2021 proved to be a busy year for cryptocurrency regulation.
Some countries also stepped up work on central bank digital currencies (CBDCs).
ForkLog has examined in detail how the regulatory landscape for digital assets evolved.
Global Regulation
FATF Guidance
One of the most important events of 2021 was publication of a revised and refined version of its guidance for the cryptocurrency industry by the Financial Action Task Force (FATF). The organisation set standards for the DeFi and NFT sectors.
In the document, supervised jurisdictions were advised to show flexibility at the initial stage of implementing the requirements. The organisation acknowledged that VASP and other market participants face certain difficulties integrating the new systems needed to ensure compliance.
FATF emphasised that national regulators should interpret definitions used by firms broadly and classify them based on the services offered.
The group provided a definition of a “virtual asset” and explained how NFTs relate to it.
It excluded decentralised applications from the VASP category. However, experts argue that developers, owners, operators or other persons who retain “control or sufficient influence over DeFi mechanisms” are highly likely to fall into such a category.
BIS Recommendations
In the Bank for International Settlements (BIS) noted that CBDCs were moving from conceptual projects to the stage of practical implementation. During the year the BIS actively participated in testing these instruments, including cross-border settlements.
In autumn the BIS presented recommendations for regulating stablecoins. Experts concluded that these assets are subject to the Principles for Financial Market Infrastructure.
ISDA Standards
In December the International Swaps and Derivatives Association (ISDA) began developing global standards for derivatives tied to digital assets. The organisation recognised cryptocurrencies as a unique class of products.
ISDA highlighted potential risks in the crypto-derivatives market, including forks, cyberattacks, airdrops, regulatory changes, vulnerabilities in infrastructure providers, and a weak linkage between derivatives and their underlying assets.
North America
USA
In January 2021 the Office of the Comptroller of the Currency (OCC) allowed national banks and federal savings associations to use public blockchains and stablecoins for settling transactions on behalf of customers.
In the same month the agency approved the first nationwide digital-asset bank license — the holder was Anchorage, a custodial service.
In May the OCC said it would revise the rules governing cryptocurrencies. Much of these provisions were issued under the leadership of Brian Brooks, who left the post in January.
In early January President Joe Biden froze proposed FinCEN rules for the cryptocurrency industry, which envisaged collecting personal information about the parties to deals and clients’ transactions of the sector’s companies. Earlier, experts criticised these norms.
In April the new head of the U.S. Securities and Exchange Commission (SEC) was appointed — the former chair of the CFTC, Gary Gensler.
From the outset the official made clear that user interests would be paramount. In July he urged expanding investor-protection rules for cryptocurrency exchanges and warned that token issuers backed by stock must report to the agency.
Gensler also drew attention to decentralised finance. In his words, the structure of these products does not provide immunity from SEC oversight.
Despite a relatively tough regulatory stance, Gensler stated that the SEC does not plan to ban cryptocurrencies. Later the agency approved ProShares’ first bitcoin futures ETF.
Head of the Fed Jerome Powell stated that his agency does not intend to ban digital assets. It is expected that the Fed will not change its stance — Biden plans to keep Powell as chair.
In March the IRS explained that U.S. residents do not need to report obtaining cryptocurrency on the first page of Form 1040 if they adhere to a HODL strategy. Later the service clarified that it is only concerned with taxable transactions.
One of the most debated topics of 2021 was the US Infrastructure Plan of $1.2 trillion, agreed by the Senate on July 28.
The document contains an expanded definition of the term “broker.” Depending on interpretation, miners and node operators in blockchains, wallet developers, liquidity providers in DeFi protocols and other non-custodial players may be required to report to the IRS on their users’ activities.
During the bill’s progression the initiative was criticised by industry representatives and experts, as well as some politicians. The latter proposed amendments, but failed to reach a consensus, so on November 16 Biden signed the document without changes in this respect.
In November the U.S. Treasury issued guidance on sanctions compliance by participants in the crypto industry, and also published a report on the risks of stablecoins, which it considers a threat to financial stability.
Canada
In February 2021 the Ontario Securities Commission registered the first Bitcoin ETF in North America. The approval went to Purpose Investments, and the fund’s units were listed on the Toronto Stock Exchange.
Two months later Canadian regulators approved the launch of several spot Ethereum-based ETFs.
In April the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) published the regulatory framework for crypto firms’ regulatory compliance.
In June the Financial Transactions and Reports Analysis Centre of Canada tightened client-verification rules for firms dealing with digital assets.
In September the CSA and IIROC issued guidance on the use of social media, advertising and marketing for cryptocurrency exchanges.
