1 Revisiting the concept of cryptocurrency
Bitcoin is the first cryptocurrency. A cryptocurrency Is, in a broad sense, a computer program. Computerized, in that it is composed of information shared and executed.
Hence, precisely, its program quality. In its Latin etymology, pro-gram could be understood as the forwarding of a letter or, more precisely, pre-writing.
Using a particular programming language, rules are established for the internal speech of the program. This speech is the information conveyed about conditions, procedures, and responses to actions performed by users in their interaction with the software.
This information, ordered and executed through algorithms, ends up being the constitution of the program, almost a Magna Charta prescribing the universe of the application. Hence the insistence of developers and software engineers that “code is law.”
It is a code that, in the case of a cryptocurrency, is open and collaborative. Moreover, its grammatical constitution is programmed in such a way as to ensure that the information transmitted is validated and recorded in a consensual manner. And distributed to as many nodes as possible.
The security provided by the consensual and distributed validation of this cryptographic information is what gave Bitcoin its initial value and, by virtue of this value, the name cryptocurrency: cryptographically transmitted value.
Cryptoassets as financial assets
Cryptographically transmitted value brings a new level of security and validity to the transmission of value over the Internet. This is what has led to the development, execution and registration of new programs, that is, new possibilities for executing digital actions through computer language, on this distributed ledger technology. Hence the name “crypto-asset” that has been given to it: it is not just an asset in the sense of financial value as traditionally understood; it is an asset in that it is maintained in activity by the actions it performs; it is an asset because it is value in motion.
2 The difficulties of legislating bitcoin
Because of the mobility characteristics of cryptoassets, which are so difficult to pigeonhole into known standards, it is inevitable that this technology will finds itself in a gray area when its legality is questioned. This is a feature related to portability and cross-border aspects of sending money around the world in seconds or minutes.
This is how governments approach the drafting of such laws on two fronts: the restrictive one to “protect” their system, or the inclusive one to attract investment and technological development.
The existence or non-existence of positive laws passed by the governments of the day on this nascent technology that we still do not fully understand obviously matters in practical terms (you will not use a technology for which you can be arrested).
However, this is a second-order question in view of the depth of the change that Bitcoin and cryptoasset technology introduces into the legalities themselves..
The fact that all of our lives are becoming digital is no secret to anyone. Even legality is becoming digital. And with crypto-asset technology, it is also becoming cryptographic, consensual and distributed.
In the future we may see, for example, that court orders on Internet-related property could be enforced automatically through the use of smart contracts.
The Bank of South Africa issued a statement on the issue of Bitcoin’s legality in a 2018 study.
In the paper, the South African body addressed the difficulties it represents for the authorities the establishment of a regulatory framework for cryptocurrencies. This, taking into account that is a new and disruptive technology.Which operates internationally and in a decentralized manner.
Analysts have stated the following:
One of the most relevant reasons why crypto assets pose a regular challenge is that they operate globally and could potentially be classified under different economic functions. As a result, regulatory responsibility often cuts across different national regulators and jurisdictions.
South African Central Bank.
The Legality of Bitcoin
Bitcoin and cryptocurrencies being an internet technology, and in this sense global, local laws are often powerless to regulate them with total effectiveness. Nevertheless, laws and bans are enacted, as in the case of China. But what has happened in these cases? Parallel markets have emerged; users have relied on the tools provided by the Internet (VPN services, encrypted messaging, deep layers of the Internet) to continue trading cryptocurrencies. Restricting the use of this technology altogether would require a global ban or blocking by Internet service providers (ISPs) of web addresses linked to this technology.
3 How to regulate bitcoin and other cryptocurrencies
How to regulate this technology, create new laws or use existing ones? These are the questions most lawmakers are asking. The disruptive nature of cryptocurrencies, with different characteristics from other traditional assets, makes it difficult to choose between the two options. Let’s look at the pros and cons of each.
Regulating bitcoin with existing regulations
To give confidence to investors and traders that they will benefit from the use of these technologies, without the risk of contravening any legislation, many authorities around the world have recognized them in existing laws that they consider relevant.
To accommodate them in the regulations for electronic transactions, raising capital and issuing securities (for the case of electronic transactions Initial coin offerings or ICOs), tax payments, anti-fraud and money laundering laws, among many other areas, seems necessary to drive mass adoption.
However, this technology, in its multiplicity of possibilities, also affects a multiplicity of areas of human relations.
It is worth mentioning, for example, that applications such as smart contracts. have been defined and recognized as tools for electronic commerce. in legal acts in some territories. They function as conditional contracts and automate already everyday business processes (tracking of goods in supply chains, to name a few).
It has already happened in Arizona (United States), where it has been established that smart contracts have the same legal status as traditional contracts. It is a recognition that was given without the need to create specific legislation..
The same happened when some tokens were defined as financial assets – based on the Howey’s test– y have had to comply with the legal requirements of such traditional instruments..
It is still difficult to determine whether this is the best way to give legal recognition to cryptocurrency technology.
Although it must be considered that the paradigm shift that this technology imparts to human-to-human relations means that, on many occasions, it is often inaccurate to define it according to traditional legal criteria related to finance.. It would be like trying to fit a sphere into a rectangle or a circle into a square.
This dilemma has been raised by several regulators, including the U.S. Commodity Futures Trading Commission (CFTC), for whom the multifaceted nature of cryptocurrencies makes their regulation extremely problematic.
Their simple classification is not easy, and authorities run the risk of setting rules for cryptocurrencies according to notions that were intended for other financial instruments.
For this reason, there has also been an emphasis on the need to. Create new regulatory molds in which this technology fits..
In this regard, it could be argued that the laws of most of the world’s central banks expressly state that these institutions exercise, exclusively, the issuance of money.
