This article is written by Kaushal Kumar, pursuing a Diploma in Cyber Law, Fintech Regulations and Technology Contracts from Lawsikho.com. Here he discusses “Future of Cryptocurrency and Legal Aspects Related to it”.
The word “virtual currency” refers to a completely intangible exchange medium which is not a legal tender but can be replaced by legal tender. Older types of “currency” that are not “legal tender” include replacements for paper-based currency such as army scripting and depression scripting. The word “virtual currency” has recently created an additional connotation that it only exists in an electronic or digital form and is only used as a medium of return between members of the internet or virtual currency society. Virtual currencies can be used to purchase virtual goods or redeem awards for online games, social media, or corporate loyalty programs.
A virtual currency subset is “cryptocurrency,” meaning an internet-based virtual currency in which cryptography validates the ownership of a particular unit of value. Its value differs with its market motion. In contrast to commodity-based currencies that derive their intrinsic value through the central authority, cryptocurrencies are not legal tendering and therefore their use involves an agreement between parties for a transaction. Bitcoins, for instance, have no physical existence and their ownership is through entries in a comprehensive database known as the “blockchain,” which is maintained over a peer-to-peer network. According to the Wikipedia, “a cryptocurrency (or cryptocurrency) is a digital asset designed to function as a medium of exchange that uses cryptography to secure its transactions, control the creation of additional units, and verify the transfer of assets.” Bitcoin was the first decentralized cryptocurrency created in 2009. Several other cryptocurrencies have come to realize since then. These are often referred to as ‘altcoins’ or ‘bitcoin alternative’. The decentralized control is related to the use in the role of a DLT or Distributed Ledger Technology of the blockchain-based transaction database of bitcoin. The cryptocurrencies transaction took place through a signed piece of data that is transmitted to the network and, if valid, ends up in a block in the blockchain in order to transfer ownership of a cryptocurrency amount to a designated digital address.
Future of Cryptocurrency
Some economic analysts predict that as institutional cash joins the market, there will be a large shift in crypto. In addition, crypto may float on the Nasdaq, which would further add legitimacy to blockchain and its uses as an alternative to standard currencies. Some predict that a verified exchange-traded fund (ETF) is all that crypto requires. An ETF would certainly make investing in Bitcoin simpler for individuals, but they still need to be the demand to want to invest in crypto, which some say may not be produced with a fund automatically.
Bitcoin is a decentralized currency using peer-to-peer technology that allows the network to jointly perform all tasks such as currency issuance, transaction processing and verification. While this decentralization makes Bitcoin free from public manipulation or interference, the flipside is that there is no central authority to make sure things are running smoothly or back a bitcoin’s value. Bitcoins are digitally developed through a method of “mining,” which needs strong pcs to solve complicated algorithms and crunch numbers. They are presently being developed every 10 minutes at a pace of 25 Bitcoins and will be capped at 21 million, a level anticipated to be reached in 2140.
These features make Bitcoin essentially different from a fiat currency supported by its government’s full faith and credit. The issuance of fiat currency is an extremely centralized activity overseen by the central bank of a nation. While the bank regulates the quantity of currency issued in line with its monetary policy goals, theoretically there is no upper limit to the quantity of such issuance. Moreover, local currency deposits are usually insured by a government body against bank failures. A Bitcoin’s value depends entirely on what investors are prepared to pay for it at a moment. Also, if a Bitcoin exchange folds up, Bitcoin balance customers don’t have any recourse to get them back.
Bitcoin Future Outlook
Bitcoin’s future perspective is the topic of much discussion. While the economic media is proliferated by so-called crypto-evangelists, Harvard University Professor of Economics and Public Policy Kenneth Rogoff indicates that the “overwhelming feeling” among crypto proponents is that complete “cryptocurrencies market capitalization could explode over the next five years, growing to $5-10[ trillion].”
