Crypto Laws Around The World, And How Non-Custodial Wallets Still Comply

The first Bitcoin was issued nearly 15 years ago, let that sink in. It’s been a while since the whole crypto ecosystem started. Despite that, laws and regulations are still very much in flux as governments and financial systems grapple with new disruptive technology and its implications for broader society.

One thing that has been a constant since the advent of crypto, however, has been the non-custodial element. For many who invest in crypto and believe in the power of decentralized finance, non-custodial wallets and having total control over your assets is the true motivation for participation. Any exchange that handles transaction data is, effectively, a step towards centralization which in turn means more regulation.

Some investors do prefer Centralized Exchanges (CEX’s) because they mimic existing financial systems and place accountability on the exchange to manage security and the integrity of assets. However, this system also allows for greater regulation of crypto investments. For those dedicated to Decentralized Exchanges (DEX’s), regulation over their crypto and assets is what they are actively trying to avoid. So now in 2023, with non-custodial wallet security constantly improving, many crypto investors are turning to DeFi as a solution to avoid governance overreach and over regulation. Some regulation does technically affect those with non-custodial wallets, let’s go deeper.

How Regulation Impacts Cryptocurrency

At the very top level, regulation has some benefits for the crypto market. It will act as a legitimising force, allowing many investors – especially in the institutional investment space ( who previously held off because of the unregulated nature of crypto) to start investing. With more investors, particularly at that institutional level, there will also be a stabilising impact in the crypto market. The wild fluctuations in price that come from such a speculative asset class will start to normalise and we’ll see fewer of the spectacular crashes as we did with the TerraLUNA and UST.

The question then becomes whether the regulation of the CEX space in crypto will also start to catch those that sit outside the system. The good news for those users that look for privacy in their crypto assets, while some regulators around the world have flirted with the idea of regulating non-custodial wallets, there is little agreement on how to do this, and each effort so far has been quickly met with resistance.

What’s new and what investors should know

Generally speaking and in most nations around the world, there are no laws forbidding people from setting up non-custodial wallets and investing in cryptocurrencies. There are taxation implications (i.e. you will have to declare these assets and potentially pay taxes on any profit made from them), but in that regard it's no different from owning any other form of asset. However, the capital gains tax differs between countries and between asset classes based on the period of investing.

In recent years there have been some concerns about the potential for non-custodial wallets to be used for money laundering and other such activities. Due to this, several governments and regulators are looking at how to apply Know Your Customer (KYC), Anti Money Laundering (AML) and asset "travel" regulations that are currently in place for other asset classes to govern non-custodial wallets. It hasn’t happened yet. The consensus across the industry is that such regulations would put such a burden on the crypto sector that it would stifle innovation and cause local investors to avoid it entirely. No country wants to be seen as ‘unfriendly’ towards crypto at this stage, especially with mainstream celebrities and prominent people being crypto advocates.

It is, thus, important to be aware that regulation could be on the horizon for all crypto users in future. After all, the banks and governments will do anything to avoid having a lack of control over what is going on in their country.

🇺🇸 Crypto laws in the United States

In the US, crypto assets have been considered securities for the purposes of regulation. If non-custodial wallets are used in a specific manner, then they will be subjected to KYC and AML regulations.

This applies at the application level, so for example, if a non-custodial wallet provider is based in the US and provides exchange-like services, such as facilitating trades between cryptocurrencies, it may be required to register with the US Financial Crimes Enforcement Network as a money services business (MSB) and comply with AML/KYC requirements. Another important regulation to note is that crypto exchanges and other organisations that facilitate trade will need to file reports when a customer moves at least $10,000 worth of virtual currency into a non-custodial wallet. The rule further requires recordkeeping for unhosted wallet transactions of $3,000 or more.

The US seems very firm on allowing people to have non-custodial wallets and use them without inhibition. A bill introduced last year set out to ban government agencies from “restricting the use of convertible virtual currency by a person to purchase goods or services for the person’s own use, and other purposes.” Based on this it seems likely that in the US, regulation around your ability to set up and use non-custodial wallets will be minimal into the foreseeable future.

