Hi Crypto Insiders, For those unfamiliar with me, I’d like to introduce myself. My name is Liam. I’ve been writing Inside Business for the past 18 months and am the former Managing Editor at Inside.com. I’ve long had an interest in the blockchain space and have been an advisor, consultant, and investor in the industry since 2016. I also hold a Law Degree and Master of Laws and currently work at Zargar Lawyers in Vancouver, advising tech startups and small businesses including blockchain companies. Over the next few weeks, I will be publishing one newsletter each Saturday for our Inside Cryptocurrency audience, analyzing the laws and regulations around different applications of Blockchain technology. At the end of these five weeks, I will join our "Inside Cryptocurrency: Law and the Blockchain" event, where I will discuss these issues directly with you and answer whatever questions you may have. Today is our third issue in this five-part series and we will be covering how blockchain technology can replace or support currencies and banking. To provide a thorough analysis of the regulatory environment we will look at the following: - The Current Situation: How do we currently make payments?
- The Blockchain Future: How can blockchain technology improve the way we make payments?
- Overview of Legal Considerations: What needs to be considered when looking at blockchain technology as a method for facilitating the transfer of currencies?
- Characterization I: Are cryptocurrencies securities?
- Characterization II: Are cryptocurrencies money?
- Stablecoins and Central Bank Digital Currencies: What are they and what are the legal concerns?
This series is not intended to provide legal advice; its purpose is to share knowledge and information gained through the study and practice of law and participation in the industry. This is a quickly evolving industry so please ensure that you stay up to date with any changes and consult a lawyer who is familiar with your personal situation before participating in the industry in any capacity. Please feel free to reach out on Twitter or LinkedIn if you have any questions, comments, or suggestions. |
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The Current Situation Currently, payment networks are highly complex and centralized. As evidenced by the recent removal of Russia from the SWIFT payments system, one of the current drawbacks or benefits, depending on your perspective, of the current system is the high level of regulation and control that allows governments and banks to instantly cause individuals to lose billions or cause a country like Russia’s currency to devalue by 30% in a single day. Overall, some of the major bugs or features of the current payment system include: - Settlement Delays: Cheques can take up to five days to settle, while international wire transfers and other payment methods can take between hours and weeks to send funds.
- Lack of Access: There are currently 1.7 billion people who are unbanked. In some parts of the world, such as Africa, this has led to mobile phone carriers becoming a primary provider of financial services.
- Lack of Visibility: For many, it is unclear how the financial system works and many in the industry have little visibility into how transactions take place, the systems used by banks, and other aspects of the financial system.
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Blockchain Future The promise of blockchain is its ability to decentralize and democratize the financial system. This means public ledgers to remove the issues of visibility, as well as access for anyone with just a phone, tablet, or computer. Furthermore, blockchain payments are nearly instantaneous — the payments can be processed in just seconds with the correct gas fees offered to miners. We’ve already seen major banks adopting this technology, with JP Morgan Chase launching a new blockchain-based payment processing network in 2017, Royal Bank of Canada creating a private blockchain ledger to move money internally and between Canada and the U.S., and others relying on third party companies like Ripple to provide blockchain software.
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Legal Considerations When dealing with blockchain technology in the banking and payments space, there are a few specific considerations: - Anti Money Laundering Regulations — If we use the blockchain to move currency we need to hold it to the same standards as existing networks in assuring that it can’t be used by criminals or terrorist organizations to move or launder funds. Whereas to obtain a bank account, customers need to prove their identity to centralized regulators, Blockchain technology is more accessible and easier to spread to remote parts of the world but this does not mean regulators will be less stringent in their application of AML laws.
- Transformation - We briefly touched on this last week but it's difficult to classify some cryptocurrencies as money, commodities, or securities. This creates inherent issues for both innovators, investors, and regulators. We will examine this in more detail later but it is a serious shortcoming of current legislation.
- Taxes — Depending on how you characterize cryptocurrencies, they will have different tax implications. We’ve already seen some countries classify them as commodities, meaning even switching between cryptos is taxable; while others have classified them as currencies with little to no taxable events.
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Characterization as Securities A major issue with regulating cryptocurrencies has been defining how they fit under existing laws. Many in the community would agree that excluding stable coins, Bitcoin is likely the coin most similar to money in its ability to be used as a method of transferring value, while altcoins represent investments in specific projects. Regulators have, however, largely been trying to lump all cryptocurrencies into one category and this has caused significant regulatory issues. Regulators themselves are struggling to understand what cryptocurrencies are exactly: - In June 2018, then SEC Chairman Jay Clayton explicitly said on CNBC that Bitcoin was not a security.
