CRYPTOCURRENCY That transaction gets submitted to a public ledger

CRYPTOCURRENCY

 

 

We
live in a world that has been permanently changed by the internet. This new
technology changed the way in which people interact and perform commercial
transactions. Taking this scenario into consideration, we bring forth a new
technology that innovated how payments systems work: the Cryptocurrency. This
technology made it possible to perform international transactions with a very
low operational cost, but it also imposes a series of regulation related challenges
since this system is not governed by any kind of governmental agency, whereas
its users are the sole responsible for its operation. Some countries have
issued information and regulation on the use of cryptocurrencies, but these
initiatives, most of the time, do not provide definitive answers regarding how
this instrument should be treated and how companies interested in their use
should do so. Thus, given the scenario that was described above, this paper
aims to indicate how the international trans-governmental institutions may help
to uniformize the commerce practices associated with the use of
cryptocurrencies.

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 cryptocurrency (or crypto
currency) is a digital asset designed to
work as a medium of exchange that
uses cryptography to secure
its transactions, to control the creation of additional units, and to verify
the transfer of assets.Cryptocurrency is an encrypted decentralized digital
currency transferred between peers and confirmed in a public ledger via a
process known as mining.

The Cryptocurrency
Basics

Public
Ledgers: All confirmed transactions from the start of a cryptocurrency’s
creation are stored in a public ledger. The identities of the coin owners are
encrypted, and the system uses other cryptographic techniques to ensure
the legitimacy of record keeping. The ledger ensures that corresponding
“digital wallets” can calculate an accurate spendable balance. Also, new
transactions can be checked to ensure that each transaction
uses only coins currently owned by the spender. Bitcoin calls
this public ledger a “transaction block chain.”

Transactions:
A transfer of funds between two digital wallets is called a transaction. That
transaction gets submitted to a public ledger and awaits confirmation. When a
transaction is made, wallets use an encrypted electronic signature (an
encrypted piece of data called a cryptographic signature) to provide a
mathematical proof that the transaction is coming from the owner of the
wallet. The confirmation process takes a bit of time (ten minutes for bitcoin)
while “miners” mine. Mining confirms the transactions and adds them to the
public ledger.

Mining:
Quite simply, mining is the process of confirming
transactions and
adding them to a public ledger. To add a transaction to the ledger, the “miner”
must solve an increasingly-complex computational problem (like a
mathematical puzzle). Mining is open source so that anyone can confirm the transaction.
The first “miner” to solve the puzzle adds a “block” of transactions
to the ledger. The way in which transactions, blocks, and the public
blockchain ledger work together ensure that no one individual can easily add or
change a block at will. Once a block is added to the ledger, all
correlating transactions are permanent and they add a small transaction
fee to the miner’s wallet (along with newly created coins). The mining
process is what gives value to the coins and is known as a proof-of-work system.

BITCOIN IN INDIA

Although
the RBI advises caution on its use, bitcoin is not illegal in India.
Cryptocurrency exchanges operate freely and hence we can say that bitcoin is
legal.

Last
week, income tax department surveyed the major bitcoin exchanges in India. The
survey reports said, this was done to collect information about transactions
and check whether there was a risk of tax evasion. This week, it was reported
that the income tax department is set to issue notices to about 5,00,000 high
net worth individuals trading on the exchange across India. This comes at a
time when there are still no clear regulations on cryptocurrencies and bitcoin
exchanges.

 

Although
the Reserve Bank of India (RBI) advises caution on its use, bitcoin is not
illegal in India. Cryptocurrency exchanges operate freely and hence we can say
that bitcoin is legal. So, if it is a legal entity, why is there silence on its
regulation? Also, who is responsible for regulating it?

 

The
RBI has so far issued three notifications pertaining to bitcoin and other
virtual currencies (VC). In all these, starting December 2013, the RBI has
cautioned users, holders and traders on the risk of these currencies and
clarified that it has not given any licence or authorisation to any entity or
company to operate such schemes or deals . In a December 2013 notification, the
RBI said, “The creation, trading or usage of VCs including Bitcoins, as a
medium for payment are not authorised by any central bank or monetary
authority. No regulatory approvals, registration or authorisation is stated to
have been obtained by the entities concerned for carrying on such activities.”
Other than cautioning the public, the RBI hasn’t taken any regulatory stance on
virtual currencies yet.

 

After
repeated cautionary circulars from the apex bank, in April 2017 the government
set up an inter-disciplinary committee—chaired by special secretary (economic
affairs)—to examine the existing framework of virtual currencies. The committee
was supposed to submit its report within 3 months. The committee was set up to
take stock of the present status of virtual currencies both in India and
globally, examine the existing global regulatory and legal structures governing
virtual currencies, suggest measures for dealing with such virtual currencies
including issues relating to consumer protection, money laundering and examine
any other matter related to virtual currencies that may be relevant. In
December 2017, finance minister Arun Jaitley told the media that the government
doesn’t consider bitcoin as a legal tender and it is working on recommendations
for such currencies.

 

Meanwhile,
Securities Exchange Board of India (Sebi) on 20 December said that if bitcoin
is considered as a commodity derivative then Sebi might regulate it. In
countries such as the US, the Sebi-equivalent regulatory body is looking into
cryptocurrenices. Experts say, considering cryptocurrencies are looked at as a
commodity, Sebi should look at regulating them.

 

REGULATION AND
UNIFORMIZATION OF PRACTICES

 

Since
there are no norms regarding the use of Cryptocurrencies in international
trade, it is important that countries and international institutions expose
their opinions and thoughts on the matter so that the this new approach to
international payment can be used by people and companies.