The asset class’s historical volatility is “no reason for panic,” he claims. Nevertheless, he tempered his optimism and that of Bitcoin’s “crypto evangelist” perspective of digital gold, calling it “nutty,” saying that its long-term value is “more probable to be $100 than $100,000.” Rogoff claims that unlike physical gold, Bitcoin’s use is restricted to transactions, making it more susceptible to a bubble-like fall. In addition, the energy-intensive verification method of the cryptocurrency is “significantly less effective” than schemes relying on “a trusted central authority such as a central bank.”
The primary advantages of Bitcoin’s decentralization and transaction anonymity have also made it a favourite currency for a host of illegal operations including money laundering, drug peddling, smuggling, and procurement of guns. This attracted the attention of strong regulatory organizations and other government agencies such as the Financial Crimes Enforcement Network (FinCEN), the SEC, and even the FBI and DHS. FinCEN released regulations in March 2013 defining virtual currency exchanges and administrators as cash service enterprises, putting them within the scope of government regulation. The DHS froze an Mt. Gox account in May of that year–the biggest Bitcoin exchange–held at Wells Fargo, saying it broke anti-money laundering legislation. And in August, the Department of Financial Services in New York issued subpoenas to 22 emerging payment firms, many of whom handled Bitcoin, asking about their actions to avoid money laundering and protect consumers.
Alternatives to Bitcoin
Despite its recent issues, Bitcoin’s success and growing visibility since its launch has resulted in a number of companies unveiling alternative cryptocurrencies, such as:
- Litecoin Litecoin is currently considered the leading competitor of Bitcoin and is intended to process smaller transactions more quickly. It was founded in October 2011 as “a coin that is silver to the gold of Bitcoin,” according to founder Charles Lee. Unlike the heavy computer horsepower needed for Bitcoin mining, Litecoins can be mined by a normal desktop computer. The maximum limit of Litecoin is 84 million–four times the 21-million limit of Bitcoin–and it has a transaction processing time of about 2.5 minutes, about one-fourth of that of Bitcoin.
- Ripple – OpenCoin, a firm established in 2012 by technology entrepreneur Chris Larsen, introduced Ripple. Like Bitcoin, Ripple is both a payment system and a currency. The element of currency is XRP, which has a mathematical basis such as Bitcoin. Unlike Bitcoin transactions, which can take as long as 10 minutes to confirm, the payment mechanism allows the transfer of funds in any currency to another user on the Ripple network within seconds.
- MintChip – Unlike most cryptocurrencies, MintChip is, in fact, creating a government institution, the Royal Canadian Mint in particular. MintChip is an electronic value-holding smartcard that can safely pass it from one chip to another. Like Bitcoin, MintChip needs no private identification; unlike Bitcoin, the Canadian dollar is supported by a physical currency.
Some of the constraints currently facing cryptocurrencies–such as the reality that a computer crash can erase one’s digital fortune, or that a hacker can ransack a virtual vault–can be overcome in time by technological developments. What will be difficult to overcome is the basic paradox that covers cryptocurrencies–the more common they become, the more they are likely to attract regulation and public scrutiny that erodes the fundamental assumption for their existence.
While there has been a steady increase in the number of merchants who accept cryptocurrencies, they remain in the minority. To be used more commonly, cryptocurrencies must first achieve widespread recognition among customers. However, with the exception of the technologically skilled, their relative complexity compared to standard currencies will probably discourage most individuals.
A cryptocurrency aspiring to become component of the mainstream financial system may need to meet extensively divergent requirements. It would need to be mathematically complicated (to prevent fraud and hacker assaults) but simple to comprehend for customers; decentralized but with appropriate consumer protection and protection; and maintain user anonymity without being a conduit for tax evasion, money laundering and other nefarious operations. Since these are formidable criteria to meet, is it possible that in a few years ‘ time the most popular cryptocurrency could have attributes falling between heavily-regulated fiat currencies and the cryptocurrencies of today? While that chance looks remote, there is little doubt that Bitcoin’s achievement (or absence of it) in coping with the problems it faces can determine the fortunes of other cryptocurrencies in the years ahead as the leading cryptocurrency at the moment.
