MAPPING CRYPTOCURRENCY REGULATION
As cryptocurrencies become increasingly ubiquitous, regulators around the world continue to grapple with staying abreast of their rapid development.
It may be no coincidence that the seeds of cryptocurrencies began germinating soon after the global financial crisis with the issue of the first Bitcoin in 2009. The seeds may have been sown with inventions such as the RSA Algorithm, which provided the first public-key cryptography, or with Hashcash, e-cash, b-money and Paypal, who were already attempting to enable cash transfers with crypto-graphical forms of security. But future historical analysis will undoubtedly cite 2008 as the first time that fiat currency, which has reigned since the collapse of the Breton Woods agreement in 1971, was seriously challenged.
The following years saw financial regulators with their hands full, dealing with the fallout from the 2007-2008 crisis, but certainly not active enough in assessing the impact of technological inventions taking place at the time. By 2013, the volume of different cryptocurrencies in circulation was approaching $1 billion, but it was two notable events that finally triggered regulatory reaction: the closing of the notorious web black market ‘Silk Road’ and the hacking of Mt Gox, the first Bitcoin exchange, which resulted in the loss of 850,000 Bitcoins. The events were significant because the scale of their impact necessitated responses from financial regulators. This was also when regulators began to recognize that cryptocurrencies were more than a passing fad.
Once regulators realized this, they reacted in three ways. First, they analyzed the product, service and risk issues of cryptocurrencies, with privacy and anonymity of the transacting parties being the prime concern. A cornerstone of cryptocurrencies is that they offer a reliable and secure means of money exchange outside the direct control of national or private banking systems. However being devoid of any controlling party, they also pose significant risks to security, counter-terrorism, law enforcement and taxation.
Some regulators have also attempted to define cryptocurrencies as an asset class. Cryptocurrencies do not have legal tender status in any jurisdiction, with many jurisdictions already declaring transactions for the sale of goods or services, capital gains and income as taxable. As taxation authorities grapple with devising guidelines for tax compliance, tax evaders might find their tax havens in the form of cryptocurrencies.
Lastly, certain jurisdictions decided to take a stand on cryptocurrencies. The legal status of cryptocurrencies varies materially from jurisdiction to jurisdiction with many remaining volatile or undefined in this space. Some jurisdictions have explicitly allowed cryptocurrency use; some such as India, Ecuador and Vietnam have banned it; others such as Sweden and China have restricted its use.
At present, cryptocurrency regulation appears to be at a roundabout with many regulators circling the subject without taking a definite direction. Additional risks have surfaced with the entry of Initial Coin Offerings (ICO), which use cryptocurrency tokens as their launch pad incentives.
Despite this, some regulators have begun selectively applying existing regulations to cryptocurrencies. For example, The Singapore Monetary Authority (MAS) does not intervene in business transactions, where goods or services are exchanged for cryptocurrencies. The Singapore revenue authorities have also issued guidelines advising that, where goods or services are exchanged for cryptocurrencies, they may be regarded as barter exchange. However, businesses using cryptocurrency exchanges will be taxed on their cryptocurrency sales.
Over the last decade, regulation around the world has been increasingly dictated by political leaders and their motives – a continuing trend that may inhibit the future regulation of cryptocurrencies. However, clarity on the regulatory status of ICOs may happen very soon, spurred by the recent controversy of cyber-currency technology project Tezos raising US$232 million to issue a cryptocurrency that does not exist and fund development of a transaction system that has no clear end-date. Jurisdictional taxation treatment of stakeholder interests in cryptocurrencies and ICOs will have a defining role in the future of both these forms of token.
Ultimately jurisdictions and their regulatory agencies will tread a fine line between encouraging fintech and protection of consumers. Most likely, taxation will play an important role in shaping some of the regulatory developments in cryptocurrencies.
About The Writer
Robert (Bob) McDowall is the CEO of UbiCap Group and former Member of the States of Alderney. A frequent contributor to the financial industry media, Bob has over 35 years of experience in banking, securities and investment, and now has a number of consulting and advisory roles in the private sector including collaboration with Z/yen on development research in blockchain and its implications across business sectors. He is also special adviser to Swiss Foundation Cardano, a decentralized platform that will allow complex programmable transfers of value in a secure and scalable fashion.
This article was first printed in MillionaireAsia Issue 47 - Mar 2018