A burgeoning popularity of cryptocurrency
Widespread usage of the Internet has resulted in the emergence of various new technologies which have altered the way society functions, affecting both human relationships and commerce. In our previous article, we had discussed financial technology – also known as fintech. Recently, there has been a lot of news regarding cryptocurrencies, as well as initial coin/token offerings in the world of fundraising.
Many will be familiar with the first cryptocurrency, Bitcoin (BTC), which has a market cap of c.$283bn and sees 24h trading volumes of c.$14bn. Some may also be familiar with Bitcoin Cash (BCH), Ether (ETH), Ripple (XRP), and Litecoin (LTC) which complete the top 5 of cryptocurrencies by market cap. In the 9 years since the creation of Bitcoin, a total of 1349 cryptocurrencies have been created and the knowledge, awareness and use of cryptocurrencies has grown exponentially.
However, apart from the intense media speculation surrounding the phenomenal rise in price of Bitcoin, most of the public is still generally unaware of what exactly cryptocurrency is and the impact that it has and will have on individuals, governments and our global economy.
What is cryptocurrency?
Let’s first delve into what cryptocurrency is. Although cryptocurrencies are being termed as “investments” and an easy way to make profit, cryptocurrency is fundamentally an alternative means of payment as opposed to traditional fiat currency. The world’s most well-known cryptocurrency, Bitcoin, was conceptualised by programmer Satoshi Nakamoto so as to facilitate peer-to-peer transactions that would eliminate the need for a centralised, regulatory authority. Instead, these transactions would be recorded on the blockchain via a process called mining (we will discuss blockchain in a subsequent article). Other alternate cryptocurrencies have been largely based around this concept. However, every cryptocurrency has different properties, such as programming language, block time and specific purpose.
In light of the above, how would we then classify cryptocurrency? It is important to note that there is contention around this subject and as such, much disagreement. While it has been termed as a virtual currency by some (for e.g., YoStartUps), others have also called it a digital currency (for e.g., CoinDesk). Which is the correct definition?
A clear difference between Digital and Virtual Currencies
The above CoinDesk article posits an easy way to understand the difference: by placing the word ‘economy’ as a suffix.
- Digital economy: This would describe all businesses, people and services working in a digital manner. Whether these are businesses operating solely online, or app building services; each look to provide a digital offering at its core.
- Virtual economy: In comparison, the virtual economy is the ‘un-real’. Whether this is the micro-economies within Farmville, or communities in World of Warcraft.
Therefore, the difference between digital currencies and virtual currencies can be understood in a similar fashion: where digital currencies are a non-physical representation of traditional fiat money, virtual currencies represent a truly online asset which does not have value other than in its virtual world.
A notable example of virtual currency is Facebook credits, which is used for advertising and in-platform games. In this example, traditional fiat currency (in digital form) must be exchanged for the virtual currency and what is notable is that this is a one-way flow – there is no easy method to exchange your Facebook credits back to traditional fiat currency, or using Facebook credits to purchase a car. As such, the use and value of virtual currencies reside within the platform they have been created in. In comparison, digital currency is a digital representation of a physical asset e.g. money in your PayPal wallet, and the money in your bank’s online account which you use to purchase some Facebook credits.
Another key distinction is the level of centralisation and ownership. While digital currency is owned and controlled by central banks and governments, virtual currency is decentralised and can be created by any corporate e.g. Facebook, app makers, individuals, corporations, and thus falls under a bespoke set of creation and usage rules, outside of national fiscal policy.
Are cryptocurrencies considered digital or virtual currencies?
Generally, cryptocurrencies are neither digital nor virtual currencies and there is a difficulty with categorisation, as it holds similarities with both:
- Similar to virtual currency: (i) cryptocurrencies are not pegged or based on an underlying fiat asset; (ii) they are decentralised and not controlled or created by a central bank or government.
- However, like a digital currency, (i) they can be used to purchase real world goods. There are many merchants which accept Bitcoin as payment, for example, a list can be found here; and (ii) cryptocurrencies are not confined to a specific platform or application.
As such, this has made cryptocurrency difficult to regulate.
