Law and Order in the Mining World: How Governments Solve Regulatory Problems
Before talking about the positions of different countries on the issue of mining regulation, let's first give a clear definition of the very concept of “mining”: crypto-mining is understood as the process of obtaining cryptocurrencies, such as bitcoin, based on computing power and basic algorithms.
In turn, it should be mentioned what is the reason for the popularity of mining in the world. The advantages of cryptocurrencies are that they can be used all over the world, under a pseudonym and without intermediary instances (banks). At the same time, large sums can be transferred around the world in a matter of minutes.
Nevertheless, the attitude towards this currency is ambiguous in different countries. Which countries in the world are actually the most crypto-friendly? Where is the relationship to the crypt twofold? And which ones don't want to deal with her at all?
In this article, we will tell you about the regulation of mining in different countries, the pitfalls of legislation and taxation issues in relation to cryptocurrencies.
Regulation of mining in different countries
There are no federal regulations governing cryptocurrencies in the United States, and each individual state government regulates exchange and mining, some under stricter systems than others.
For example, in New York there is a BitLicense, which is considered one of the strictest in the country, and a law has also been signed introducing restrictions on mining for environmental reasons.
The state of Montana in the United States has passed a law on the protection of bitcoin mining operations, providing a legal basis for mining operations and giving them greater stability. It sets out both regulatory requirements for cryptocurrency transactions and clear guidelines for the use of electricity. Montana hopes to attract new businesses and investments to the state.
However, in other states, such as California, there is again a rather weak regulatory system.
A few years ago, China was the largest trading place for bitcoins and cryptocurrencies and was considered the center of their receipt in the world. Chinese cryptocurrencies were considered promising and intended to make investors rich.
However, the country's leadership, seeking to control the growing popularity of Chinese cryptocurrencies, finally banned cryptocurrencies not approved by the government in September 2021. The only legal Chinese cryptocurrency at the moment is the digital yuan.
With the introduction of bans in 2021, cryptocurrency trading in China is completely prohibited, which excludes the possibility of safely buying cryptocurrencies in China, but this does not apply to the digital yuan.
The result of the above-mentioned bans was that a lot of miners left China, equipment was actively sold. But the paradox lies in the fact that by the end of 2022, China accounts for 21% of the global bitcoin mining, which indicates that official legal norms and reality may contradict each other.
The resolution of July 2020 allowed transactions with digital financial assets (DFA), legalizing transactions with cryptocurrencies, but prohibiting their use as payments for goods and services.
Russian banks and exchanges can be DFA operators if they register with the central bank, known as the Bank of Russia, which also oversees the ”activities of information system operators.” In court, in disputed cases of transactions with cryptocurrency, the parties had to declare these transactions and their ownership of the cryptocurrency.
Starting from January 1, 2021, owners of cryptocurrencies whose transaction amount exceeds 600,000 rubles ($7,757) during a calendar year are required to report their crypto transactions and wallet balances to the Russian tax authorities. The Law applies equally to both individuals and organizations.
Russian government officials must declare that they have any cryptocurrency. In addition, crypto exchanges and miners are required to provide information about their transactions with cryptocurrencies to Rosfinmonitoring, the Federal Financial Monitoring Service.
According to the Ministry of Finance, regulation is necessary to prevent illegal transactions with cryptocurrencies, including money laundering. Failure to report twice in three years or intentionally providing inaccurate information to the Russian tax authorities is a serious criminal offense and carries penalties ranging from fines, forced labour and imprisonment.
Currently, a new law has been prepared regulating cryptomining and the use of cryptocurrencies by both individuals and public and private institutions. It is expected that it will be adopted in the first half of 2023 and will come into force in July.
The situation in different EU countries is different, but in general, it should be noted quite a friendly attitude towards mining and cryptocurrencies on the part of EU members.
Especially noteworthy are countries such as Malta and Estonia, which are a kind of centers for any activities related to cryptocurrencies. The only threat to mining at present may be a military conflict, which has led to an increase in the cost of energy resources, which can make mining less attractive, reducing its profitability.
