CRYPTOCURRENCY Welive in a world that has been permanently changed by the internet. This newtechnology changed the way in which people interact and perform commercialtransactions.
Taking this scenario into consideration, we bring forth a newtechnology that innovated how payments systems work: the Cryptocurrency. Thistechnology made it possible to perform international transactions with a verylow operational cost, but it also imposes a series of regulation related challengessince this system is not governed by any kind of governmental agency, whereasits users are the sole responsible for its operation. Some countries haveissued information and regulation on the use of cryptocurrencies, but theseinitiatives, most of the time, do not provide definitive answers regarding howthis instrument should be treated and how companies interested in their useshould do so. Thus, given the scenario that was described above, this paperaims to indicate how the international trans-governmental institutions may helpto uniformize the commerce practices associated with the use ofcryptocurrencies.
cryptocurrency (or cryptocurrency) is a digital asset designed towork as a medium of exchange thatuses cryptography to secureits transactions, to control the creation of additional units, and to verifythe transfer of assets.Cryptocurrency is an encrypted decentralized digitalcurrency transferred between peers and confirmed in a public ledger via aprocess known as mining.The CryptocurrencyBasicsPublicLedgers: All confirmed transactions from the start of a cryptocurrency’screation are stored in a public ledger. The identities of the coin owners areencrypted, and the system uses other cryptographic techniques to ensurethe legitimacy of record keeping. The ledger ensures that corresponding”digital wallets” can calculate an accurate spendable balance. Also, newtransactions can be checked to ensure that each transactionuses only coins currently owned by the spender. Bitcoin callsthis public ledger a “transaction block chain.
“Transactions:A transfer of funds between two digital wallets is called a transaction. Thattransaction gets submitted to a public ledger and awaits confirmation. When atransaction is made, wallets use an encrypted electronic signature (anencrypted piece of data called a cryptographic signature) to provide amathematical proof that the transaction is coming from the owner of thewallet.
The confirmation process takes a bit of time (ten minutes for bitcoin)while “miners” mine. Mining confirms the transactions and adds them to thepublic ledger.Mining:Quite simply, mining is the process of confirmingtransactions andadding them to a public ledger. To add a transaction to the ledger, the “miner”must solve an increasingly-complex computational problem (like amathematical puzzle).
Mining is open source so that anyone can confirm the transaction.The first “miner” to solve the puzzle adds a “block” of transactionsto the ledger. The way in which transactions, blocks, and the publicblockchain ledger work together ensure that no one individual can easily add orchange a block at will. Once a block is added to the ledger, allcorrelating transactions are permanent and they add a small transactionfee to the miner’s wallet (along with newly created coins). The miningprocess is what gives value to the coins and is known as a proof-of-work system.
BITCOIN IN INDIAAlthoughthe RBI advises caution on its use, bitcoin is not illegal in India.Cryptocurrency exchanges operate freely and hence we can say that bitcoin islegal.Lastweek, income tax department surveyed the major bitcoin exchanges in India. Thesurvey reports said, this was done to collect information about transactionsand check whether there was a risk of tax evasion. This week, it was reportedthat the income tax department is set to issue notices to about 5,00,000 highnet worth individuals trading on the exchange across India. This comes at atime when there are still no clear regulations on cryptocurrencies and bitcoinexchanges.
Althoughthe Reserve Bank of India (RBI) advises caution on its use, bitcoin is notillegal in India. Cryptocurrency exchanges operate freely and hence we can saythat bitcoin is legal. So, if it is a legal entity, why is there silence on itsregulation? Also, who is responsible for regulating it? TheRBI has so far issued three notifications pertaining to bitcoin and othervirtual currencies (VC).
In all these, starting December 2013, the RBI hascautioned users, holders and traders on the risk of these currencies andclarified that it has not given any licence or authorisation to any entity orcompany to operate such schemes or deals . In a December 2013 notification, theRBI said, “The creation, trading or usage of VCs including Bitcoins, as amedium for payment are not authorised by any central bank or monetaryauthority. No regulatory approvals, registration or authorisation is stated tohave been obtained by the entities concerned for carrying on such activities.”Other than cautioning the public, the RBI hasn’t taken any regulatory stance onvirtual currencies yet. Afterrepeated cautionary circulars from the apex bank, in April 2017 the governmentset up an inter-disciplinary committee—chaired by special secretary (economicaffairs)—to examine the existing framework of virtual currencies. The committeewas supposed to submit its report within 3 months.
The committee was set up totake stock of the present status of virtual currencies both in India andglobally, examine the existing global regulatory and legal structures governingvirtual currencies, suggest measures for dealing with such virtual currenciesincluding issues relating to consumer protection, money laundering and examineany other matter related to virtual currencies that may be relevant. InDecember 2017, finance minister Arun Jaitley told the media that the governmentdoesn’t consider bitcoin as a legal tender and it is working on recommendationsfor such currencies. Meanwhile,Securities Exchange Board of India (Sebi) on 20 December said that if bitcoinis considered as a commodity derivative then Sebi might regulate it. Incountries such as the US, the Sebi-equivalent regulatory body is looking intocryptocurrenices.
