Ever since its birth in 2009, Bitcoin — the world’s first and most popular crypto-currency, has regularly been in the news for all the wrong reasons — drugs, tax evasion, organized crime, money laundering and terrorism financing. Some countries have banned Bitcoin, some are regulating it, while some are ignoring it.
Today there are more than 750 crypto-currencies with a capitalization of more than US$ 25 billion.
For this article, I connected with a wide range of Bitcoin users, enthusiasts and researchers and asked them 3 questions:
- In your opinion, how should crypto currencies like bitcoin be regulated?
- It is argued that crypto currencies like bitcoin do not have any legal uses and are only used for tax evasion, multi level marketing scams, selling drugs & other contraband, money laundering and financing terrorism. What are your comments on this?
- Today there are hundreds of virtual currencies in the world. How do you see this landscape evolving over the next few months?
Note: The terms bitcoin, virtual currencies and crypto-currencies are used interchangeably in this article.
1. How should crypto currencies like bitcoin be regulated?
Bitcoins and other crypto-currencies must be recognised as private digital money, says Arnab Naskar, who is pursuing Ph.D. from Hamburg University and is currently involved in a project that aims to develop smart contracts in the supply chain management industry.
Arnab feels that even though crypto-currencies do not fully qualify as currencies, the recent spate of Initial Coin Offerings (ICOs) makes it hard to consider them as assets (a view that Debasis Nayak, Partner, Tech Juris Law Consultants disagrees with). Japan recognises virtual currencies as a method of payment and taxes profits from virtual currency trading. In Germany, virtual currencies are classified as “units of accounts” [Rechnungseinheiten] and commercial Bitcoin platform operators are required to have a license from the German Federal Financial Supervisory Agency.
Elaborating upon the tax implications, Arnab proposes a multi-pronged approach. Firstly, bitcoin mining should not be taxed, as mining is “not earning, but a creation itself”. Secondly, converting virtual currencies to fiat currency should be taxed as “income from other sources”. Thirdly, income received in virtual currencies should be taxed in the country of the service provider.
Arnab further feels that Governments are apprehensive about crypto-currencies because of their anonymous structure and cross-border transaction capability. He feels that virtual currency transactions must be routed through recognised exchanges and wallet holders must fulfil Know Your Customer (KYC) norms.
Partially agreeing with this approach is George Gor, CEO at CoinIdol.com News Outlet, who is of the opinion that “there should be no regulation for cryptocurrency, until they are exchanged in fiat”. He also feels that the “crypto community needs more systems for self regulation than the government regulation. But if we transfer money to fiat and back, we need regulation from government as well”.
On the other hand, Saurabh Agrawal, co-founder & CEO of bitcoin exchange Zebpay, feels that crypto currencies require self governing councils and that Governments “should create a sandbox atmosphere for such companies to grow”. He added that developed countries like Japan, USA, Switzerland and Ireland find crypto currencies useful and have regulated it”.
As long as proper records are being maintained of how virtual currencies are being transferred or converted into fiat currency, maintaining the current status quo about their regulation and seeing how they evolve is not a bad idea before defining statutory boundaries, says Debasis Nayak.
Fiat or Crypto, currency in general derives its value by trust placed on the underlying system that supports its utility function and maintenance, says Dr. Sujeewa Rathnayake, a senior Technologist . “However, key differentiator of crypto-currencies is its ability to pass through national boundaries. Hence, crypto-currency will be more effectively managed by supra nation organizations such as the World Trade Organization or the United Nations and / or unions similar to the European Union. It is critical for crypto-currency to go beyond physical national boundaries for all legal and / or compliance purposes”.
Mohit Kalra, CEO & Founder at Coinsecure, has a different opinion on the issue of bitcoin regulation. He feels that due to the de-centralized nature of crypto-currencies, they can never be regulated on their own. He added that KYC (Know Your Customer), AML (Anti Money Laundering) and foreign exchange laws can only apply when these currencies are converted to fiat currencies.
Allison Coleman, Founder at Axisflip Cryptofinancial, TimeCandy Radio, Crash Coffee, Zerocoast LTD feels that the environment where users & developers are able to operate without asking permission by default has created a resilient ecosystem for blockchain technology.