Cryptocurrency distinct from other forms of sovereign currency
As of the date of this article, we are not aware of any jurisdiction in which digital currency has status as legal tender or of any digital currency issued by a government’s central bank. A brief summary of cryptocurrency and its differences between traditional precious metals and fiat currency is set out below:
| Precious metals | Cryptocurrency | Fiat Currency |
|---|---|---|
| Created by computers | Issued by government | |
| High scarcity | Limited supply and has a set maximum | Unlimited supply and can be produced by the government when necessary |
| Physical medium of exchange | Digital medium of exchange | Physical medium of exchange |
| Manual | Presented by private and public pieces of code | Form of coins or paper money |
| Decentralised, able to be manipulated by market | Decentralised and not controlled by any entity or government | Centralised and controlled by the law and banks |
| The value is determined by market, supply and demand | The value is determined by supply and demand | The value is determined by markets and regulations |
What are the current regulations on cryptocurrency in the world?
The global cryptocurrency market has been growing steadily, although its lack of regulation and at times volatile swings in value are a cause for concern for both countries and investors. At the moment, the market is valued at USD 492 billion, with the biggest local market shares in Japan and United States.
A look at how Cryptocurrencies are regulated/treated globally
| Country | Classification | Taxation | Regulations/Anti-money laundering (AML)/Terrorist Funding | Regulatory Developments |
|---|---|---|---|---|
| Australia | Asset | Supply of BTC is not a financial supply for goods and services tax (GST). It is however, an asset for capital gains tax (CGT) purposes with respect to personal transactions. If one is in the business of mining, any income derived will form part of assessable income. | The Senate has indicated that they intend to strengthen the Anti-Money Laundering and Counter-Terrorism Financing Act. A recommended bill has been published by the Senate in October 2017. | Australia: Government plans to align GST treatment of cryptocurrencies with that of fiat currency Previously, consumers (i.e., for personal transactions) who used cryptocurrencies as payment would have been taxed twice – once for the purchase of cryptocurrency, and again when using it to purchase goods and services, subject to GST. However, new legislative amendments to the GST Act and GST Regulations, to be made official on 1 July 2018, ensure that the purchase of cryptocurrencies will no longer be subject to GST. As for businesses, if it receives BTC in return for goods and services, the business may be charged GST on the BTC. This signals a greater willingness to accept cryptocurrencies as a legitimate means of payment. In addition, Australian Parliament intends to regulate and monitor cryptocurrencies by revising the AML/CFT bill which will include bitcoin exchanges under the scope of Australian legislation for the first time. The bill will enable the Australian Transaction Reports and Analysis Centre (AUSTRAC) chief executive to “make rules to expand or narrow the scope of the digital currency definition.” Moreover, a number of civil penalties will be introduced for unregistered operators of digital currency exchange services, all of which are subject to strict liability. |
| China | Virtual commodity, legal for private use but illegal for commercial purposes | NA | All Bitcoin exchanges and Initial Coin Offerings (ICOs) were banned in China in September 2017. | China: Government shuts down all cryptocurrency exchanges, bans initial coin offerings The New York Times, citing data by blockchain analysis firm Chainalysis, reported in late June last year that 42 percent of all bitcoin transactions took place on Chinese exchanges in the first half of 2016. In an effort to crackdown on the potential fraudulent activities using bitcoin and the financial risks posed by the extreme volatility of cryptocurrencies, there was a nation-wide ban on Bitcoin exchanges and ICOs in September 2017 as the government officially requested that all trading and coin exchange platforms halt their services by the end of September. |
| Estonia | Decentralised virtual currency, alternative means of Payment. Not treated as financial instrument. | Profits from trading bitcoin as well as dividends obtained from the proceeds of an ICO are subjected to income tax. The European Court of Justice ruled that trading of cryptocurrencies be exempt from VAT in 2015. | Just last year, the government seemed to clamp down on Bitcoin trading activities. However, it appears that the government has since relaxed their policy on BTC. Digital currency exchanges are still subject to anti-money laundering supervision. | Estonia: First state to offer its own ICO? Estonia has had a tumultuous relationship with cryptocurrencies in the past, stating in 2015 that VAT should apply to the full amount of Bitcoin trades. Just last year, the Supreme Court of Estonia ruled in favour of restrictions on bitcoin trading activity in the wake of a lawsuit filed by a digital currency broker. However, since then, the government appears to have gradually embraced cryptocurrencies, recognising its potential benefits and usefulness to society in the future. In August this year, there were reports claiming that the Estonian government was considering launching its own cryptocurrency, called Estcoin, through an initial coin offering, which turned out to be false. While this may come as a disappointment to some, it is certainly possible that this idea might be brought up again in time to come. |
