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CRYPTO-CURRENCY: LEGAL APPROACHES TO THE CONCEPT FORMATION
DOI: http://dx.doi.org/10.14420/en.2016.1.2
Alimbek Khidzev, Post-graduate student of the Law and Political Science Departmentat the International Institute of Public Administration and Management of the Russian Presidential Academy of National Economy and Public Administration.
The article contain a brief retrospective journey into development of crypto-currency, determine its legal status with the point that that the legal base of this phenomenon is very poor and hardly developed and highlight some pressing issues of social relations involving crypto-currency. The primary analysis of Bitcoin as a crypto-currency is performed, showing its pros and cons of usage. The essential features of crypto-currency are defined, such as decentralized nature, anonymity and lack of guarantee. It is also emphasized that the crypto-currency should not be banned, it must be studied, apprehended and maybe regulated properly.
Bitcoin, crypto-currency, currency emission, legal status of crypto-currency, virtual currency, electronic money, computer technology, cryptography.
It is uneasy to explain the idea and nature of crypto-currency to a non-specialist in cryptography and computer technologies. There are various kinds of crypto-currency on the web, the most popular being Bitcoin, Lite-coin, Namecoin, NXT, PPCoin, Quark and others1. It should be mentioned that by the end of 2013 the total number of crypto-currencies reached 802, though the most wide-spread one — Bitcoin — was launched not until 2008.
The legal status of crypto-currency is vague and volatile. Though widely spread, Bitcoins have very poor and hardly developed legal base. Meanwhile, there is no denying that the crypto-currency is existing and used extensively. It
1 Cohen R. The Top 30 Crypto-Currency Market Capitalizations In One Place // URL: http://www. forbes.com/sites/reuvencohen/2013/11/27/the-top-30-crypto-currency-market-capitalizations-in-one-place/
2 An Analysis of Anonymity in the Bitcoin System // URL: http://arxiv.org/abs/1107.4524
Abstract.
Keywords:
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is quite enough to pool resources and start the crypto-currency studies and legal grounding, especially since "the Central Bank and Russian Government can with due time develop regulations for electronic currencies circulating in Russia"1, as the First Deputy Governor of the Bank of Russia Georgiy I. Luntovskiy was quoted by media.
Like any other currency that we deal with in daily life, the crypto-curren-cy has its own purchasing power. It is noteworthy that, for instance, Bitcoin was officially trading at $404 as of 26 September 2014, while in December 2013 it hit $1'1512. It seems even more so absurd that back in 2010, an American citizen Laszlo Hanyecz was first to purchase real goods for Bitcoins, having bought two pizzas for 10'000 coins (Bitcoins)3, which is about $7 million at current rate. I would like to define the most fundamental features of the crypto-currency:
1. Decentralized nature. No crypto-currency in its nature has any centralized government, emission, control etc. Physically, in a manner of speaking, crypto-currency is a cypher code computed by a certain algorithm. However, such cypher computation (that is, emission) is performed by a group or community of computation units, such as networking computers, instead of a single agency. According to the Memorandum issued by the Federal Financial Monitoring Service, «... the emission and circulation process of the most wide-spread crypto-currencies is totally decentralized with no possibility to control it, including the government control»4.
2. Anonymity of transactions using crypto-currency. That means that the user of a digital (virtual) wallet for crypto-currency is able to pay online for wide variety of services, including illegal ones. It was an illustrious incident when U.S. FBI investigated and disclosed the founders of the black market Silk Road in the United States. The users of this online system enjoyed various services offered for sale (purchasing narcotic drugs and psychotropic substances, different weaponry etc.) and paid them with Bitcoin. This particular fact is referred to by the Central Bank of Russia in its information report: «Due to anonymity of activities related to digital currency emission by an unlimited range of persons and usage thereof in transactions, companies and individuals can be involved, with or without their intention, in illegal activities, including money laundering and terrorist financing»5. The Bank of Russia warns against using «digital currencies», while «Russian legal entities rendering services related to exchange of digital currencies to rubles
1 The Central Bank discerned the crypto-currencies to have a future in Russia // URL: http://www. yourbanks.ru/news/174852.html? ELEMENT_ID=174852&TRASH=&PAGEN_8=5
2 URL: https://blockchain.info/ru/charts/market-price
3 Mack E. The Bitcoin Pizza Purchase that's Worth $7 Million Today. Forbes (12/23/2013) // URL: http://www.forbes.com/sites/ericmack/2013/12/23/the-bitcoin-pizza-purchase-thats-worth-7-million-today/