🇬🇧 Crypto laws in the United Kingdom

Cryptocurrency regulation in the UK is sweeping, with what it terms virtual asset service providers (VASPs) required to keep detailed records of beneficiaries, complete enhanced due diligence for politically exposed persons, and appoint an individual to be in charge of overseeing such compliance and regulatory issues in the wider space.

On the side of taxes, individuals with non-custodial wallets are liable to pay for gains and losses that are taxed under capital gains tax, as well as revenue generated from mining, staking, and other crypto-generating activities.

The UK was going to be one of the nations to require cryptocurrency providers to collect personal data from individuals using non-custodial wallets for the transfer of digital assets. This initiative was put on hold after the sector expressed concerns that the burden of collecting such information would stifle innovation and put undue regulatory pressure on crypto organisations.

🇪🇺 Crypto laws in the European Union

The EU has long been seen as a forerunner in regulating the crypto sector, and this came to a head in 2022 when the European Council approved the Markets in Crypto-Assets (MiCA) regulation. This is one of the first attempts in the world to comprehensively regulate crypto markets. Among other things, MiCA places accountability on third parties for the loss of any crypto assets or the ability to access markets by the consumer. It also has robust governance requirements that are aimed at transparent lines of responsibility, providing effective processes to identify and report on risk, and featuring adequate internal control mechanisms.

Effectively what all of this means is that people that use exchanges and otherwise deal in crypto in Europe have some of the strongest consumer protections in the world.

Meanwhile, as far as non-custodial wallets are concerned, the EU previously looked at including such wallets in its “Travel Rule”.  This would have ensured that all crypto transfers could always be traced for blocking suspicious transactions. It would have also allowed for the tracking of the source and whereabouts of funds.However, as with the UK (above), this idea was sidelined, and the non-custodial wallet has been removed from the “Travel Rule.”

🇨🇦 Crypto laws in Canada

Canada has been a pioneer in the adoption of regulation around crypto assets. It requires all exchanges to be registered (while having a mechanism to allow unregistered exchanges to trade while they seek registration), but the country uses a ‘light-touch approach’ when it comes to non-custodial wallets. Interestingly, there was a controversy last year where regulators warned several high-profile executives at exchanges to stop recommending that consumers use non-custodial wallets.

This, however, was less a consequence of any efforts to curb non-custodial wallet use, but rather to address a short-term effort by authorities to prevent rioting truckers across the nation from being able to access and trade assets. The government ordered all regulated financial institutions (including crypto exchanges), to freeze trading for several of these “designated persons”. This prompted the aforementioned executives to take to Twitter and point out that there wasn’t anything anyone could do to freeze non-custodial wallets.

This brief case study highlights the global challenges that come with regulating non-custodial wallets. The taxation authorities will investigate them when they’re noticed (generally via conventional money leaving people’s accounts and being used to make crypto purchases on centralized exchanges), but it’s difficult to regulate them once the crypto moves to non-custodial wallets..

🇦🇺 Crypto laws in Australia

Australia is very much playing catch-up with crypto regulation, with the current government the first to take meaningful steps towards establishing a regulatory framework, and that government only came to power in mid-2022. However, the government has determined crypto assets to be exchange-traded products (ETPs), and are treated in the same way as stocks and other such investment products are.

In Australia, exchanges are required to register with an government organisation called the Australian Transaction Reports and Analysis Centre (AUSTRAC). AUSTRAC is a specialist organisation specifically dedicated to monitoring financial transactions to identify money laundering, organised crime, tax evasion, welfare fraud and terrorism financing. However, self-executing code (such as non-custodial wallets) is not covered by this requirement, and as it currently stands, experts question whether the regulatory framework would allow for this to occur while preserving anonymity and keeping the legislation “technology neutral.”

With that being said, the government has defined crypto asset secondary service providers (CASSP) as platforms that facilitate exchange, transfer, or the storage of crypto assets, and non-custodial wallets would fall into that category. CASSPrs are expected to comply with anti-money laundering laws, and there is also likely to be requisite expertise and infrastructure added to the regulatory risk. The long and short of it is that while Australia is currently something of a wild west for non-custodial wallets, increased regulation is on the horizon. Even if it’s not quite certain what form that would take right now.