| Gibraltar | Virtual currency, method of payment | Gibraltar is known for being a low-tax regime, with no capital gains tax, sales tax or VAT. Corporate tax rate is 10% for net profits | Gibraltar has introduced a new regulatory framework for cryptocurrencies that will be implemented in January 2018. | Gibraltar: One of the first few nations to embrace cryptocurrencies With a strong track record in regulated e-commerce such as e-gaming, Gibraltar is taking the lead in promoting a stable crypto economy through proper regulation. Rather than introducing strict rules that would restrict cryptocurrency trades and ICOs, the regulations proposed by the government help to facilitate these activities while ensuring that cryptocurrencies are not used for illicit activities. The regulatory framework will be introduced as an amendment of the Gibraltarian Financial Services (Investment and Fiduciary Services) Act 1989, and will regulate the activities of Gibraltar-based companies that use Distributed Ledger Technology (DLT) for cryptocurrency exchanges. The framework aims to create a conducive environment for cryptocurrency exchanges to do business, with DLT service providers being provided a working license subject to these companies conforming to certain regulatory principles. These principles include honesty, integrity, the protection of customer assets and maintaining a high degree of cybersecurity. |
| Japan | Legal Method of payment | Exempt from consumption tax but subject to Capital gains tax | Virtual currency (VC) exchange must conduct KYC checks and report suspicious transactions to regulators. VC exchanges include shops which sell/purchase VC, operator of BTC ATM, operator of ICO, brokerage firm which intermediates sales/purchase of VC, or exchange in which its users can sell/purchase VC from other users. | Japan: A legal means of payment, but not considered legal tender In April of this year, the country implemented its new Virtual Currency Act, and with the approval of its Japan Financial Services Agency (JFSA), authorised the use of Bitcoin and Ethereum cryptocurrencies as legal payment. This Act amended the Payment Services Act to include virtual currencies as a type of payment instrument. However, it must be noted that while the Act exempts both Bitcoin and Ethereum from the 8% Japanese consumption tax as it would for its Yen, if does not go so far as to recognise them as legal tender. This means people are not legally obligated to accept the cryptocurrencies as payment for goods and services. Other amendments include the requirement for registration of virtual currency exchanges with the JFSA, i.e. they are now required to obtain licensing as a payment institution in Japan to operate their business. VC Exchanges are also required to conduct proper KYC checks on customers. Exchanges are also required to adhere to stricter regulations, including the requirement to hold a minimum liquid capital of JPY 10 million, implement a secure IT management program to prevent the hacking of funds and personal information, and submit to an annual audit by an auditing firm or certified public accountant.In addition, anti-money laundering compliance is mandatory. QUOINE Corporation was the first crypto company to receive an official licence from the JFSA on 29 Sept 2017 to operate QUOINEX, a cryptocurrency exchange, under the VCA. QUOINE worked closely with the Big Four audit and accounting companies, developing comprehensive AML countermeasures, internal audit, management systems, as well as communicating with the JFSA and Kanto Financial Bureau. JFSA has since issued 11 licences. In August this year, Japan accounted for up to 46% of the global Bitcoin market. |
| Malaysia | In a statement released in 2014, Bank Negara Malaysia (BNM) stated that the Bitcoin is not recognised as legal tender, and warns of the usage of such digital currency. | There has been a lack of comments regarding taxation on bitcoin and other cryptocurrencies given that BNM is still deliberating the status of cryptocurrency. | BNM has stated that it will decide by the end of 2017 on whether cryptocurrencies should be banned or regulated. | Malaysia: Development of a regulatory structure for cryptocurrencies Bank Negara Malaysia stated in 2014, that it does not view it as legal tender, warning the public of the financial risks involved when trading cryptocurrency and urging them to exercise caution. Apart from this, there has been a lack of clarification surrounding the legal status of cryptocurrency and whether it is subject to taxation until October this year, when Bank Negara Malaysia announced that it was considering a ban on cryptocurrency. In November 2017, BNM also announced that it will introduce cryptocurrency regulations and new banking rules in early 2018. Working together with the Securities Commission Malaysia, there will be "relevant regulations and guidelines" issued for functional use cases of digital assets. These include "secondary market trading of established cryptocurrency and digital assets" in the capital market. There is speculation that these regulations will make it mandatory for all cryptocurrencies’ conversions into cash to be reported as transactions under the anti-money laundering laws, effective January 2018. Digital currency conversion into cash will likely fall under the strict Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, to reduce the possibility of cryptocurrency being used for fraudulent activities or to finance terrorism. |
