Challenges in regulating crypto currencies like bitcoin

Editorial Analysis - Challenges in regulating Cryptocurrencies like bitcoin

Context :-

  • A statement by the ministry of finance on cryptocurrencies warned investors to “stay away from such Ponzi schemes” as there is a “heightened risk of investment bubble of the type seen in Ponzi schemes”.
  • Countries across the world are grappling with the choice of an optimal regulatory framework in this field.
  • Any regulatory framework in this field requires a comprehensive understanding of the functioning and structure of cryptocurrencies.

Difference between Virtual Currencies & Electronic Money :-

  • While electronic money is legal tender that can be stored on a chip, VCs are a form of money or currency which does not derive its value from any sovereign authority, but by its technology.
  • Cryptocurrency relies on principles of cryptography to implement a decentralized peer-to-peer ledger.

About Virtual Currencies like bitcoin :-

  • The key ideas that underpin bitcoin have been elaborated upon in its creator, Satoshi Nakamoto’s 2008 white paper, where bitcoin was introduced as an electronic, peer-to-peer, fully decentralized cash system, which does away with the need for a centralized entity.

Transactions system :-

  • Validity of a transaction is arrived at through solving a computationally challenging exercise based on a cryptographic hash (known as proof of work), any malformed transaction is rejected by the participants (or miners) who keep working on finding the next valid block, after the successful completion of which they are rewarded with a transaction fee and a newly issued unit of currency.
  • Transactions in this network are identified by public-private keypairs—a string of letters and numbers used to protect messages cryptographically.

Concerns among Cryptocurrency :-

  • Consumer protection
  • Money laundering
  • Financing of criminal activities.
  • By design, cryptocurrencies allow anonymous funding potentially acting as conduits for money laundering and terror financing.
  • The consumer protection, in particular retail consumer protection concerns, stem from their volatile nature.

Regulatory Jurisdiction Issues :-

  • There is no physical existence of money in the forms of notes, or cash, or gold bars. As a result, regulatory jurisdiction becomes complicated.
  • One might argue that the location of the public-private keypair, the pseudonym identifying the transaction, could serve as a basis for regulation. However, not only is such a key non-existent physically, it could further be split into multiple components and spread across the globe, physically and electronically.
  • Unless there is a robust de-anonymization framework, identifying the individual will not be easy, especially with the prevalence of remote servers.
  • The most centralized channel to control the transactions and speculation would be to control the exchanges. Many exchanges in India and other countries follow “know your customer” and other regulatory mandates, which grants the investors significant protection while maintaining their privacy.
  • While the location of exchanges simplifies the question of jurisdiction, possibilities exist where an individual transfers coins from their private wallet.
  • The determination of location has important implications for cross-border payments’ purposes.

Taxation Issues & Laws :-

  • Taxation-related issues also become more complex.
  • The Internal Revenue Service in the US treats crypto-currencies as “property”, hence making them applicable to capital-gains tax, while bitcoin mining is subject to self-employment tax regulations.
  • The recent legislation in South Korea subjects income from crypto-currency trading to capital taxation rules.
  • If the public-private keypair is stored at one location, then the tax jurisdiction is clear but If the key is split into multiple parts and stored at different locations, the applicable tax would need to be reconciled with the taxation laws of all these locations.

Block-chain :-

  • While the ability to mask identities while performing transactions in cryptocurrencies has led to suspicion. The reassuring part emerges from the underlying technology of cryptocurrencies itself—blockchain.
  • The fundamental difference between pseudonymity and anonymity is worth reiterating. The public-private keypair assures that the transaction leaves traces on every node (or system) which stores the blockchain, and can be linked to real-world identities using transaction-graph analysis.

Conclusion :- An active effort in linking research to policy making to better understand the implications of cryptocurrencies and its underlying technologies would be favourable.

(Source : LiveMint & Ideas of Radhika Pandey & Bhavyaa Sharma)

Leave a Reply