financial control

Results:
- Miners relocated en masse to the US, Kazakhstan, and other countries
- Crypto trading driven underground in China
- Intensive development of the CBDC (Digital Yuan)

International Tax Cooperation: CARF

CARF (Crypto-Asset Reporting Framework) — OECD-led framework for automatic exchange of crypto tax information between countries.

Phased implementation expected from 2027 onward

Details:
- Crypto exchanges in each country will automatically provide
  foreign customers' transaction data to the tax authorities
  of those customers' home countries
- Transactions made on foreign exchanges will become
  visible to domestic tax authorities

Implications:
- The notion that "foreign exchanges are untraceable" is ending
- Past unreported transactions may be subject to audit

Country-by-Country Regulatory Comparison

Country / Region	Approach	Notable Features
United States	Strengthening securities law application	ETF approved, SEC enforcement actions
EU	Comprehensive MiCA regulation	World’s first systematic legal framework
United Kingdom	FCA registration and promotion rules	Principles-based approach
China	Full ban + CBDC	Digital Yuan push
Singapore	License-based permission	Asia crypto hub
UAE / Qatar	Friendly regulation	Middle East crypto hubs

Practical Guide for Investors

What to do now:
☐ Complete KYC at regulated exchanges (identity verification)
☐ Keep an annual transaction log in a spreadsheet (for calculating gains)
☐ Prepare for foreign account disclosures if thresholds are exceeded
☐ Secure documentation of cost basis for all holdings

What NOT to do:
✗ Use foreign exchanges to evade taxes
✗ Trade through someone else's account (money laundering)
✗ Continue large unreported transactions

Howey Test: if all four conditions apply, the asset is a security = subject to SEC regulation MiCA = EU’s comprehensive crypto regulation, the world’s first systematic legal framework CARF 2027: foreign exchanges will automatically provide transaction data to domestic tax authorities ETF approval (US 2024): opened the gate for large-scale institutional crypto investment