| Russia | Asset, not a form of legal tender. | Plans to tax crypto miners | While there have been numerous reports of a ban on cryptocurrency exchanges, regulations are most likely to be passed after Putin approved a list of instructions in the follow-up to the 10 October 2017 meeting on using digital technology in Russia. | Russia: Confusion regarding the status of cryptocurrency Russia’s views towards cryptocurrency and its uses may seem polarising to many. On the one hand, there have been reports stating that Russia will “block access to websites belonging to exchanges and trading platforms offering cryptocurrencies like Bitcoin”. This view seemed to have been support by Putin, commenting that cryptocurrencies could be used to launder money, evade taxes and finance terrorism. On the other hand, statements have been made by Russia’s finance minister Anton Siluanov, who indicated that cryptocurrencies should be regulated due to the reality that cryptocurrencies are beginning to permeate society. The confusion seems to have been cleared up after a report released on the 21st October 2017 by the Kremlin stated that Putin has ordered for the amendment of Russian laws to address the requirements for blockchain cryptography processes and production as well as to regulate public fund-raising and crypto-currency. With this, it is likely that Russia will continue to support the field of cryptocurrency, albeit cryptocurrencies being subjected to stricter guidelines. |
| Singapore | IRAS treats it as goods/asset | Entities dealing with cryptocurrency must conduct KYC requirements and report suspicious transactions to regulators. | Singapore: Not yet regulated Singapore has not imposed direct regulations on the use of cryptocurrencies as it does not consider them to be securities or legal tender. However, the Inland Revenue Authority of Singapore (IRAS) has set out guidelines on the taxation of profits derived from the trade of virtual currencies: • Where businesses accept virtual currencies as payment for their goods and services, such sales should be recorded according to the open market value of their goods and services in Singapore dollars. • Where the open market value of their goods and services cannot be determined in Singapore dollars, the sale can be recorded based on the virtual currency exchange rate at the point of the transaction. • Businesses will be taxed on their profits gained from trading in the virtual currency. • Where businesses buy virtual currencies for the purposes of long-term investment, profits will be treated as capital gains and are therefore non-taxable. Initially, the Monetary Authority of Singapore (MAS) took the stance that it would not regulate the use of Bitcoins as payment for goods and services, stating in 2013 that it was ‘a commercial decision in which MAS does not intervene’. However, due to concerns over money laundering and terrorist financing, in 2014 MAS stated that it is working on regulations to govern virtual currency intermediaries in Singapore, as of now yet to be released. On 13 March 2014, MAS’ media release clarified that MAS’ while virtual currencies per se were not regulated, intermediaries in virtual currencies would be regulated for Money Laundering/Terrorism Financing risks, as well as financial activities that fall within the purview of MAS, such as ICOs and potential money laundering or terrorism financing schemes. This position has been reinforced in MAS’s release on 1 August 2017 clarifying the regulatory position on the offer of digital tokens in Singapore. We will discuss the regulation of digital tokens that do not function solely as virtual currencies and initial coin offerings in the next article. However, in the Consultation Paper on the proposed Payment Services Bill released by MAS in November 2017, MAS has listed the ‘buying or selling of virtual currency, or providing a platform to allow persons to exchange virtual currency in Singapore” as a regulated activity under the Bill, which would mean that virtual currency exchanges that meet the funds possession criteria will need to hold a payment services licence. MAS will also introduce anti money-laundering and terrorism financing regulations to be imposed on virtual currency exchanges. These include exchanges that originate from initial coin offerings (“ICOs”), where the ICO issuer provides virtual currency services”. As such, it is likely that there will be regulations imposed on intermediaries dealing with cryptocurrencies, rather than on the cryptocurrencies as a whole. However, there are exemptions from these regulations for certain types of payment activities that pose less risk. One example is limited purpose virtual currency, such as in-game assets and loyalty points. Such forms of virtual currency, as mention previously in this article, only have use and value within the platform they are created in. As such, they are limited in user reach and scope of use, and do not need to be regulated. Online marketplaces and social media platforms that provide information on cryptocurrency will also not be subject to these regulations. |
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| South Korea | Financial Services Commission (FSC) vice-chairman has stated that digital currencies cannot be considered money or currency, nor financial products. | The National Tax Service (NTS) plans to impose income tax and transfer income tax on cryptocurrencies, as of the government’s efforts to regulate the usage and trading of cryptocurrencies. | South Korea imposed a ban on initial coin offerings (ICOs) at the end of September this year. However, there are plans to introduce a legal framework to help “curtail money laundering and tax dodging” | South Korea: Authorities intend to regulate cryptocurrency exchanges and ICOs Following China’s decision to ban all cryptocurrency exchanges and ICOs, South Korea’s Virtual Currency Task released a statement signaling its desire to impose a blanket ban on all ICOs. South Korea has taken a