Introduction
Bitcoin is a form of digital currency that exists exclusively on phones and computers, meaning it’s like the money you have in your wallet, only it’s not tangible whereas Cryptocurrency is a broader term that includes Bitcoin and other digital currencies that use cryptography (a code or secret) to make financial transactions more secure.
The emergence of the Bitcoin and other cryptocurrencies has changed the financial understanding by introducing a new form of digital money. But this innovation has also led to highly pluralistic legal environment which questions previous legal structures and turns to salient concepts such as money, property or financial transaction.
With the advancement of cryptocurrency, governments, courts and various regulatory authorities are still trying to figure out how to operate in this space. They are issues relating to the treatment of cryptocurrency as a currency, commodity or security, taxation and regulatory requirements for anti-money laundering and know-your-customer policies’.
It should be noted that cryptocurrency is decentralized and borderless by nature, so the legal regulation of such instruments tips the traditional system of states’ jurisdiction and sovereignty. Further, the application of smart contracts and decentralized financial platforms also opens up new concerns with regards to the presence of intermediaries and means of enforcing contracts.
Still, one is able to see that the legal environment surrounding Bitcoin and cryptocurrency is changing swiftly. Judicial organs have delivered historical decisions, public organizations are providing directives, and governing bodies are searching for new models of supervision and control. In this article I will need to overview the state-of-art of the law, give an insight of important tendencies, problems, and perspectives in such dynamic and innovative sphere as Bitcoin and other cryptocurrencies.
Regulatory Framework
This overview outlines the regulatory environment surrounding Bitcoin and cryptocurrency, consisting of definition and classification, Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulation; along with taxation.
A. Definition and Classification
Bitcoin and cryptocurrency are defined and classified differently based on jurisdiction as follows:
1. Currency: Some countries classify Bitcoin as currency; thus subject to foreign exchange controls.
2. Commodity: Other countries classify cryptocurrency as a commodity, which is regulated under commodity trading law.
3. Security: Some countries classify cryptocurrency as a security, and subject to securities law.
4. Property: Finally, some jurisdictions classify cryptocurrency as property and regulated with property-related law.
B. Anti-Money Laundering (AML) and Know-Your-Customer (KYC) Regulation
AML/KYC regulation is presently in place to curb illegal activities, including money laundering and terrorism financing. Examples include:
1. Customer Due Diligence (CDD): Cryptocurrency exchanges and service providers must complete CDD on clients.
2. Suspicious Activity Reporting (SAR): After a CDD verification, all regulated entities that conduct mortgage transactions are required to file a SAR if there is suspicion of any illegal activity with regard to cryptocurrency transactions to the financial intelligence unit in their country.
3. Transaction Monitoring: Conduct continuous monitoring of all cryptocurrency transactions in order to be able to identify and prevent potential illegal activities.
C. Taxation
Tax on Bitcoin and cryptocurrency varies from jurisdiction to jurisdiction and includes:
1. Capital Gains Tax: That is, in some countries, profits from the acquisition of cryptocurrency are taxed as capital gains tax.
2. Income Tax: Some countries may tax profits from cryptocurrency as income tax.
3. Value-Added Tax (VAT): Some countries and jurisdictions may apply VAT to cryptocurrency transactions.
4. Tax Exemption: Some countries provide an exemption for cryptocurrency related transactions and/or offer tax credits.
Additional Regulatory Environmental Factors
– Licensing and Registration: All cryptocurrency exchanges and service providers are required to obtain registration or licenses with their appropriate regulatory authority.
Regulated entities are required to file reports, amongst the regulated entity payment processes, and keeping records of the transaction.
– Consumer Protection: Regulation is intended to provide protections to the consumer by limiting fraud, market volatility, etc.
Legal issues and challenges
Enthusiasts of Bitcoin and cryptocurrency face various legal issues and challenges, including:
A. Security and Hacking:
1. Exchange Hacks: Another issue involved in any marketplace and affecting exchanges for cryptocurrencies is hacking that leads to considerable losses.
2. Wallet Security: He pointed out that the users’ wallets can be hacked and their money stolen.
3. Phishing Scams: Hackers deceive the users into opening up the private keys or log in details.
4. Regulatory Response: It must be noted that governments and regulatory bodies fail to effectively handle the security breach and hacking events.