Legal Aspects and Issues Associated with Crypto-Currencies
Virtual currencies, depending on the nation, have different legal elements to consider. Some nations classify them as cash and legal, some classify them as assets and legal, while some nations like India do not classify them as illegal or legal, without legal frameworks. Bitcoin is produced illegally in nations like Bangladesh and Russia. Its status is somewhat complex in other nations. Cryptocurrencies are prohibited in some nations due to existing legislation, such as Iceland. However, cryptocurrencies in India, like many other countries, currently have no legal framework in place and are unregulated. Cryptocurrencies related legal issues are as follows,
- Decentralized nature: Unlike government-issued currencies (i.e. banknotes, coins, etc.) that are directly under the control of the issuing authority and derive their value from the promise of the issuing authority and stored gold, Cryptocurrencies are decentralized in nature, making it difficult for them to be regulated by the government.
- Absence of a well-defined legal framework: Most nations lack an adequate legal framework to regulate the value and flow of virtual currencies both inside and outside the nation, creating additional hurdles to regulate a decentralized currency.
- The volatility of Virtual Currencies: As can be seen from latest modifications in the value of most renowned cryptocurrency bitcoin, which in 2010 had a base value of $0.30 and in 2017 grew to nearly $4000, virtual currencies follow a volatile track of ups and downs that further bring market and economy instability.
- Independent Wallets: Wallets holding cryptocurrencies and engaged in transactions are established and managed by private companies that have no control over any organization owing to the lack of any binding international laws in place. They, therefore, have no liability for the loss of the customer as well as for any form of financial crime committed by and through the use of these wallets.
- Taxation: Taxation issue is one of the major cryptocurrencies issues. Because of their pseudo-anonymity, if properly used, they can readily be used by hiding the property for tax evasion purposes. Cryptocurrencies are often categorized as a taxable asset, for example in the United States. While bringing big amounts of foreign currency into a nation may de-stabilize its economy and may cause taxation problems, it also presents financial market volatility. Online path to take and store cryptocurrencies makes it simpler to get them across border checkpoints, where they can be cashed out when they are inside the nation, efficiently avoiding border taxes. Loopholes current in some countries ‘ legal and tax scheme allow an individual to use cryptocurrencies features such as anonymity and lack of or outdated or improperly enforced cryptocurrencies schemes.
- Money Laundering: Money laundering is typically taken into account when developing a country’s legal framework when discussing Cryptocurrency. But since its emergence, many countries are struggling through cryptocurrencies with problems related to money laundering. Due to the ease of their motion between nations with little or no oversight, money laundering is a main legal complication with such currencies. While organizations can monitor virtual currency purchased through banks, it becomes difficult when purchasing or selling the coins using money or other hard-to-trace techniques. Other safety provided in connection with trading in cryptocurrency are:
Spoofing and Phishing Payment Information
Like ordinary e-money, phishing attacks also affect cryptocurrency users because they can be redirected to a fake website that requires them to enter their crypto-wallets user I d and passwords. While transaction spoofing may be performed by an attacker when a user attempts to copy the wallet address for a transaction that is replaced by malware and the user is unaware of the changes as not everyone is watchful to double-check a long address copied by them.
Error in User Address
There is also a prospective loss danger when an error is made in the address of the recipient that can result in cash loss. For example, in the case of Ethereum, if some of the last digits of the recipient address are mistakenly entered, the money will disappear or be transferred to the exact address, but the intended value multiplied by 256 will be transacted.
Loss of a Wallet File
One of the cryptocurrencies ‘ significant issues is the loss or theft of local wallet documents due to hard disk crashes or other interruptions. So, a paper wallet is usually recommended to store local passwords or a hardware wallet backup.
Investing in cryptocurrency-funding can be achieved via Initial Coin Offering (ICO) through virtual currencies. Generally, an ICO is awarded to increase a lump sum of money through the purchase and sale of cryptocurrency that needs an Internet connection. Another obstacle when managing virtual currencies is the lack of a risk-free access system to control the cryptocurrency market to track down and de-anonymize a payee on the cryptocurrency market.
