II. History
Before analyzing the ramifications of the global cryptocurrency market as it continues to rapidly expand and the legislative responses that must emerge pursuant to this development, initial consideration must be given to the boundaries of cryptocurrency classifications and these coins’ respective origins.
While it is true that pseudo forms of cryptocurrencies existed before 2008, these mediums maintained a plethora of characteristics that made them unattractive, and, thus, these currencies lacked large-scale marketability. Among these disadvantages was the fact that these initial digital mediums maintained a “double spending” problem throughout their existence. It was these issues that prompted Satoshi Nakamoto—a relatively unknown entity believed to be of western origin—to introduce today’s most well-known cryptocurrency, Bitcoin.
In addition to the intrigue that arose from the creator’s surreptitious identity, Bitcoin’s near covert introduction to the international market provides some indication of how the new medium garnered significantly greater intrigue when compared to the interest raised by its predecessors. The currency was initially introduced in an academic paper titled “Bitcoin: A Peer to Peer Electronic Cash System,” which also introduced the blockchain database (to be discussed below) itself. But this paper represented a mere idea and left readers with a hunger for more information regarding their own engagement with this new system of exchange. It was, in all likelihood, this hunger for information that led future investors to pay particular attention to the reference code that Nakamoto released on a third-party monetary system which allowed individuals to obtain the first units of Bitcoin.
Additionally, to fully understand the foundation upon which Bitcoin and all cryptocurrencies are based, there must be an analysis of blockchain technology and its analogous role to that of governments in establishing credibility for mediums of exchange. This technology serves as the foundation upon which Bitcoin and other cryptocurrencies are traded and where these transactions are verified. Finally, the primary advantage of this platform is that it allows currencies to be exchanged without the need for a third-party bank or other institution which may be regulated by an industry that lacks trust among the system’s potential patrons.
III. Current State of U.S. Law
With the foundation of the world’s most popular cryptocurrency and its medium of exchange addressed, the analysis naturally turns to the legislation and judicial precedent that has arisen from the crypto market’s proliferation. While the United States was not the first country to begin regulating cryptocurrencies, most crypto investors, exchanges, trading platforms, mining firms, and investment funds, as well as the Jobs Act, are housed in the United States. The nation-state seeks to become a world leader in exemplary crypto management and, thus, serves as a starting point for this legal analysis. An inspection of U.S. crypto regulation also serves as a unique inquiry, as different viewpoints among agencies are found within the country. These differing approaches to crypto regulation are largely due to the country’s many federal administrative agencies such as the Treasury’s Financial Crimes Enforcement Network (FinCEN), the Federal Reserve Board, the Commodities Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC). To delineate these agencies’ respective classifications of various blockchain-based currencies, the SEC primarily considers cryptos to be securities, the CFCT refers to the medium as a commodity, and the Treasury’s FinCEN program simply uses the term “currency,” thus analogizing digital coins to the U.S. dollar. Notably, with regard to the FinCEN’s classification, the use of the term “currency” also makes cryptos subject to the Anti-Money Laundering Act of 2020, helping the United States curtail illegal criminal activity and increase confidence in the platform. Importantly, with these abounding disparities between Bitcoin classifications among U.S. agencies, Massachusetts District Judge Rya W. Zobel held that blockchain-based coins are “commodities,” as defined by the plain language of the Commodities Exchange Act. This decision also allowed for greater consistency and efficiency regarding the enforcement of Bitcoin transactions, as the “commodities” classification allows agencies like the CFTC to “prosecute fraud involving virtual currency,” further establishing confidence in this new medium of exchange.
IV. A Profound Case Study Demonstrating the Risks of Crypto Leniency and Sparsely Regulated Expansion
Turning next to an interesting case study of a country that has both designated Bitcoin as legal tender and garnered substantial attention from the international exchanges community, El Salvador currently accepts Bitcoin for all goods and services as if it were the U.S. dollar. But the decision to classify Bitcoin as a near-ubiquitous form of payment has received a considerable amount of backlash from international organizations like the International Monetary Fund (IMF). The principal concern of these governing bodies is that cryptocurrencies are still considered far more volatile than currencies administered by more traditional financial institutions. The decision further puzzled many economists as El Salvador had already adopted the U.S. dollar, one of the world’s most stable currencies, as its official legal tender beginning in 2001. In many ways, El Salvador serves as the foremost support for the contention that cryptocurrencies may continue to struggle as they vie for a position as viable mediums of exchange in the future. Nonetheless, the country maintains the position that the benefits of adopting Bitcoin as legal tender will eventually outweigh or mitigate the dangers of digital currencies. This philosophy, and the reasoning behind it, is substantially analogized by Switzerland’s explanation for classifying cryptos as legal tender, to be discussed next.