Bitcoin and crypto-assets, however, are not an issue. do not belong exclusively to the realm of monetary speciesThey have been classified by various institutions as property, commodities, assets, securities, among others, in addition to currencies.
In the specific case of Bitcoin, if it is not considered a property, as the CFTC has sometimes stated, but a currency, what would be the relevant legislation to regulate it? In general, currencies do not have their own law.
To legal tender currencies, in the absence of foreign exchange control involving offenses related to illicit currency, are regulated by central banking laws.
The purpose of these laws is to regulate the powers of central banks, the body responsible for monetary policy. Its basic functions are to achieve price stability and maintain the value of the national currency by managing interest rates.
Likewise, they establish legal tender and are responsible for its issuance and drainage, as well as regulating inflation. But in bitcoin this monetary governance is usually already regulated in its own code..
Lawmakers need to know about bitcoin
In a Forbes publication, analyst Roselyne Wanjiru detailed the three challenges facing regulators in African countries as they attempt to regulate the cryptocurrency sector. In citing them, she makes it clear that the elements hindering regulation in Africa are the same ones that need to be overcome in the rest of the world. The analyst made it clear that the cryptocurrency ecosystem requires legislators with in-depth knowledge of the sector. The author concludes that three aspects must be taken into account to legislate bitcoin: decentralization, the diversity of protocols and governance existing in the ecosystem, and the plurality of jurisdictions on the planet.
The creation of new laws to regulate bitcoin
Considering that it is often difficult to regulate bitcoin with existing laws, the question arises whether it is necessary to it is necessary to develop legislation specifically for these technologies and how legislation should be made to achieve the most favorable regulation.
But it is often the case that when an attempt has been made In the case of Brazil and the aforementioned example of South Africa, legislators have not failed to recognize the difficulties. This, taking into account the fact that the new ecosystem involves large numbers of people. a variety of issues related to finance, taxation, law, privacy, among others.
It should also be mentioned that legislating crypto-assets implies the need to establish a common interpretation of the definitions of the different areas of this technology, which has not yet been defined. remain vague and widespread in most cases.
Progress in creating new laws to regulate bitcoin.
Until a few years ago, the preferred option for regulators was to use existing local laws to try to regulate bitcoin. However, the more recent trend is for authorities to create new legislation. El Salvador and the Central African Republic, the two countries that have declared bitcoin a legal currency, have created new laws. The same is being considered in Panama, Costa Rica, Chile, Brazil and Paraguay. Meanwhile, large economies, such as the United States, the United Kingdom and the European Union, are following different paths. The first two are still debating whether to use old laws or create new ones, while the European Union is moving forward with a new regulation (MiCA law).
In light of the above, it is essential to pay attention to the qualities and characteristics of this technology itself in order to adjust it effectively. In this sense, its qualities and characteristics are those written in its code.
Therefore, although governments around the world have very different views on regulation, the writing of new laws is ongoing. Widespread shift from cash to digital currencies Is a long-term global trend that neither financial institutions nor government regulators can simply ignore.
Hence the need for dialogue and the establishment of standards and agreements on the subject. This activity has begun to emerge from the hearts of various companies in the ecosystem, with some self-regulatory initiatives.
4 Self-regulation of Bitcoin
Given the obstacles to Bitcoin regulation using existing laws or creating new ones, it would seem that self-regulation, not only in human terms, but also in the terms of the code itself, would be the most effective way to regulate this technology..
In Bitcoin, the issuance of circulating currency is mathematically predetermined. Through the transaction validation process known as the mining Miners are rewarded for the processing power they contribute to network security with new coins born from the same certification process.
Issuance is controlled by two processes: difficulty adjustment and the halving.
To prevent the increase in processing power from creating coins prematurely, the Bitcoin code states that the greater the processing power, the greater the difficulty of mining.
Hence the need to use increasingly powerful equipment in order to continue mining revenues in the face of increasing difficulty.
On the other hand, even anticipating the increase in the number of miners on the network, every 210,000 blocks added to the main chain is the phenomenon known as halving Or the halving of the mining bounty.
Thus, initially, the reward for bitcoin mining was 50 BTC; once that number of blocks was reached, in 2012 the reward was reduced to 25 BTC; in 2016 to 12.5; and in 2020 to 6.25 BTC.
Through these processes established in the Bitcoin protocol it is known approximately when the last BTC of the 21 million established as total circulating will be issued.
This is a demonstration of self-regulation within the same limits preset in the code of a cryptocurrency. It can be noted that in terms of the aspects necessary for the regulation of a currency, the code is law.
Now, what can or cannot be done with a cryptocurrency, if crimes are committed by using it as a means of payment instead of any other traditional currency, the consequence should depend on the unlawful act committed and not on the means used to commit it. For, just as money is laundered with dollars, the crime is committed by the person and not by the currency..
The challenge of regulating a decentralized network.
The decentralization of blockchain networks poses a real challenge for states, as centralized authorities, such as banks, are structured to oversee monetary policy and flows in a country. But the same level of supervision does not apply to the cryptocurrency ecosystem. In fact, maintaining oversight is expensive. The United States, for example, spends millions of dollars to monitor cryptocurrencies. Governments establishing transaction tracking as a rule makes the ecosystem an increasingly controlled and less private environment for those who interact with it.
5 Bitcoin regulation, an open process
After examining the different aspects that influence the cryptocurrency regulatory process, the answer to the question of how to regulate bitcoin is open to different readings.
It can be concluded that the process depends on a number of factors that fall within the multidisciplinary scope and the approach taken in different territories. This is still an open road, currently under construction.
This article was adapted from a paper by Iván Gómez.
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