Experts say, considering cryptocurrencies are looked at as acommodity, Sebi should look at regulating them. REGULATION ANDUNIFORMIZATION OF PRACTICES Sincethere are no norms regarding the use of Cryptocurrencies in internationaltrade, it is important that countries and international institutions exposetheir opinions and thoughts on the matter so that the this new approach tointernational payment can be used by people and companies. Thecreator of the Bitcoin system (Nakamoto, 2009) argues that the financial systembased on trust in economic agents is too fragile, exposing society as a wholeto the risks inherent in such an environment, thus, the cryptocurrency wascreated in order to achieve a very clear goal: Topromote disintermediation in the execution of commercial transactions on theInternet (implementation of a monetary freedom), that is, to make it possiblefor sellers and buyers to carry out their transactions independently, withoutneeding financial institutions, in a safe and fast way. The intermediation of transactions has thefollowing characteristics “(A)the activity of giving and receiving financial resources whereas theintermediary acts as creditor and debtor of both parties at the ends of theoperation 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 maydevelop the role of financial intermediary, such as credit institutions(commercial banks, leasing companies, among others), brokerage firms andsecurities distributors and even qualified investors .
Financial disintermediation breaks with all ofthe assumptions described above, but it generates the same effects since itenables financial assets to be exchanged for goods and services without theinterference of the aforementioned institutions. Thus, based on the scenariodescribed above, the Cryptocurrency performs the same function as theinstruments normally used to facilitate trading in the modern world. The impactgenerated by this new technology comes from the fact that virtual currencymeets the needs of modern commerce without having to be part of the bankingnetwork. Althoughthe primary objectives of the cryptocurrency involved the disintermediation oftransactions, many companies currently make use of the new technology asintermediaries or fiduciary agents. However, these companies offer theirservices at a very competitive rate, which tends to be much lower than thosepractices by the banking system. Cryptocurrenciespose a number of challenges to national and international regulatory bodies fora variety of reasons, many of which are 8 inherent to its issuance and means ofoperation. After all, how can one cope efficiently with a self-managed systemthat emits units of value independently while acting as both a means of paymentand a means of custody? Each of these functions is currently performedindependently by private or public entities in today’s society and this newtechnology has broken with all the previously presented paradigms, forcing usto view our institutions from a completely different perspective. Asit is almost impossible to combat this new system given the large investmentsin infrastructure, time and personnel needed to do so (besides the need forintense international joint action in this regard) and the fact that the useand acceptance of cryptocurrency in the market grows every year , regulationand uniformization o practices are the best way to protect the economic andfinancial order, in addition to opening new choices to the market.
However,before determining which regulatory strategy is appropriate, we should checkwhat kind of market will be regulated as such matter has been addressed inother jurisdictions. The study of cryptocurrency paymentarrangements developed by the European Financial and Administrative Authoritymay help us this time as it offers a way to classify the payment arrangementsinvolving cryptocurrencies, taking into account the interaction between themand the global economy. The study divides the possible types of operationstaking into account the payment flows to be effected by those involved, thatis, the classification takes into account the use or not of traditionalcurrency and cryptocurrency, in isolation or jointly. Based on this type of thinking, we arrive atthree types of payment arrangements: Closed Arrangements, Unidirectional FlowArrangements and Arrangements with Bidirectional Flow. The closed arrangementsdo not have any kind of connection between the global economy and the economiesthat revolve around Cryptocurrency.
Thus, in this case, the cryptocurrenciesare exchanged with cryptocurrencies, there being no use of traditional currencyinvolved in the transaction. Such a situation can be found in online computergames in which ingame currency is not accepted by market participants but canbe used by players to purchase goods and services in the game. Thistype of arrangement, which focuses on a specific virtual community, is notrelevant from the point of view of regulation or legislative activity ratherthan a simple online world interaction that does not affect the global economy(it affects, at most, the economic interactions within the closed systemitself), therefore, can be excluded from the scope of the present work. Inarrangements with Unidirectional Flow the Cryptocurrency can be transformedinto money, however, the opposite cannot occur. Wemay find this situation when one buys some form of credit that can only beaccepted in one place and cannot be turned into money again, just like FacebookCredits sold by Facebook in 2009 that could be used to purchase products andservices within the social network but could not be reversed in the amountoriginally paid in cash. Again, such a payment arrangement does not have agreat need for regulation insofar as it is not endowed with liquidity, acharacteristic necessary in order to affect global economy. Inthe Bidirectional Flow Arrangements, the cryptocurrency could be convertedfreely into cash and vice versa, without any kind of hindrance in the performanceof such activity.
In this case, virtual currencies can be effectively used tobuy and sell goods and services. This is the case that deserves the attentionof regulators, self regulators insofar it can generate effective impact in theglobal economy. Thus, regimes that are open and / or linked to the globaleconomy (Unidirectional and Bidirectional Payment Arrangements), whicheffectively generate economic impacts, make the regulation of such situationswithin the competence States and, in a subsidiary way, by international andlocal entities, particularly if bilateral exchange rates create the opportunityfor speculative behaviour, and / or if any cryptocurrency is used to buy realgoods and services, competing against traditional currencies. In order to avoidany kind of abuse by participants in the cryptocurrency market and to take fulladvantage of the positive effects generated by this new technology, the Statemust issue regulations on the subject, even so that the negative effects of theuse of this type can cause in the economy and international institutions, asrepresentatives of the interests of the sates, particularly those interested inthe modernization and harmonization 10 of rules on international business, mustact in order to protect both the integrity of the economy and the marketparticipants.
It should be noted that banking and financial activity, which inmany ways resemble activities carried out by participants in thecrypto-currency market, have always been subject to specific regulation.Thus,once a technology capable of fulfilling many of the functions performed by thetraditional financial system is created, which has always been subject toextensive regulation, there is no reason for the State and internationalinstitutions to refrain from trying to understand and regulate these newsituations. In order to avoid that the operators of the cryptocurrency marketsperform transactions to Blue Chip SWAP, operations that do not bring anybenefit to the national economy, regulation and uniformization of practicesmust take place.