"Catering to institutional investors through codified regulation in line with legacy investment vehicles is a likely & lucrative path for expansion by Blockchain technology."
- Allison Coleman
Allison believes that Bitcoin will not reach its full potential without the funds of various institutional investment vehicles, which require burdensome regulation. Allison adds that “If Bitcoin is to be taken seriously as a tool to transform marketplaces, we will ultimately need regulations which parallel those in other securities. This standardization could help bridge the gap between traditional investment organizations and the crypto-token markets, allowing for significant growth”.
Bellaj Badr, CTO at Mchain has an interesting take on the issue. “I believe that the crypto-currencies are created to bypass any regulation and the authorities power and to empower the end user against any regulator. Regulating these systems is impossible while their decentralised architecture operates independently of any authority. However, we can regulate the off-chain services like crypto-currencies exchange markets, the commercial operators such as the online wallet provider and the bitcoin adoption as a payment solution. All these measures will not regulate the bitcoin itself but regulate slightly its adoption in the real economy”, he says.
Manie Eagar, CEO DigitalFutures and Chairman Blockchain Association of Canada, says that the position in Canada is that normal compliance, business rules and consumer protection should apply. “Regulation is currently a jurisdiction-specific debate so it depends on which country you are talking about and depending on how they treat cryptocurrencies — asset, currency, value transfer”. He adds that as the user and investment base grows, Governments will inevitably pay closer scrutiny to bitcoin and the other major currencies and token schemes.
"It is still premature to become specific about blockchain standards as the technology is evolving so fast ."
- Manie Eagar
Manie adds that Canada is monitoring any activity in this space directly with tools and regulations that they already have in place such as Money Services Business (MSB) licences, crowd-funding caps, securities & foreign exchange laws, Anti Money Laundering and Know Your Customer regulations.
According to Nilam Doctor, President and CTO, GreenCoinX Inc, a full KYC (Know Your Customer) on blockchain should be enabled for all bitcoin / fiat transactions. He feels that “linking crypto currencies to bank wallets, Aadhar and biometrics will enable innovations from grass root level”.
Ian M. Worrall, co-founder of MyBit.io is of the opinion that “bitcoin should be regulated just like cash”. He adds that blockchain is an entirely different technology that needs to be evaluated for specific industry use cases before regulators put blanket rulings into effect.
Bitcoin should be regulated by the free market and not by government intervention according to Kingsley Edwards, Founder & CEO of Leet.gg and co-owner of Rogue.gg. He adds “If anything, companies should set up NGOs to help regulate anything that needs to be dealt with from a community standpoint”.
Bjorn Bjercke, a Norway based Bitcoin and Blockchain Specialist, makes an interesting point when he says that “people should take a step back and realize that bitcoin, the longest running crypto currency, is still an experiment”. He is of the opinion that the Bitlicence issued by the New York State Department of Financial Services for the State of New York has not been very successful because it only regulates a geographic area whereas “bitcoin and other crypto currencies are unfamiliar with the concept of geography”.
Taking a very different view, Julien Hamonic, Venture Partner (Human Capital), says “at its core, Bitcoin is the combination of C++ software code, private and public keys. The community of users makes it grow, evolve and live. At most, one could say that users should comply with copyright laws on github”.
Jake Wiser, Creative Marketing at CureCoin, feels that bitcoin should be regulated like stocks and should be taxed when you cash out to dollars or buy bitcoin using dollars.
“Policymakers need to tackle the challenges in understanding both the functionality and risks of decentralised cryptocurrency, in order to create an appropriate legal and regulatory framework”, says Rajinder Tumber (www.RSTumber.com), UK Parliament committee member on Artificial Intelligence.
"Regulation that’s tailored to traditional financial services or investment vehicles may fail to account for the unique elements of cryptocurrency."
- Rajinder Tumber
Rajinder Tumber makes an excellent point when he says that “personal account information is not transmitted in connection with a cryptocurrency transaction, which offers greater anonymity than credit / debit card payments. While this provides protection against identity theft, the increased anonymity may make it more difficult to identify, prevent and investigate criminal activity”.