stricter stance regarding the regulations of cryptocurrencies in the past few months, with authorities monitoring developments in cryptocurrencies and plans to introduce legal frameworks to ensure that cryptocurrencies are not used for the purposes of money laundering or tax evasion. While many media outlets have reported that ICOs are already officially banned in South Korea, this is not the case. For a ban on all ICOs to take effect, new legislation must be passed. In December, South Korean authorities provided more insight into proposed regulations for cryptocurrency exchanges as well as activities that involve the use of cryptocurrency. According to various news reports released last week, the South Korean government intends to submit a bill to the National Assembly that will amend current laws to include provisions for cryptocurrency transactions. In recognising that cryptocurrency transactions are already taking place in high volume, the regulators have made provisions to allow crypto exchanges to operate legally. There will be six conditions to be met, along with additional conditions from a Presidential Decree. These six conditions are as follows: 1. Customers’ funds must be kept separately. 2. Exchanges must provide users with thorough explanations of investment risks 3. Exchanges must confirm users’ real names. 4. An adequate anti-money laundering system must be established 5. Exchanges must also have an asset protection system such as dispersion of cryptographic keys 6. Exchanges must increase transparency by disclosing transaction details to the public. The bill will also regulate activities that use cryptocurrencies to: 1. Raise funds 2. Procure other cryptocurrencies 3. Give credit 4. Manipulate prices and to use with multi-level and door-to-door sales. Among other measures, there will be a ban on banks, minors, and foreigners trading cryptocurrency as well as a clampdown on virtual bank accounts needed to trade cryptocurrencies in Korea. Furthermore, the Virtual Currency Task Force will now be led by the Ministry of Justice, taking over from the Financial Services Commission. |
| Switzerland | Legal method of payment, asset | Corporate companies generally enjoy low tax rates. There is no VAT and no capital gains tax. | Switzerland is one of the more progressive nations with regards to the regulation of Bitcoin. | Switzerland: Promoting the use of cryptocurrencies in more mainstream markets With its various municipalities well known for accepting Bitcoin payments for public services, Switzerland views cryptocurrencies and other related Digital Ledger Technologies as the future for its economy. This can be observed when financial regulators approved Falcon Private Bank and online trading platform SwissQuote to offer Bitcoin investments to clients in July this year. Its introduction into established Swiss financial systems is a signal of gradual acceptance of Bitcoin and the significant role that it will play in efforts to embrace digital technologies. Moreover, Swiss-based associate Crypto Valley has also announced its support for an “ICO Code of Conduct”, laying the foundation for potential self-governance models for the ICO industry. Rather than banning ICOs, the non-profit organisation stated the need for clear and flexible regulation that clarifies the legal status of ICOs and coin tokens. |
| United Kingdom | Asset or private money | Exempt from VAT but Capital gains tax is applied | Treasury report suggested to bring virtual currency under ambit of AML regulation | U.K.: Treasury announces intention to introduce stricter regulations While taxation on Bitcoin trading in the form of capital gains tax already applies in the U.K., the U.K. Treasury stated in late October this year that the “UK government is currently negotiating amendments to the 4th Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas… We expect these negotiations to conclude at EU level in late 2017/early 2018”. While the U.K. has not actively regulated cryptocurrency trades and ICOs apart from taxation, this is a signal of intent to ensure that cryptocurrency will not be used for fraudulent activities. |
| United States | Property/Asset. The Commodity Futures Trading Commission (CFTC) asserted in September 2015 that BTC will be classed as a commodity in the U.S. along with gold and oil. | New York – Capital gain is applied. Sales tax is not applicable. | Requirements as applicable on money services businesses. | United States: Bitcoin regulations being passed in various U.S. states According to The Columbia Science and Technology Law Review, the regulatory responses to cryptocurrencies and other digital ledger technologies range from excitement to suspicion to indifference in the various states. In an analysis by Business Insider, the law review details that the U.S. federal government has not exercised its constitutional preemptive power to regulate blockchain to the exclusion of states. As such, the states remain free to introduce their own rules and regulations. For example, New York became the first state to regulate cryptocurrency companies through state agency rulemaking in June 2015 and “at least eight U.S. States have worked on bills accepting or promoting the use of Bitcoin and blockchain technology, while a couple of them have already passed them into law.” Moreover, cryptocurrencies are also making its way into Wall Street. In July 2017, New York-based startup LedgerX, a bitcoin options exchange, was granted the first derivatives clearing organization licence for digital currencies, allowing it to clear and custody financial instruments backed by bitcoin, ether and any number of blockchain-based cryptocurrencies. |
Why are some countries regulating cryptocurrencies more than others?