Payment Gateway Hacking
Hacking can be performed by convincing the hosting provider that they are the true domain owners and then the cash flows are intercepted. Many well-known financial services have fallen prey to hackers using such tactics.
Fraud at the Trading Exchange
With Bitcoin’s popularity and latest price increase, many potential platforms for exchange and trading are flourishing around the globe. These trade exchanges store in their local servers the public and private keys of all the wallets of their clients. If any, a trading exchange supplier will decide to run away with the cryptocurrencies of all their customers. Then there is not much that can be done against such offences owing to the absence of legislation and legal frameworks, which in turn puts all traders in a fragile position.
Precautionary Measures and Initiatives by Regulatory Authorities and Government Agencies
Virtual currencies ‘ legal status differs widely from nation to nation, and many of them are still undefined or undergoing modifications. While many nations do not illegalize the use of cryptocurrencies, their status as cash (or commodity) differs, with different legislative consequences. While some nations have explicitly permitted their use and trade, others have in any way limited or prohibited their use. Similarly, separate public organizations, departments, and courts differ on cryptocurrencies views. For instance, cryptocurrencies are unregulated in India, UK, Brazil, etc. because there is no legal framework yet in place, or their use has been deregulated and is free to use with no or minor legal constraints. While these are regulated in nations like France, Finland and Germany, use is legal but specifically regulated for tax or other purposes, and sometimes classified as cash. In some nations, the use of cryptocurrency is limited but legal in certain conditions, such as in China, people may be able to transact, while corporations and banks are unable to do so. It is illegal in Iceland to buy or sell bitcoins, but they can be mined. Nations like Russia, Bangladesh, and Ecuador have outright banned bitcoins. Recently CME Group Inc. in the U.S. has opened up a future exchange in bitcoins while SEBI, India has established a Financial and Regulatory Technology (CFRT) Committee to examine, deliberate and advise on cryptocurrencies issues. Reserve Bank of India also issued warnings about the volatile nature of cryptocurrencies to customers engaged in bitcoin trading. Below are some suggestions and precautions for cryptocurrency owners and crypto-investors,
- Always check the address of a Web wallet and prevent following suspect connections to a Web bank or Web wallet.
- Always double-check the address of the recipient, the amount entered, details of the transaction fees and other charges before the transaction.
- Recover expired account passwords and other details and maintain them secure and personal.
- Investment in cryptography is dangerous. Common procedures must, therefore, be followed while investing in unforeseen conditions such as diverse investment, provider reliability and a powerful mindset.
- It is advisable to use cryptocurrency wallets and paper wallets. Use excellent antivirus programs to safeguard pcs and devices that are used to access crypto-wallets, as well as other cryptocurrencies operations.
Most use of Virtual Currency worldwide is currently under a vacuum in terms of legality and controlled. Some nations have included it in their financial system, but some have totally prohibited it. If Virtual Currencies ‘ popularity rises further, it may be regulated by more and more nations, although it is not the case that many consider bans on it. With the increasing client base and the latest upsurge in the value of Bitcoin, which is one of the most popular virtual currency available, there are increasing hurdles such as the need for a legal framework and regulatory authority, awareness of wallet use, transaction processing as well as hazards associated with virtual currency transactions. Cryptocurrencies can, therefore, be said to have excellent potential for becoming a global currency. Even in nations where the courts prohibit its use, it is still a matter of restricting the use completely without internet censorship. Thus, it can be ascertained that the integration of Virtual Currencies into legal frameworks and the current financial system has enormous growth potential and advantages. Indian banking and finance are prepared to leverage transaction processing from the capacities of blockchain technology and distributed ledgers. There is likely to be more discussion about the legality and recognition of cryptocurrencies around digital currencies in the next few years. The key legal problems surrounding cryptocurrencies were discussed in this article and these are the primary concerns that nations need to consider when establishing Virtual Currencies legislation.
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