- In 2018, SEC Director of Corporation Finance William Hinman said that Ethereum was not a security.
- In a 2019 notice, the Canadian Securities Administrators said that Bitcoin was not a security, nor a derivative, nor a commodity.
- In the Coinflip case, the Commodity Futures Trading Commission claimed that Bitcoin is properly defined as a commodity.
- In August 2021, new SEC Chairman Gary Gensler claimed that cryptocurrencies were securities, stating that "If someone is raising money, selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that's a security."
This lack of clarity and uniformity in the definition of specific crypto assets is a major impediment to their use as a payment method. There is a good reason that stocks are not used to buy coffees and it's because of the high level of regulation required to sell and buy securities, the same stands for commodities.
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Characterization as Money If a cryptocurrency is used as a method of payment, it will need to attain the legal status of money to avoid being taxed and regulated to the same extent as securities and commodities. However, in the U.S., the idea of Bitcoin or any other cryptocurrency becoming "money" has not been seriously considered and there is little discussion outside of court cases. - The IRS has clearly said that it does not view Bitcoin or any crypto assets as money.
- In Canada, while the Canadian Revenue Agency has also clearly stated it does not consider crypto assets to be money, the Bank of Canada has been more open to other interpretations, stating that the use of credit cards, debit cards, cheques, and contactless payments evidence that the old concept of "legal tender" is no longer impactful or useful. They instead have taken the approach that if something can be used (i) as a means of exchange, (ii) as a unit of measurement, (iii) a store of value for future use then it could be money. This definition however has not been tested.
- In the U.K., in 2018, the then-Governor of the Bank of England said that Bitcoin could not be money as (i) Bad Store of Value: it is too volatile, (ii) Difficult to Exchange: No major stores and retailers accept it as payment, (iii) Not a Unit of Account: Even businesses that work in the industry don't hold their funds in BTC, and instead hold fiat while working in the crypto industry.
- Interestingly, in two U.S. cases, judges found that Bitcoin was money. In U.S. Vs Faiella it was said that "Bitcoin clearly qualifies as money under plain meaning definitions ... [it] can be easily purchased in exchange for ordinary currency, acts as a denominator of value and is used to conduct financial transactions." In the Shavers case, the judge reached a similar conclusion stating "it is clear that Bitcoin can be used as money."
Overall, it seems that people outside the financial industry see Bitcoin as an obvious example of money but until the Federal Reserve, IRS and others agree with that definition, the use of cryptocurrencies as a method of payment will be incurring high tax burdens. Other countries have already classified Bitcoin as money and El Salvador has even made it legal tender.
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Stablecoins and Central Bank Digital Currencies Stablecoins and Central Bank Digital Currencies are two specific types of cryptocurrencies due to their unique nature: Stablecoins Stablecoins are coins backed by fiat currency or commodities that help reduce their volatility, making them a more reliable store of value. Under Treasury Secretary Janet Yellen, stablecoins have come under scrutiny amid concerns that they provide a false sense of security to consumers who believe they are equal to holding a U.S. Dollar, when in reality those issuing the coins could potentially be using the funds in reserves for alternative purposes. Both the SEC and IOSCO have said that stablecoins need to be regulated but the extent of future regulations is unclear. The Treasury Department has currently been tasked with developing a framework. Central Bank Digital Currencies These are cryptocurrencies developed and distributed by central banks that are expected to allow national currencies to evolve and adopt many of the benefits of cryptocurrencies — while allowing central banks to keep control over monetary policy. China and Venezuela are currently leading in this space. The U.K. has been exploring the creation of a U.K. CBDC for almost a year and the U.S. is expected to decide whether to develop a US CBDC in six months. A major concern in this space is privacy, and whether the government would be able to track all transactions conducted using a CBDC. Next week's newsletter will look at Privacy issues, and discuss Stablecoins and Central Bank Digital Currencies — including legislation, comments from regulators, and more.
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| Do you think Bitcoin is money? | | | | |
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 |  | Liam Gill is a founder, lawyer and investor.
He previously founded Fumarii Technologies, which became a top 20 ranked cloud computing service (Yahoo Finance! 2019) valued at over $30M. He holds an LLB Laws (UK), MSc Management and Master of Laws and currently practices law at Zargar Lawyers + Business Strategists in Vancouver, Canada.
|   | | Editor | Eduardo Garcia is a writer and editor based in New York. He is writing an illustrated book about climate change that will be published by Ten Speed Press, an imprint of Penguin Random House. Bylines in The New York Times, The Guardian, Slate, Scientific American, and others. In one of his previous lives, Eduardo worked as a Reuters correspondent in Latin America for nearly a decade. | |
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