Introduction

The rapid growth of cryptocurrency, led by Bitcoin’s introduction in 2009, has forced governments worldwide to address the regulatory challenges of this emerging financial ecosystem. North America, comprising the United States, Canada, and Mexico, has taken varying approaches to regulating cryptocurrencies. The regulatory landscape in these countries continues to evolve as their governments seek to balance innovation with consumer protection, financial stability, and crime prevention. This article provides a factual and comprehensive analysis of the current state of cryptocurrency regulation in the United States, Canada, and Mexico as of 2024.

The United States

Federal Framework

In the United States, cryptocurrency regulation occurs at multiple levels, with federal, state, and sometimes local authorities involved. The federal government has yet to implement a cohesive regulatory framework for digital currencies. But various agencies have assumed oversight based on the activities associated with cryptocurrency.

1. Securities and Exchange Commission (SEC): The SEC’s primary concern regarding cryptocurrencies is whether they qualify as securities. Under the 1934 Securities Exchange Act and the 1940 Investment Company Act, the SEC is empowered to regulate assets it deems to be securities. In 2017, the SEC issued a report indicating that certain Initial Coin Oerings (ICOs) could be classified as securities, bringing them under its regulatory jurisdiction. The “Howey Test” is often applied to determine whether a cryptocurrency qualifies as a security. As of 2024, ongoing lawsuits against major cryptocurrency exchanges. Issuers have further clarified the SEC’s authority in the space.

2. Commodity Futures Trading Commission (CFTC): The CFTC classifies cryptocurrencies like Bitcoin and Ether as commodities under the Commodity Exchange Act. This grants the CFTC oversight of the derivatives markets, including futures and swaps, related to these cryptocurrencies. However, the CFTC does not regulate spot markets, although it has pursued cases involving fraud and manipulation in those markets.

3. Financial Crimes Enforcement Network (FinCEN): FinCEN, part of the U.S. Department of the Treasury, focuses on anti-money laundering (AML) and combating the financing of terrorism (CFT). In 2013, FinCEN issued guidance clarifying that cryptocurrency exchanges are considered money transmitters and must comply with the Bank Secrecy Act (BSA). That requires registration with FinCEN, implementing AML programs, and reporting suspicious activities.

4. Internal Revenue Service (IRS): The IRS treats cryptocurrencies as property for tax purposes, meaning that cryptocurrency transactions are subject to capital gains tax. In 2014, the IRS released Notice 2014-21, which provides basic guidelines for reporting cryptocurrency transactions. Further updates have clarified reporting requirements. Including the obligation to report holdings on tax returns and airdropped tokens as taxable income.

State-Level Regulations

At the state level, the regulatory landscape is fragmented, with some states adopting favorable regulations and others imposing stricter requirements. For instance:

New York: The New York Department of Financial Services (NYDFS) introduced the BitLicense framework in 2015, requiring cryptocurrency companies to obtain a license to operate within the state. BitLicense imposes stringent requirements regarding AML/CFT, consumer protection, and cybersecurity. Many companies have opted not to operate in New York due to these regulatory hurdles.

Wyoming: In contrast, Wyoming has positioned itself as a cryptocurrency-friendly state, passing several laws that provide legal clarity and favorable conditions for digital assets. For example, Wyoming has exempted cryptocurrencies from property tax and introduced a framework for special purpose depository institutions (SPDIs) designed to serve cryptocurrency companies.

Emerging Developments

The debate over creating a comprehensive regulatory framework for cryptocurrency continues at the federal level. Recent legislative proposals such as the Digital Commodity Exchange Act (DCEA) and the Eliminate Barriers to Innovation Act aim to provide clarity on jurisdictional boundaries between the SEC and CFTC. However, as of 2024, no federal law has yet been passed, and the U.S. regulatory landscape remains a patchwork.

Canada

Federal Framework

Canada’s approach to cryptocurrency regulation is more unified compared to the United States, but it shares several regulatory objectives, including consumer protection, AML/CFT compliance, and the promotion of financial innovation. The primary regulatory agencies involved include:

1. Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): FINTRAC is responsible for enforcing Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). In 2014, Canada became the first country to implement AML regulations for cryptocurrency. All cryptocurrency exchanges operating in Canada must register with FINTRAC as money services businesses (MSBs) and comply with reporting, record-keeping, and AML requirements.

2. Canadian Securities Administrators (CSA): The CSA, an umbrella organization of provincial and territorial securities regulators, has taken the position that many cryptocurrency oerings and trading platforms are subject to securities laws. In 2021, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) issued guidance for cryptocurrency exchanges, clarifying that platforms dealing in crypto assets that are securities or derivatives must register as securities dealers.