Central America
El Salvador
In early June President Nayib Bukele spoke at the Bitcoin 2021 conference, announcing his intention to legalise digital gold. A few days later the Parliament passed the corresponding law, and on 7 September it came into force.
To support liquidity the government approved a Bitcoin fund of $150 million. The fund’s balance holds 1,220 BTC.
To attract additional capital, the government decided to exempt foreign investors from capital gains tax and the tax on Bitcoin transactions.
Mexico
In June the Bank of Mexico, the Ministry of Finance and the National Banking and Securities Commission issued a joint statement reminding that cryptocurrencies are not legal tender in the country.
South America
Brazil
The Brazilian Securities and Exchange Commission (CVM) approved the first Bitcoin ETF in Latin America. The fund’s shares belong to the asset-management company QR Asset Management.
In July the CVM registered a second exchange-traded fund from QR Asset Management — this time based on Ethereum.
A month earlier the Central Bank of Brazil delayed the launch of the digital real, with completion planned for the end of 2022.
Venezuela
In autumn the Central Bank of Venezuela launched the digital bolivar. After the CBDC’s release some experts noted that it lacked digital components that would distinguish it from fiat currency.
Paraguay
In June a bill was introduced in the Parliament of Paraguay aimed at developing a regulatory framework for cryptocurrency regulation.
The author, Carlos Rejala, clarified that there is no talk of legalising Bitcoin as in El Salvador.
Uruguay
In August the Senate of Uruguay presented a bill regulating cryptocurrencies and allowing payments in digital assets, including by companies. The document contemplates that their use will become legal in any business.
European Union
In 2021 European regulators gave substantial attention to CBDC development. Several countries ran pilots, and international regulators launched initiatives aimed at digitalising the euro.
In January the European Central Bank (ECB) concluded public consultations on a digital euro. The majority of respondents identified data privacy as the most important feature of a CBDC.
In spring the regulator’s head Christine Lagarde stated that a digital euro could appear within four years if policymakers approve the project.
In July the ECB began the CBDC research phase. In autumn the regulator identified members of the advisory group on potential development and distribution of a CBDC.
Despite a focus on CBDC, the private market did not escape attention either.
The European Commission introduced a bill proposing a ban on anonymous transactions with digital assets.
In November the ECB Governing Council approved a new supervisory framework for electronic payments, which included assessment of the effectiveness and safety of wallets and services linked to cryptocurrencies.
France
In January the Bank of France tested a CBDC in a pilot project issuing tokenised shares of a currency fund. For the first time in the country a private blockchain platform was used.
In the summer the regulator, together with the Swiss crypto-bank SEBA, completed testing of securities transactions based on a CBDC.
Thereafter the Bank of France and the Monetary Authority of Singapore (MAS) conducted a successful experiment in cross-border settlement.
In November the French regulator tested a digital euro in government-bond transactions. In conjunction with a group of dealers, it conducted 500 operations on primary and secondary markets.
Germany
In July German institutional funds were allowed to invest up to 20% of assets in cryptocurrencies. In April the Bundestag approved the corresponding bill, which was subsequently adopted by the Bundesrat.
At the end of the year the parties forming Germany’s new government signed a coalition agreement, in which cryptocurrencies and blockchain technology are listed among the country’s priority development areas for the next four years.
Denmark
In June Denmark announced its intention to amend the 1922 tax code to correctly reflect residents’ dealings with digital assets. Authorities concluded that existing rules lead to miscalculations of the tax base and risks of tax evasion.
Ireland
In April the Central Bank of Ireland extended the anti-money-laundering and counter-terrorist-financing regime to the crypto industry.
Netherlands
The Dutch Central Bank reversed the 2020 decision to impose stricter requirements on crypto-asset service providers. The regulator said the tightening was “not sufficiently fair.”
Portugal
In June the Central Bank of Portugal issued the first licenses to two bitcoin exchanges — Criptoloja and Mind the Coin. The trading platforms were recognised as “virtual asset service providers.”
Asia
China
In 2021 China began yet another crusade against the cryptocurrency industry, culminating in a ban on mining and all digital-asset activities.
In May the CITIC Bank forbade individuals and legal entities from using accounts to purchase and trade digital assets. In the same month, media reported on a notice issued by three associations under the People’s Bank of China (PBoC). The document prohibited local companies from supporting cryptocurrency-related businesses.
At the same time authorities in Inner Mongolia began cracking down on illicit mining, and the State Council’s Vice Premier Liu He stated intent to take measures against mining and trading Bitcoin.
Following the region, restrictive campaigns were rolled out in the provinces of Xinjiang