🇨🇳 Crypto laws in China

China is a particularly complex example of crypto regulation, not least because historically, significant effort has gone into curbing it. The Chinese government banned the issuing of initial coin offerings (ICOs) in 2017, and ordered the closure of all exchange platforms.

However, officially, it is not illegal to hold cryptocurrency in China, and in 2020, the People’s Bank of China issued a draft law that would pave the way for a digital yuan, as a central bank-controlled crypto asset.

This was then followed by the announcement and launch of the China Digital Asset Trading Platform in December 2022. This is the first legally compliant secondary trading platform for digital assets in the country.

Given the authoritarian and highly regulated tendencies of the Chinese government, it is likely that there will be pressure placed on non-custodial wallets that exist outside of this trading platform. Certainly, users of such wallets will still find it difficult to buy and exchange crypto using fiat currency, and then use it for any purpose, as the government still only recognises one exchange platform.

🇸🇬 Crypto laws in Singapore

Singapore’s crypto laws track along with much of the rest of the world, with regards to exchanges being obligated to protect against money laundering and be compliant with terrorism laws. The Singapore government is also proactive to regulate the behaviour of exchanges, as well as the consumer protections available to investors. However, Singapore does have a fairly unique quirk where it is very concerned about its population not fully understanding the risk of crypto investments. In 2022 it passed laws to prevent the advertising of crypto services in a manner that trivialised the risk of them.

Other than that the government has committed to minimising its involvement in cryptocurrencies. As far as non-custodial wallets are concerned, they’re not subject to Travel Laws and other than the wallet providers being sure to pay additional due diligence due to the increased risk of money laundering, there are no particular obligations on the wallet holders to do anything more than meet their taxation obligations.

🇯🇵 Crypto laws in Japan

Japan has embraced cryptocurrencies at a governance level and was one of the first nations to do so. Since 2016 cryptocurrencies have had a regulatory framework to work within, and were recognised as a form of currency, the government of Japan has provided NFTs (another form of crypto asset) to successful mayors for city initiatives, and the government’s own stablecoin, the JPYCoin, can be used to shop at major stores.

As far as exchanges are concerned, Japan has one of the tightest regulatory environments in the world (the nation cracked down when one of the first exchanges, the Japanese-based Mt. Gox, collapsed). It was because of these regulations that the Japanese subsidiary of FTX - which remained liquid as its parent company in the US collapsed - was still facilitating transactions, even as users from elsewhere in the world were left in limbo. However, there are no particular regulations or restrictions on non-custodial wallets. Service providers that merely provide users with such an application, which the users manage for themselves, do not count as a crypto asset custody service.

How Non-Custodial Wallets Still Comply to Crypto Laws

While there are specific nuances across the world, the long and short of the matter is that the bulk of regulations affect those organisations that provide custodial services, rather than individual investors in crypto. If the organisation holds your crypto assets for you and behaves like a bank or a stock exchange, then they are expected to conform to a similar set of regulations as other financial services.

On the other hand, if you are managing your assets for yourself, via a non-custodial wallet like Frontier, then you’re probably not liable to be bound by any more regulation than you would in owning cash or stock. Your main obligations will be tax-related. You will still owe money on the profit realised from crypto trading. While it might seem that there’s a lot of anonymity involved in crypto, the reality is that tax organisations across the world are paying very careful attention to this. How much control and visibility they will have is difficult to tell given that most DeFi and crypto activity is behind closed doors.

Of course, with crypto laws being so young, there is still a lot of active debate occurring too. There is also the complexity of the technology to consider, and whether it’s even practically possible to fully regulate the space. Therefore, make sure you pay close attention to the evolving discussion and how changes in the law might apply to you.Do you want a non-custodial wallet you can trust? Download Frontier - The One Web3 Wallet that includes Crypto, DeFi, NFTs, and more. It enables your personal crypto journey with non-custodial security, fraud detection, and prevention mechanisms. Contact Us here to speak to our team/community, we’d love to hear from you!