The
creator of the Bitcoin system (Nakamoto, 2009) argues that the financial system
based on trust in economic agents is too fragile, exposing society as a whole
to the risks inherent in such an environment, thus, the cryptocurrency was
created in order to achieve a very clear goal:

To
promote disintermediation in the execution of commercial transactions on the
Internet (implementation of a monetary freedom), that is, to make it possible
for sellers and buyers to carry out their transactions independently, without
needing financial institutions, in a safe and fast way.

 The intermediation of transactions has the
following characteristics

“(A)
the activity of giving and receiving financial resources whereas the
intermediary acts as creditor and debtor of both parties at the ends of the
operation that is taking place; and (B) mandatory participation in the chain;
and (C) such operations must be carried out constantly; and 7 (D)
Professionalism in carrying out such operations.” Many types of entities may
develop the role of financial intermediary, such as credit institutions
(commercial banks, leasing companies, among others), brokerage firms and
securities distributors and even qualified investors .

 Financial disintermediation breaks with all of
the assumptions described above, but it generates the same effects since it
enables financial assets to be exchanged for goods and services without the
interference of the aforementioned institutions. Thus, based on the scenario
described above, the Cryptocurrency performs the same function as the
instruments normally used to facilitate trading in the modern world. The impact
generated by this new technology comes from the fact that virtual currency
meets the needs of modern commerce without having to be part of the banking
network.

Although
the primary objectives of the cryptocurrency involved the disintermediation of
transactions, many companies currently make use of the new technology as
intermediaries or fiduciary agents. However, these companies offer their
services at a very competitive rate, which tends to be much lower than those
practices by the banking system.

Cryptocurrencies
pose a number of challenges to national and international regulatory bodies for
a variety of reasons, many of which are 8 inherent to its issuance and means of
operation. After all, how can one cope efficiently with a self-managed system
that emits units of value independently while acting as both a means of payment
and a means of custody? Each of these functions is currently performed
independently by private or public entities in today’s society and this new
technology has broken with all the previously presented paradigms, forcing us
to view our institutions from a completely different perspective.

As
it is almost impossible to combat this new system given the large investments
in infrastructure, time and personnel needed to do so (besides the need for
intense international joint action in this regard) and the fact that the use
and acceptance of cryptocurrency in the market grows every year , regulation
and uniformization o practices are the best way to protect the economic and
financial order, in addition to opening new choices to the market.

However,
before determining which regulatory strategy is appropriate, we should check
what kind of market will be regulated as such matter has been addressed in
other jurisdictions.

 The study of cryptocurrency payment
arrangements developed by the European Financial and Administrative Authority
may help us this time as it offers a way to classify the payment arrangements
involving cryptocurrencies, taking into account the interaction between them
and the global economy. The study divides the possible types of operations
taking into account the payment flows to be effected by those involved, that
is, the classification takes into account the use or not of traditional
currency and cryptocurrency, in isolation or jointly.

 Based on this type of thinking, we arrive at
three types of payment arrangements: Closed Arrangements, Unidirectional Flow
Arrangements and Arrangements with Bidirectional Flow. The closed arrangements
do not have any kind of connection between the global economy and the economies
that revolve around Cryptocurrency. Thus, in this case, the cryptocurrencies
are exchanged with cryptocurrencies, there being no use of traditional currency
involved in the transaction. Such a situation can be found in online computer
games in which ingame currency is not accepted by market participants but can
be used by players to purchase goods and services in the game.

This
type of arrangement, which focuses on a specific virtual community, is not
relevant from the point of view of regulation or legislative activity rather
than a simple online world interaction that does not affect the global economy
(it affects, at most, the economic interactions within the closed system
itself), therefore, can be excluded from the scope of the present work. In
arrangements with Unidirectional Flow the Cryptocurrency can be transformed
into money, however, the opposite cannot occur.

We
may find this situation when one buys some form of credit that can only be
accepted in one place and cannot be turned into money again, just like Facebook
Credits sold by Facebook in 2009 that could be used to purchase products and
services within the social network but could not be reversed in the amount
originally paid in cash. Again, such a payment arrangement does not have a
great need for regulation insofar as it is not endowed with liquidity, a
characteristic necessary in order to affect global economy.

In
the Bidirectional Flow Arrangements, the cryptocurrency could be converted
freely into cash and vice versa, without any kind of hindrance in the performance
of such activity. In this case, virtual currencies can be effectively used to
buy and sell goods and services. This is the case that deserves the attention
of regulators, self regulators insofar it can generate effective impact in the
global economy. Thus, regimes that are open and / or linked to the global
economy (Unidirectional and Bidirectional Payment Arrangements), which
effectively generate economic impacts, make the regulation of such situations
within the competence States and, in a subsidiary way, by international and
local entities, particularly if bilateral exchange rates create the opportunity
for speculative behaviour, and / or if any cryptocurrency is used to buy real
goods and services, competing against traditional currencies. In order to avoid
any kind of abuse by participants in the cryptocurrency market and to take full
advantage of the positive effects generated by this new technology, the State
must issue regulations on the subject, even so that the negative effects of the
use of this type can cause in the economy and international institutions, as
representatives of the interests of the sates, particularly those interested in
the modernization and harmonization 10 of rules on international business, must
act in order to protect both the integrity of the economy and the market
participants. It should be noted that banking and financial activity, which in
many ways resemble activities carried out by participants in the
crypto-currency market, have always been subject to specific regulation.

Thus,
once a technology capable of fulfilling many of the functions performed by the
traditional financial system is created, which has always been subject to
extensive regulation, there is no reason for the State and international
institutions to refrain from trying to understand and regulate these new
situations. In order to avoid that the operators of the cryptocurrency markets
perform transactions to Blue Chip SWAP, operations that do not bring any
benefit to the national economy, regulation and uniformization of practices
must take place.