4 Memorandum of the Federal Financial Monitoring Service «Concerning usage of crypto-currencies».
5 Information report of the Bank of Russia of 27.01.2014 "Concerning usage of 'virtual currencies', specifically Bitcoin, in transactions".
and foreign currencies or to any goods (works, services) is deemed to be a potential involvement in shady transactions in compliance with the anti-money laundering and anti-terrorist financing laws»1.
3. Crypto-currency is backed with no guarantee. The former US Federal Reserve Chairman Alan Greenspan voiced that Bitcoin is a bubble, as having no real value in his opinion: «You really have to stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven't been able to do it»2. Judging by the nature and aforesaid features of the crypto-currency, one can conclude that Greenspan's words are quite reasonable, while the liquidity of crypto-currencies is highly volatile.
With regard to the facts mentioned above, it is rather cumbersome to define the idea of crypto-currency as it is unprecedented. President of the Russian E-money Association Victor Dostov and expert Pavel Shust define crypto-currency as «non-governmental payment units with no single emission center»3. The specialists managed to conclude that the crypto-currency cannot be qualified as electronic payment units (e-money) in accordance with the terms of the Federal Law № 161-FZ of 27 June 2011 (as amended on 05.05.2014) «Concerning the national payment system», due to crypto-currency lacking the following attributes of e-money:
- e-money are of a pre-paid nature, while the emission of crypto-curren-cies is effected by the users themselves and is not conditioned by any Fiat money contributions;
- e-money transfers are monetary transfers without opening a bank account that implies cashless flow of funds, while crypto-currency can be qualified neither as the cash, nor like currency in general, because Bitcoin constitutes neither a «monetary unit in the form of bills or coins of the Bank of Russia», nor «monetary units in the form of bills, treasury notes or coins circulating and serving as means of cash payment within the relevant foreign country (group of foreign countries)». Bitcoins are not recognized on the bank accounts or deposits under section 1 of the Federal Law «Concerning currency regulation and currency control»);
- some Russian e-money systems have developed on the basis of the receivables assignment, which is not applicable to the crypto-currencies, the Bitcoin owner having no claims or receivables against a person or a group of persons. Liquidity of any payment instrument depends solely upon the market position, with reference to national currencies or other assets. Therefore, a crypto-currency can be regarded as a specific object of civil law rights4.
1 Ibid.
2 URL: http://www.businessinsider.in/Everyone-Is-Baffled-By-Alan-Greenspans-Comment-About-Bit-coin/articleshow/26873628.cms
3 V. L. Dostov, P. M. Shust Crypto-currency market: risks and possibilities for banking institutions // Settlement and Transaction Activities in a Commercial Bank 2014. № 1
4 Ibid.
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As noted by A. Leyba, Bitcoin does not come within the definition of electronic payment units, in the context of section 3 of the Federal Law «Concerning the national payment system», or of the payment system, which is also established by this law1. It is further pointed out that, pursuant to clause 2 paragraph 2 section 1 of the Federal Law «Concerning currency regulation and currency control», Bitcoin is not a foreign currency and shall not be qualified as the objects of civil law rights enlisted in article 128 of the Civil Code of the Russian Federation, as it does not constitute a thing (goods), cash or non-cash money, uncertificated securities or property rights. Consequently, Bitcoin shall be referred solely to other property2.
Foreign practices of regulating legal status of crypto-currencies are controversial, too. Due to recent notorious scandals involving Bitcoins to pay for illegal goods, substantial restrictions have been enacted in the USA, though legal rules can vary depending on the state. In China crypto-currencies used to be in favour, however, in the context of the above-mentioned disadvantages, the usage of crypto-currency has been tightly restricted on the supreme political level. To the contrary, in Canada usage of Bitcoins is authorized nationwide with the full advantage taken thereof.