V. Stable Proliferation of Cryptos on the Scale of a National Sovereign
As city director of Lugano, Switzerland, Pietro Poretti has explained that many sovereigns seek to become “centers of excellence for blockchain development,” and this goal purports to require that the Swiss support the platform’s main applications. Additionally, Poretti seeks to draw crypto enthusiasts to Lugano, subsequently boosting the local economy and placing the region ahead of the curve with respect to this emerging future of fully electronic currencies.
An additional understanding of Switzerland’s national crypto regulatory framework is necessary to fully contemplate the international ramifications and insights that are provided by the country’s policies as a whole. Today, although it is Switzerland’s national policy to classify cryptocurrencies as legal tender, the digital mediums are not accepted in all contexts. In addition to the country’s “remarkably progressive” stance on cryptos’ classification as legal tender, Switzerland also defines cryptos as assets which are subject to wealth tax and must be declared on annual tax returns, a measure likely intended to mitigate the concerns that some entities have posed regarding cryptos’ potential for criminal applications. Notably, these regulations and classifications are created pursuant to the Swiss Federal Tax Administration’s (SFTA) legislatively delegated authority—an agency mirroring the U.S. SEC in many ways.
Critically, Switzerland serves as a model for the contention that with greater crypto acknowledgement and proliferation necessarily comes an increased need for regulation. For example, the SFTA maintains comprehensive crypto regulations by requiring licensure for all crypto traders from the Swiss Financial Market Supervisory Authority (FINMA). In addition to these licensure requirements, the SFTA also monitors Initial Coin Offerings (ICOs) in ways that reflect policy objectives found in the agency’s regulation of the banking, collective investment schemes, and securities trading industries, thereby demonstrating the nation’s consideration of crypto alongside these established currencies and mediums of financial exchange. Finally, Switzerland has passed many legislative initiatives—such as the Blockchain Act and Distributed Ledger Technology Act—geared towards the propagation and subsequent monitoring of cryptos.
While Switzerland has established itself as a frontrunner in the world of crypto exchanges, the country shows many signs of continuing to advance its new age financial endeavors. Turning to another case study of a particular division of the Swiss national community, the town of Zug—an established and internationally recognized crypto nucleus—has promoted Bitcoin by allowing residents to pay city fees with this contemporary means of exchange. But the Swiss disposition towards crypto expansion cannot be classified as an amalgamation of independent actors contributing to international recognition. For example, the nation-state’s propensity towards crypto uses is demonstrated by Swiss Secretary for International Finance Jörg Gasser’s emphasis on the need to promote the medium—albeit with the necessary regulations in place. Finally, the federal Swiss government’s interest in cryptos is evident from the nation’s Federal Counsel voting in favor of proposals to further mitigate the illegal applications of cryptocurrencies, thereby providing support for their more widespread adoption. In sum, Switzerland has adopted an approach to crypto expansion that is principally characterized by monitorization throughout national and local objectives to increase the mediums’ use. As a historically financially forward country, it stands to reason that Switzerland would seek to establish itself at the forefront of the crypto market as it continues to progress.
VI. Current State of International Law Where Cryptocurrencies Do Not Constitute Legal Tender
As Singapore is one of the nation-state sovereigns that has released the most literature regarding its stance on cryptocurrencies, it serves as an excellent case study for countries that have yet to recognize digital exchange mediums as legal tender and the policy objectives behind this decision. Notably, as a foundational consideration, Singapore’s policies regarding the interactions of legal decisionmakers and blockchain technologies can be characterized by the legal community’s decision to regulate the number of firms that are permitted to engage in the crypto market at any particular time rather than regulating the blockchain coins themselves. While there are currently only eighteen “crypto companies” permitted to conduct operations in Singapore, the current trend demonstrates an exponential increase in the number of firms gaining permission to manage crypto initiatives within the state’s borders. Notably, even these firms’ crypto transactions are subject to Goods and Services Taxes (GST). In sum, while it remains true that many legal commentators have described Singapore’s approach to crypto expansion as “welcoming,” the country has only allowed licensure to ten percent of the entities that have applied to engage in the Singaporean market. It, therefore, stands to reason that increased allowance of crypto firm immigration to Singapore will further help the country—an established financial hub—“attract digital asset services-related firms from China, India, and elsewhere” in the future years.
In addition to Singapore’s general policy objectives and their implications, an analysis of Singapore’s more nuanced crypto regulations is necessary to fully grasp the country’s stances on blockchain technologies as a whole. In contrast to the Swiss classification of Bitcoins as “assets,” Singapore denotes these digital currencies as “goods.” While this may seem to be a subtle distinction, the legal ramifications of this designation are notable. A classification as a “good” means that Goods and Services Taxes are applied to Bitcoins in Singapore, and this tax mirrors the Value Added Taxes imposed on securities, which many actors in the international community have adopted. Finally, this classification is further signified by the fact that, in 2017, the Monetary Authority of Singapore (MAS) issued a statement explaining that it would only regulate virtual currencies if they were classified as “securities.” As increased regulation of blockchain currencies has tended to show various countries’ dispositions towards expanding the applications of virtual mediums of exchange, Singapore’s decision to regulate Bitcoins less stringently than securities further demonstrates the country’s hesitance in contributing to blockchain proliferation to the extent of Switzerland and other countries.