“At this nascent point in the evolution of digital value exchange, I believe a sandbox observation / exemption approach is the most thoughtful”, says J. Bradley Hall, Founder, Chairman and CEO at ICON CAPITAL RESERVE SA.
2. Do virtual currencies have any legal uses or are they only useful for illegal activities?
“Yes, it is used for those purposes. But so is regular cash. Currently, fiat money in the form of cash is used for most drug transactions. Bitcoin is a small player in comparison. I think what needs to be considered is why are people going to black markets. A black market exists when the ‘white’ market fails to deliver a service or a product that is wanted by consumers. It shows a failure of the official market”, says Kary Bheemaiah.
Quoting the example of Venezuela, Kary says “people are mining bitcoin in order to buy food on Amazon Pantry because the official market has failed and the currency is in turmoil”.
Kary adds that “saying that a currency (which is just a means of transferring and exchanging value) is the source of a problem is ridiculous. The currency is just a tool. It is the environment where it is used that is the issue and what needs to be done is a much deeper level of analysis”.
"Saying that a currency is the source of a problem is ridiculous. The currency is just a tool."
- Kary Bheemaiah
“While we talk about transparency we fail to see that today transparency is a one-way street. While Governments and firms can see all our financial transactions (which tells more about you than the websites you visit) via KYC procedures, we cannot do the same. Why can’t we have Know your Bank (KYB) or Know your Government (KYG) just like KYC?”, asks Kary.
“Bitcoin is a mode of payment. Whatever one can do with fiat, the same can be done with Bitcoin too. It’s totally on the users what they do with their money. It’s not that there was no tax evasion or illegal activities happening before Bitcoin was even invented. Hawala network is massive in India and most of the money is laundered through this network with no trail at all. At least with Bitcoin, the transaction is recorded on to the Blockchain, which can never be deleted or modified. There is still a track of Bitcoin transactions”, says Mohit Kalra.
"Although bitcoin has been misused for criminal activities, it has not posed a large scale systemic risk to date anywhere in the world that warrants a complete clampdown ."
- Manie Eagar
Bellaj Badr, CTO at Mchain makes a valid point when he says that “global currencies are already used for illegitimate activities and such activities are not restricted to bitcoin”.
"The fact that I can use Bitcoin to pay international employees, contracts, other business expenses, etc. without going through a bank and getting killed by transfer and currency exchange fees, gives it immense value."
- Ian M. Worrall
“Most cryptocurrency users, like myself, do report our cryptocurrency funds to the tax authorities as the majority of us are law abiding citizens. We use cryptocurrency for legal purposes like paying for flights, hotel booking, buying books or paying for a cup coffee”, says Bjorn Bjercke.
He adds that “most criminal activity around the globe is funded using the US dollar” and that the risk of money laundering and terrorist financing is very low as compared to the risk from fiat currencies.
He makes a valid point when he says that “cryptocurrency itself is not the cause of criminal activities. Criminal humans are the cause and they should be dealt with regardless of what currency they are using”.
"The crime is not in using a currency. It’s the crime being committed that should be the focus ."
- Kingsley Edwards
Giving legal status to bitcoin and taxing it would boost the country’s and user’s confidence in the future technology, feels Suhas Hegde, DigiByte Payment Network.
“We are always suspicious about new technologies that could change our lives, and it is very easy to demonize something so difficult to understand (due to its technical level), says Guilhem Lalain, a Spain based bitcoin enthusiast.
“The foremost use of virtual currency is the transfer of funds from one person to another, without the involvement of a third party, at a very low cost. With no central authority watching bitcoin, some people misuse it but we must focus on its benefits”, says Manish Agarwal, senior Altcoin Expert at Alcurex.
“Any value system can be used to settle illegal transactions. In such circumstances, the perpetrator is booked and tried. The Government does not ban use of currencies or commodities. It regulates the usage”, says Vishal Gupta, CEO at SearchTrade.