3. Bank of Canada: Canada’s central bank has conducted extensive research into the potential issuance of a central bank digital currency (CBDC). While the Bank of Canada has yet to introduce a CBDC, it continues to explore the feasibility of such a project, focusing on the potential benefits for financial inclusion, stability, and monetary policy.

Provincial Regulations

Canadian provinces also play a role in regulating cryptocurrencies, particularly in the realm of securities. For instance:

Ontario: Ontario’s securities regulator, the Ontario Securities Commission (OSC), has taken a proactive stance in regulating cryptocurrency exchanges. In 2021, the OSC began enforcing registration requirements for crypto-asset trading platforms, leading to enforcement actions against non-compliant companies.

Taxation of Cryptocurrencies

The Canada Revenue Agency (CRA) treats cryptocurrency as a commodity for income tax purposes, similar to the U.S. IRS approach. Cryptocurrency transactions, including trades and payments, are taxable events. Individuals must report capital gains or losses on their tax returns. Additionally, goods and services tax (GST) may apply when cryptocurrencies are used in transactions for goods or services.

Emerging Developments

Canada has been relatively progressive in its regulation of cryptocurrency. But like the United States, it faces challenges in keeping up with the rapidly evolving nature of the technology. In 2023, the CSA introduced new rules requiring enhanced transparency from cryptocurrency trading platforms. Particularly those are concerning the custody and segregation of client assets. These rules aim to address concerns about the security of customer funds in the wake of several high-profile exchange failures.

Mexico

Federal Framework

Mexico’s regulatory framework for cryptocurrency is still in the early stages, though it has made significant strides in recent years. The key regulatory components include:

1. Fintech Law: In 2018, Mexico enacted its Fintech Law, which provides a legal framework for financial technology companies, including those dealing with cryptocurrencies. Under this law, cryptocurrency exchanges are required to register with the Mexican central bank, Banco de México (Banxico), as financial technology institutions (FTIs). The Fintech Law imposes requirements related to AML/CFT compliance, cybersecurity, and consumer protection. It also gives Banxico the authority to determine which cryptocurrencies can be traded within Mexico.

2. National Banking and Securities Commission (CNBV): The CNBV, which oversees financial markets, has issued guidance on the classification and treatment of cryptocurrencies. It has generally supported the development of the fintech industry but remains cautious about the risks posed by digital assets, particularly regarding fraud and money laundering.

3. Taxation: In Mexico, cryptocurrency is treated as an asset for tax purposes. Individuals and businesses involved in cryptocurrency transactions are required to report profits as part of their income tax obligations. In 2020, the Tax Administration Service (SAT) began targeting cryptocurrency users who failed to report taxable gains, indicating the government’s increasing focus on taxation and compliance in this area.

Emerging Developments

As of 2024, Mexico continues to refine its regulatory approach to cryptocurrencies. Banxico has taken a conservative stance on the issuance and circulation of cryptocurrencies within the country, reflecting concerns over financial stability and crime prevention. However, the Fintech Law has been praised for providing much-needed legal clarity for companies operating in the space. Additionally, Mexico is exploring the potential development of a CBDC, which could provide a government-backed alternative to private cryptocurrencies.

Conclusion

Cryptocurrency regulation in North America remains a work in progress, with the United States, Canada, and Mexico taking di􏰀erent approaches based on their unique financial systems, regulatory priorities, and concerns. In the United States, regulation is fragmented across various federal and state authorities, while Canada has adopted a more centralized regulatory approach with a strong focus on AML and securities laws. Mexico, though still in the early stages of regulating digital assets, has implemented a clear legal framework under its Fintech Law, positioning it as a regional leader in fintech innovation. As the cryptocurrency market evolves, so too will the regulatory frameworks in these countries, with a continued emphasis on balancing innovation, consumer protection, and financial integrity.

References

– Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Link
– U.S. Securities and Exchange Commission (SEC) Link
– Commodity Futures Trading Commission (CFTC) Link
– Financial Crimes Enforcement Network (FinCEN) Link

– Bank of Canada Link
– Banco de México (Banxico) Link
– Canadian Securities Administrators (CSA) Link
– Internal Revenue Service (IRS) Link
– Mexico’s National Banking and Securities Commission (CNBV) Link
– Canada Revenue Agency (CRA) Link
– U.S. Department of the Treasury  Link