However, the greatest progress was made in New York, where the New York Department of Financial Services (DFS) introduced its own rules for the companies selling or buying crypto-currency, including the exchange operations. These regulations can have impact on other states as well. The initiative comprises the requirement to obtain a special «BitLicense» that is going to authorize companies and individuals to commit the operations of such nature. In addition to BitLicense, the rules developed by DFS include the requirement to hold the reserve of the same size and the same virtual currency as the money deposited by clients of the company. Moreover, the companies dealing with virtual currency shall work with real names and addresses of the clients and warn them of the possible risks involving virtual currency. The companies shall also notify the government of the virtual currency transactions exceeding 10'000 US dollar equivalent. Such company shall by all means contain a position of a computer security specialist3.
Crypto-currency is a new trend in the system of money relations and finance. No definition of the crypto-currency has been entrenched clearly and distinctly in the laws and regulations so far. For this reason, it is cumbersome to determine the essence and legal nature of this phenomenon. The crypto-currencies have had a significant effect on the global market, creating a certain moot case in the monetary and financial operations of the currency exchanges with the mixed response from the governmental authorities. In some countries crypto-currencies
1 A. Leyba. Real life of virtual money // EJ-Jurist, 2014. # 23
2 Ibid.
3 URL: http://www.forbes.com/sites/timworstall/2014/07/19/how-to-stop-bitcoin-banking-give-it-a-bitli-cense-in-new-york/
have been accepted and introduced for use and circulation, while in other countries they faced expressed antagonism and were rejected, for instance in Russia. At the same time, Head of Sberbank, Herman O. Gref pointed at the World Economic Forum in Davos: «Crypto-currency is a very interesting global experiment that breaks the paradigm of currency emission. It definitely should not be banned, it must be studied and maybe regulated properly»1.
Reference
1. Federal Law of 10 December 2003 № 173-FZ «Concerning currency regulation and currency control».
2. Federal Law of 27 June 2011 № 161-FZ (as amended on 05.05.2014) «Concerning the national payment system».
3. Herman Gref commenting on the crypto-currencies in Davos // URL: http://newmoneyfeed.com/news/german-gref-o-kriptovalyutah-v-davose.
4. V. L. Dostov, P. M. Shust Crypto-currency market: risks and possibilities for banking institutions // Settlement and Transaction Activities in a Commercial Bank. 2014. № 1.
5. Memorandum of the Federal Financial Monitoring Service «Concerning usage of crypto-currencies».
6. Information report of the Bank of Russia of 27.01.2014 «Concerning usage of 'virtual currencies', specifically Bitcoin, in transactions».
7. A. Leyba. Real life of virtual money // EJ-Jurist, 2014. № 23.
8. The Central Bank discerned the crypto-currencies to have a future in Russia // URL: http://www.yourbanks.ru/news/174852.html? ELEMENT_ ID=174852&TRASH=&PAGEN_8=5
9. An Analysis of Anonymity in the Bitcoin System // URL: http://arxiv.org/ abs/1107.4524
10. Cohen R. The Top 30 Crypto-Currency Market Capitalizations In One Place // URL: http://www.forbes.com/sites/reuvencohen/2013/11/27/the-top-30-crypto-currency-market-capitalizations-in-one-place/
11. Greenspans A. Comment about Bitcoin // URL: http://www.businessinsid-er.in/Everyone-Is-Baffled-By-Alan-Greenspans-Comment-About-Bitcoin/ articleshow/26873628.cms
12. Mack E. The Bitcoin Pizza Purchase that's Worth $7 Million Today. Forbes (12/23/2013) // URL: http://www.forbes.com/sites/ericmack/2013/12/23/ the-bitcoin-pizza-purchase-thats-worth-7-million-today/
1 Herman Gref commenting on the crypto-currencies in Davos // URL: http://newmoneyfeed.com/ news/german-gref-o-kriptovalyutah-v-davose.