Evidently, there seems to be a polarising view regarding how cryptocurrencies and ICOs should be regulated. While certain governments such as Russia, China, and many other jurisdictions have moved to ban cryptocurrency exchanges and ICOs, other jurisdictions such as Gibraltar and Japan are moving towards embracing cryptocurrencies. In order to mitigate the risks commonly associated with Bitcoin and other alternate cryptocurrencies, these jurisdictions are beginning to introduce reasonable guidelines and regulations that facilitate rather than hinder cryptocurrency transactions.
Two main concerns
Jurisdictions that have pushed for stricter controls and regulations are mainly concerned with two main issues:
#1 – Cryptocurrencies can be used to carry out fraudulent activities as well as fund terrorism
Due to the decentralised and pseudo anonymous nature of cryptocurrencies, criminal groups are able to launder funds through trading operations, bypass capital controls across borders without revealing their true identities. Apart from money laundering, a host of other financial crimes have been linked to bitcoin, such as scams, dubious loans, trusts and tax evasion. This was highlighted in a joint decree from Chinese state officials explaining why China moved to ban the trading of cryptocurrencies and ICOs.”
Another growing concern for authorities is the possibility for terrorist groups to use bitcoin for financing, as well as accessing the dark web to buy illicit weapons using bitcoin. An article by CipherBrief outlined the dangers that bitcoin poses when used for the wrong intentions, stating that several terrorist groups have asked for donations in bitcoin. The article states “the Ibn Taymiyya Media Center, an online jihadist media unit based in the Gaza Strip, attempted a social media fundraising campaign by asking for donations in bitcoin. Indonesia has said members of the local ISIS-affiliated militants have conducted transactions with individuals in Syria in bitcoin and through PayPal”. These examples demonstrate how terrorist groups are beginning to experiment with digital ledger technology which might expedite the process of fundraising along with ensuring anonymity.
#2 – The volatile nature of cryptocurrencies due to decentralisation may threaten to destabilise existing market structures and fiat currency rates
The speculative and volatile nature of cryptocurrencies may threaten the stability of the global economy and financial markets should the price of Bitcoin collapse. Cryptocurrencies are solely motivated by market forces – demand and supply and lack any sort of centralised control. Already, economists are labelling the price of Bitcoin as an economic bubble that is bound to burst. Since the start of the year, Bitcoin has achieved the incredible feat of increasing more than 1,000 per cent in value, with its current price past the US$15,000 mark per Bitcoin. As of now, the market cap of Bitcoin has hit dazzling heights of $190 billion, and with the rising number of cryptocurrency users, any sort of collapse might spell trouble for economies and individuals all over the world. The effects of a bitcoin collapse may spill over to a wide range of markets and financial infrastructures, especially stock exchanges and banks which engage in cryptocurrency related activities.
Moreover, in developing economies such as Venezuela where hyperinflation is a pertinent problem, locals are turning to the mining of Bitcoin as a means to continue paying for basic commodities. In an IMF report last year, it was mentioned that cryptocurrencies are used to circumvent exchange and capital controls in China, Cyprus, Greece, and Venezuela. In these countries, cryptocurrencies are an attractive proposition and allows for capital flight, making it exponentially harder for governments to stabilise the domestic economy and currency.
What does all this mean for users in Singapore?
