Fiat currencies derive their authority as a medium of transaction from the government or monetary authorities. For example, every dollar bill is backed by the Federal Reserve.
However, cryptocurrencies are not backed by any public or private entity. Therefore, it is difficult to determine their legal status in the various financial jurisdictions around the world. Further complicating matters is the fact that cryptocurrencies operate largely outside of the existing financial infrastructure. The legal status of cryptocurrencies impacts their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that cryptocurrency remittances should be subject to the requirements of its Travel Rule, which requires AML compliance.
As of December 2021, El Salvador was the only country in the world that allowed bitcoin as a legal tender in monetary transactions. In the rest of the world, regulation of cryptocurrencies varies by jurisdiction. Japan’s Payment Services Act defines Bitcoin as legal property.
Cryptocurrency exchanges operating in that country must record information about the customer and details about the transfer. China has banned cryptocurrency trading and mining within its borders. It was reported that India formulated a framework for cryptocurrencies in December.
Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies must be classified as “financial instruments.” In June 2021, the European Commission published the Markets in Crypto-Assets (MiCA) Regulation, which establishes regulatory protections and rules for companies or financial service providers that use cryptocurrencies. In the United States, the largest and most developed financial market in the world, crypto-derivatives such as bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has stated that Bitcoin and Ethereum are not securities.
