Regulation of Crypto-Currency around the World
A Crypto-Currency refers to a virtual or any digital currency meant to be a medium of exchange. A Crypto-Currency (Crypto-Currency or crypto for short) is a digital asset designed to work as an exchange medium wherein individual coin ownership records are stored in ledgers existing in the form of computerized database that uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Crypto-currencies typically use decentralized control as opposed to centralized digital currency and central banking systems. When a crypto-currency is minted or created before issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each Crypto-Currency works through distributed ledger technology, typically a block-chain that serves as a public financial transaction database[i].
According to Jan Lansky, a Crypto-Currency is a system that meets six conditions —
- The system does not require a central authority; its state is maintained through distributed consensus.
- The system keeps an overview of Crypto-Currency units and their ownership.
- The system defines whether new Crypto-Currency units can be created. If new Crypto-Currency units can be created, the system defines their origin’s circumstances and determines the ownership of these new units.
- Ownership of Crypto-Currency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
In March 2018, the word Crypto-Currency was added to the Merriam Webster Dictionary.
Regulations on cryptocurrencies around the world
One exciting aspect of the fast-growing Crypto-Currency market is the fluidity of the terms used to describe the different products that fall within its ambit. While the various forms of what is broadly known as “cryptocurrencies” are similar in that they are primarily based on the same type of decentralized technology known as block-chain with inherent encryption, the terminology used to describe them varies significantly from one jurisdiction to another. Some of the terms used by countries to reference Crypto-Currency include digital currency (Argentina, Thailand, and Australia), virtual commodity (Canada, China, Taiwan), crypto-token (Germany), a payment token (Switzerland), cyber currency (Italy and Lebanon), electronic currency (Colombia and Lebanon), and virtual asset (Honduras and Mexico).
One of the most common actions identified across the surveyed jurisdictions is government-issued notices about the pitfalls of investing in the Crypto-Currency markets. Such warnings, mostly issued by central banks, are designed mainly to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies, which are not. Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many organizations that facilitate such transactions are unregulated. Most also note that citizens who invest in cryptocurrencies do so at their risk and that no legal recourse is available to them in the event of a loss.
Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism. Some of the countries surveyed go beyond simply warning the public and have expanded their laws on money laundering, counterterrorism, and organized crimes to include Crypto-Currency markets, and require banks and other financial institutions to facilitate such markets conduct all the due diligence requirements imposed under such laws.
A limited number of countries surveyed regulate initial coin offerings (ICOs), which use cryptocurrencies as a mechanism to raise funds. Of the jurisdictions that address ICOs, some (mainly China, Macau, and Pakistan) ban them altogether, while most tend to focus on regulating them. In most of these latter instances, the regulation of ICOs and the relevant regulatory institutions vary depending on how an ICO is categorized. For instance, in New Zealand, particular obligations may apply depending on whether the token offered is categorized as a debt security, equity security, managed investment product, or derivative.
Some jurisdictions are seeking to go even further and develop their system of cryptocurrencies. This category includes a diverse list of countries, such as the Marshall Islands, Venezuela, the Eastern Caribbean Central Bank (ECCB) member states, and Lithuania. Some countries that have issued warnings to the public about the pitfalls of investments in cryptocurrencies have also determined that the size of the Crypto-Currency market is too small to be cause for sufficient concern to warrant regulation and a ban at this juncture (Belgium, South Africa, and the United Kingdom)[ii].
Cryptocurrencies pride themselves on standing apart from government, but that has not stopped some states and localities from trying to crack down, at least on illicit dealings that range from drug smuggling to bribery to fraud. The Chinese government has banned the use of cryptocurrencies to fund startup companies. However, in the U.S., the federal government has stayed away from regulation because it is not clear even to regulators precisely what these digital currencies are and who would be responsible for regulating them. Are they security, like a bond, and thus under the Securities and Exchange Commission jurisdiction? Or are they a commodity, like gold, to be regulated by the Commodity Futures Trading Commission?
The debate over regulation is not just about protecting citizens. It is also about manoeuvring for position in what states see as an emerging market with lots of potential economic growth. Most states are sitting back right now to figure out where this is going. Others are jumping in, trying to gain an advantage either by protecting taxpayers or encouraging investment.
Washington State, for example, has been wary about crypto-cash flooding in to make tech deals. To protect investors from fraud, the state requires Crypto-Currency exchanges to create a cash reserve, equal to the volume of transactions, so there is a real backup for the deals. New York State, determined to retain its place as the nation’s financial hub, has fostered the creation of a fully licensed digital currency exchange.
On the other hand, Wyoming has made a play for the Wild West side of the business. Hoping that a free market would help boost jobs, the legislature exempted cryptocurrencies from the state’s financial and securities regulations, as long as the currencies were not being sold as investments. The state effectively decided that the new money was neither a commodity nor security.
This time, the feds are on the sidelines and states are jockeying for advantage in a global marketplace that none can control, and few of them fully grasp. The pace of change is so fast that any state advantage could be gone in a heartbeat, and the damage from any misstep could be massive.
[i] Bidisha Roy, Student of Department of Law, The university of Burdwan