To add further clarity to the common delineations between crypto regulations and the monitoring of other securities, our analysis naturally returns to North America and a country that has extensively grappled with blockchain policies while maintaining that the currencies implicated by these policies remain unclassified as legal tender. Specifically, the Canadian Securities Administrators (CSAs) have enumerated many situations in which securities laws may apply to cryptocurrencies, even though the mediums are not ubiquitously classified as such. Notably, the circumstances in which Canadian securities laws apply to crypto currencies are expansive. For example, blockchain assets that are traded on any designated crypto trading platform are subject to securities legislation. Additionally, the exchange of contracts pertaining to crypto assets are also regulated as securities. Finally, platforms that store crypto assets in a virtual “wallet” and ICOs are subject to the application of securities laws.
Canadian crypto laws also serve as a natural segue before a more in-depth analysis of the criminal implications of blockchain currencies and the methods of mitigating these illegal uses, as the country is widely seen at the forefront of this facet of legal analysis pertaining to crypto. Canada’s most prominent initiative in mitigating the criminal applications of cryptos came through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in 2014. In relevant part, the objective of this act was to establish the Financial Transactions and Reports Analysis Centre of Canada (FTRAC) and establish identification and recordkeeping requirements for crypto service providers that the Canadian legislature identified as being particularly susceptible to money laundering and the financing of terrorist activities. Additionally, the PCMLTFA has been amended many times since 2014 and shows Canada’s continued interest in entertaining the continually expanding uses of cryptocurrencies. For example, in 2019, the Act was amended to hold that the same due diligence and reporting obligations that previously applied to money services businesses (MSBs) also apply to all Canadian exchanges, including crypto transactions. This amendment was particularly impactful to crypto markets in particular, as it laid the foundation for the Virtual Currency Travel Rule of 2020, which required all financial institutions and MSBs to keep a record of all cross-border cryptocurrency transactions. In other words, this cross rule, in tandem with the PCMLTFA’s amendments of 2019, greatly increased the regulation of cryptos, subsequently perpetuating the aforementioned trend by increasing investor confidence in virtual currencies and encouraging their use. Finally, in 2021, crypto’s regulation as a form of security was cemented by the Canadian Securities Administration’s (CSA) published guidance regarding the regulatory expectations for crypto investors and how they must protect against theft and disclose relevant risks.
In sum, Canada represents a sovereign that has acknowledged the inevitable proliferation of cryptocurrencies and responded to its expansion without expressing interest in issuing further legislation relating to cryptocurrencies or classifying the medium as legal tender in the near future.
VII. The Dichotomy Between Countries Seeking to Expand Crypto Uses and Those Curtailing
The case studies above reveal the trend wherein more financially established sovereigns have adopted a far more subtle approach to their reconciliation with the emerging crypto market, while countries that have historically been seen in search of stable form currencies are more inclined to pass legislation encouraging the proliferation of blockchain coins. But Switzerland presents itself as an obvious outlier from this bright-line rule, as the country has long been seen as a financial hub with its banks maintaining high profile clients from around the globe. Therefore, the addition of Switzerland to the analysis indicating the initially mentioned bright-line rule for determining which countries should seek to expand the uses of cryptocurrencies suggests that there is a developmental timeline along which countries of varying financial prominence will choose to expand their intranational use of internationally exchanged virtual currencies. Pursuant to this spectrum, countries that have searched for stable exchange mediums prior to 2008 have become zealous adopters of blockchain technologies, while sovereigns with traditionally established currencies have been more hesitant to encourage the use of cryptos within their borders. Finally, Switzerland purports to establish itself at the spectrum’s opposite end of El Salvador as the Swiss—a historically prominent and internationally influential country—have adopted some of the world’s most favorable legislation regarding the expansion of crypto applications.
It is this very outlier—Switzerland—that provides the depth necessary to suggest that the transition from crypto curtailment to progressivism may, in fact, not be temporal but rather based on other factors. This suggestion is even further strengthened by recent research suggesting that the financial hierarchy of sovereign actors within the world economy is likely to remain relatively consistent in the coming decades, with minor alterations arising between countries like China and the U.S. or El Salvador and Cuba. Therefore, a more accurate trend must take into account the individualized dispositions of certain countries to establish themselves as financial “superpowers” in the international community. For this reason, it remains peculiar to see so many sovereigns in the western hemisphere opting to rely near exclusively on their established currencies despite cryptos’ emergence and exponentially increasing influence. Even if other western countries opt not to adopt cryptos to the extent that Switzerland has, substantially greater foundational legislation is needed to combat the possibility of other nations using cryptos as a means of destabilizing our current financial frameworks.