Different approaches to regulation
Now let's look at the different types of mining regulation:
There are a number of countries where mining is completely banned - Algeria, Bangladesh, Bolivia, Nepal, North Macedonia and Ghana. The ban may be partial, for example, in the Russian Federation they are now planning to introduce a ban on mining in residential buildings, but it may concern, as in New York, mining only a number of cryptocurrencies.
Licensing of miners
Licensing of miners may be different, but it is always carried out by a state financial authority.
For example, in Kazakhstan, licensing is carried out for 2 different categories of persons, where the first is miners - owners of digital infrastructure, and the second - owners of equipment.
In Iran, an establishment license and an operating license are required. In this case, the first establishes a legal entity as a legal cryptominer, while the second allows it to actually start crypto mining.
In Germany, in turn, a license from BaFin is mandatory if mining is carried out not only for personal needs. In the USA, the possibilities of obtaining and the requirements for obtaining licenses will vary depending on the state. As for the Russian Federation, then, as already mentioned, the expected law will bring clarity.
Taxation of mining
The approach to taxation is also different, while in a number of countries cryptocurrencies obtained as a result of mining are taxable, since they are equated to income, in other countries such a tax is not applied, but is already charged from income received as a result of various operations with mined cryptocurrencies.
However, in some countries both taxes are paid, an example of which is the United States, or taxes are not paid at all, as it was before January 2023 in Belarus.
Development of separate laws and policies to regulate mining
It would be correct to say that almost all countries of the world have already faced the need for legal regulation of mining in one way or another. In accordance with the official position on this issue, one or another state adopts laws and regulations that either support mining or express a negative attitude towards it.
Problems related to the regulation of mining
Violation of the rights of miners
The issue of violation of the rights of miners is quite specific, and if this happens, it is more likely that miners suffer not from direct actions of the state or regulatory authorities, but from illegal miners. The actions of so-called shadow miners violate the legislation of a particular country to one degree or another, which in turn often leads to stricter control and penalties for all mining participants in the long term.
In this regard, it is useful to remember that information about proven and reputable representatives of the cryptocurrency market is always provided by well-known websites like Ultramining.
Rising electricity prices
Electricity costs account for up to 90% of the total costs of the mining process. This is due to the fact that obtaining one bitcoin requires huge computing power of a computer, and the more such power, the higher the consumption and energy costs. And since this electricity is taken not from some separately allocated reservoir for these purposes, but from the total consumption by the state, this subsequently leads to an increase in electricity prices on the scale of this country.
At the moment, many countries are trying to solve this problem by using renewable energy sources, although many miners still prefer to migrate to places where the cost of electricity is lower and coal is used to produce it. Although a number of miners are switching to cloud mining, which is also a much more energy-saving option compared to mining farms.
In addition to increased electricity consumption, mining also entails the occurrence of significant CO2 emissions into the planet's atmosphere and a large amount of electronic waste.
A number of states are also trying to solve such problems by encouraging responsible mining, these initiatives include tax incentives, support for the use of renewable energy resources and a number of other measures.
Well, the cryptocurrency world can be both exciting and very dynamic, offering a new form of individual freedom, namely freedom from control or supervision by central authorities. But it also often happens exactly the opposite, when those who are engaged in cryptocurrency are simultaneously subject to a variety of rules based on their country's attitude to digital assets.
In some countries, mining and the use of cryptocurrencies is completely illegal, while in other countries it is a rapidly developing industry that is easily accepted by the authorities.
As for the forecasts of the future regulation of mining in the world, experts' opinions differ here. This is primarily due to the fact that the current legislatures regarding mining are relatively new and it is still difficult to fully assess the impact they have had on the industry and the states in which they operate. Also, various unpredictable events, such as the war and the associated rise in the price of energy resources, can completely change the attitude of legislators to this issue.
But despite all the ambiguities, it is safe to say that most civilized countries still treat mining and cryptocurrencies positively and see significant potential in them.