At the present moment, the majority of countries do not regulate cryptocurrencies and the legal status of such currencies are not clearly defined. While there is an increasing number of jurisdictions which are planning to introduce guidelines and restrictions, they are generally aimed at promoting a more conducive and regulated environment to ensure that the trading of cryptocurrency is transparent and legal. In terms of the usage of cryptocurrency, there are already several companies and online services that accept payment in Bitcoin and other alternative cryptocurrencies. A list of Singapore retailers that accept Bitcoin both online and offline can be accessed here. Despite, the future of Bitcoin being unpredictable and highly speculative in nature, there are many international retailors which also accept payment in Bitcoin and the list will continue to grow as the usage of Bitcoin and other currencies become more widespread.
There are a number of enclaves in the world that are working towards becoming a fully crypto economy
#1 – Zug and Chiasso, Switzerland
Switzerland is known for being one of the more progressive and open countries with regards to cryptocurrencies and the municipalities Zug and Chiasso embody this perfectly. Zug, Switzerland is known as the “Cryptovalley” due to the municipality allowing citizens to pay for public services using Bitcoin. Combined with the fact that Zug has one of the lowest corporate tax rates in Switzerland, this has become an attractive destination for Fintech and cryptocurrency exchanges who are looking to set up their business in a new environment. Likewise, the municipality of Chiasso, Switzerland has also highlighted its openness to new technologies by accepting tax payments in Bitcoin. Known as the “Cryptopolis”, the Mayor, Bruno Arrigoni, states that Chiasso is “recognised internationally as an epicentre of a growing technological and economic growth for both the canton and in Switzerland.” Evidently, both Zug and Chiasso are excellent examples of what a crypto economy looks like, helping to pioneer a new technological age that no longer depends on the usage of traditional fiat currency.
#2 – Bitcoin in Africa
Africa has long been a continent plagued by inflation, bureaucracy and corruption. This makes Bitcoin, a decentralised currency free from any government control an exciting proposition for many countries in Africa. In Zimbabwe, the country’s economic crisis and hyperinflation in 2008 led to massive saving losses. As such this has resulted in a growing number of Zimbabweans using Bitcoin as a saving mechanism to avoid a similar outcome in the future.
In Nigeria, currency controls have led to families remitting money back to Nigeria in Bitcoins. The authorities in Nigeria pegged the Naira at an artificially strong rate of 200 Naira to 1 USD in 2015. By remitting money back in the form of Bitcoin, the exchange rates are significantly better, and families are able to exchange their Bitcoin for more Naira as compared to exchanging USD for Naira. Bitcoin allows Nigerians to bypass currency controls which have caused them many problems in the past. In a recent blockchain conference held in Lagos in October this year, the Central Bank indicated its approval for the usage of Bitcoin, helping to cement the cryptocurrency’s importance in the Nigerian economy.
#3 – Rising uptake by financial institutions
In a report by Barron’s Asia, stock exchanges and banks are starting to introduce Bitcoin futures and options while hedge funds and venture capitalists are investing in new coins. The follow examples help illustrate just how much influence Bitcoins and alternative cryptocurrencies might have on global financial structures and markets:
- The first U.S. Bitcoin futures are now available for trading on the CBOE (Chicago Board Options Exchange)
- Nasdaq is planning to offer its own futures next year, while Cantor Fitzgerald will introduce a Bitcoin options product
- With regards to ICOs, there being no clear regulation that helps distinguish securities from crowdfunding projects. Notwithstanding this, there has been a spike in interest in ICOs, with around $3.6 billion invested by speculators, hedge funds and venture capitalists in such coin offerings compared to just $96 million last year
- Accounting and consultancy firm, PwC, became the first “Big Four” firm to accept Bitcoin payments from clients. Accounting firms such as PwC and Ernst Young have shown greater interest in Bitcoins compared to their bank counterparts, with EY joining the Bitcoin Association, a Switzerland-based advocacy group in May this year.
Conclusion
Admittedly, while the trading of cryptocurrencies in mainstream financial sectors and markets are still at an infancy stage, there is clear evidence of the potential that cryptocurrencies and blockchain technologies offer. There is already increasing adoption by users, financial institutions and countries alike. In relation to cryptocurrencies being recognised as legal tender, its current volatility and illicit usage may detract countries from embracing it completely. This might change in a few years’ time, when there is a greater understanding of digital ledger technologies and its implications on society.
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This article is written by Yeong WanHsi of Arrowgates LLC and edited by Gabriel The of Asia Law Network.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