3. How would the virtual currency landscape evolve over the next few months?
“In the coming future, Blockchains would be able to communicate amongst themselves and cater to the noble purpose of creation of Internet of Money, says Atulya Bhatt, an Internet of Money, Blockchain and Crypto-economics researcher.
"Most virtual currencies, other than bitcoin, are just gimmicks."
- Mohit Kalra
“Most virtual currencies, other than bitcoin, are just gimmicks. I don’t believe they have any future at all. But there are some crypto currencies which have shown some promise, like Ethereum, Monero, Zcash”, says Mohit Kalra.
"Over the next 1–2 years a majority of virtual currencies that do not provide value will be phased out and focus will remain on those such as Ethereum and Web 3.0 DApps that provide value."
- Ian M. Worrall
“Developers & users will rally around a handful of substantially different flavours of crypto tokens, ultimately with a few testing forks in each to try out new features & then decide whether to implement them into the coin’s primary release”, says Allison Coleman, Founder @ Axisflip Cryptofinancial, TimeCandy Radio, Crash Coffee, Zerocoast LTD.
Allison feels that “the highest quality & most elegant solutions will be rewarded with market share” and that “many of the non contender crypto-currencies provide an excellent learning opportunity”.
"The market will shake out the altcoins that don’t make the cut, and the users will have a choice for their preferred implementations ."
- Allison Coleman
“Most virtual currencies are highly speculative and do not look sustainable (just refer to the small market caps and low trading volumes) and I am sure many more derivative and new tokens will be added as the spate of Initial Coin Offerings (ICO) in the pipeline hit the market”, says Manie Eagar.
"There will be inevitable consolidation and I always caution cryptocurrency investors across the board."
- Manie Eagar
Kingsley Edwards, sees Bitcoin and Ethereum staying in the limelight for the years to come. “I don’t put much focus into other altcoins until they have a proven track record”, he adds.
“I believe crypto-currencies will work a lot like languages, but instead of geographical borders separating languages, what you purchase will separate cryptocurrencies. One cryptocurrency might be good for buying everyday groceries and smaller goods like a train ticket or a cup of coffee. You will use another cryptocurrency to buy a car because insurance and driver’s license information might be a part of the transaction in that blockchain. For buying or renting a house you might use a separate cryptocurrency with historical maintenance information and electrical grid connectivity information on the same transaction in that blockchain”, says Bjorn Bjercke.
“However this will be seamless for the users. It will not matter what cryptocurrency you hold because it will seamlessly be converted into the currency that the merchant or counterpart wants to receive”, adds Bjorn Bjercke.
Julien Hamonic predicts that the Bitcoin and Alt combined market cap will grow by 25% annually, while Jake Wiser feels that the future belongs to utility coins like CureCoin.info and to coins with well written and original code and a strong development team.
The absence of regulations for Initial Coin Offerings (ICO) gives scammers with new false tokens an access to the market, says George Gor. A system of assistance for traditional non-tech investors would lead to a boom of legal ICOs and new investments for legal cryptocurrencies, he adds.
Mass adaptation of and innovation takes much longer than vested parties anticipate and / or like. Hence, I do not see any paradigm shift happening within the next few months”, says Dr. Sujeewa Rathnayake.
"Crypto currencies are not closer to tipping point for mass adoption by industries or by general public."
- Dr. Sujeewa Rathnayake
Cryptocurrencies are currently in the Diversity phase (of Kevin Kelly’s 5 stage process of evolution — Specialisation, Diversity, Ubiquity, Socialization and Complexity), according to Kary Bheemaiah.
Rajinder Tumber hits the nail on the head when he says that very few people understand cryptocurrency, let alone finance itself. “It is rare to find cryptocurrency discussed in schools and higher / further education. Given the barriers to understanding cryptocurrency and the large amount of misinformation / propaganda, it is important that academics take the lead and explain both the advantages and disadvantages of cryptocurrencies. Unfortunately, cryptocurrency is a black box to the vast majority of the population. We need to open the box and peer inside to fully realize the potential, he adds.
“Landscapes don’t evolve over months but years. We are moving towards competing chains ecosystem where the marketplace will pick winners”, says Vishal Gupta.