B. Intellectual Property Disputes:
1. Patent Infringement: Business entities do not respect the existing patents concerning the application of blockchain.
2. Copyright Infringement: Using open-source software and code and you don’t need any permission.
3. Trademark Disputes: Trademark ownership could be an issue with companies when using cryptocurrency brands.
4. Licensing Agreements: Some disagreement often occur due to the licensing of intellectual property.
C. Smart Contracts and Dispute Resolution:
1. Enforceability: It has to be noted that smart contracts are not always legally enforceable in different jurisdictions.
2. Interpretation: Smart contract agreements attract controversy as regards the meaning of the terms used in the contract.
3. Breach of Contract: Contestation may arise in smart contracts and customers and merchants may decide to breach the agreement as per the smart contract.
4. Dispute Resolution Mechanisms: Dispute resolution mechanisms for smart contracts are yet to be implemented effectively.
Additional legal issues and challenges:
– Jurisdictional Issues: Any kind of purchases and sales whether local or international have jurisdictional implications.
– Regulatory Uncertainty: Some say that it increases uncertainty because there are very few clear instructions.
– Consumer Protection: It means that investors and consumers must be protected from fraud and unfair fluctuations of prices on the stock exchange.
– Taxation: Some countries do not even have a clear policy on how to tax cryptocurrencies.
Therefore, there is a need for well-defined laws and improvements of the laws, better ways of solving the disputes arising from the uses, and better security measures for the expansion of the uses of Bitcoin and cryptocurrencies.
Future implications and recommendations
The phenomenon of Bitcoin and cryptocurrency has a limitless potential in the future; however, further concerns and recommendations should be given with the aim at promoting stable conditions for investments.
A. Regulatory Clarity:
1. Clear Guidelines: It is upon the governments and the regulatory authorities to develop and issue out the polices that seek to govern the use of cryptocurrencies.
2. Global Cooperation: There is a need for cross-border collaboration, so that, there are similar legal frameworks that may help eliminate some forms of regulatory competition.
3. Adaptive Regulations: It stated that there should be provisions for relaxation of rules so as to capture up with advancement and innovations.
B. Industry Collaboration:
1. Self-Regulation: Instead, the industry should create independent regulatory organizations which will encourage the adherence to the best practices and standards.
2. Collaborative Efforts: This means it is the responsibility of industry players to share information, experience and some form of input.
3. Public-Private Partnerships: The contribution of the two sectors with private sectors is that it take the lead in achieving development goals through the innovations.
C. Legal Innovation:
1. Smart Contract Development: Contrasting examples demonstrate that further refinement of smart contracts can increase effectiveness and decrease the number of conflicts.
2. Alternative Dispute Resolution: It is with respect to these reasons that other forms of dispute resolution could work satisfactorily and expeditiously.
3. Legal Frameworks: It is necessary to create such legal conditions that initially, a solution without references to blockchain and cryptocurrency would not be possible at all.
Recommendations:
1. Education and Awareness: Raise awareness of cryptocurrency to users, investors and regulators with help of lessons given via cryptocurrency, block chain technology.
2. Investment in Infrastructure: Build blocks that will support cryptocurrency and blockchain technology to grow.
3. Encourage Innovation: Support experimentation but at the same time do not ignore the regulatory policies existing in the market.
4. Global Dialogue: One can promote interaction between leaders in different nations for the purpose of discussing similar issues and experiences.
On solving these implications and incorporating these suggestions, we are setting the ground for Bitcoin and cryptocurrency to grow as they will enable an effective, reliable, and more innovative financial system for all.
Case Laws
A landmark case of Internet and Mobile Association of India v. Reserve Bank of India 2020. In this case, the Supreme Court of India set aside RBI circular that restrained all banks/financial institutions from extending their services to cryptocurrency exchanges/ traders. The court held that:
1. The RBI’s circular was unconstitutional and thereby, defeated the rights to trade and commerce.
2. Cryptocurrencies are not banned in India and the government has even not declared them unlawful.
3. The RBI’s circular was not a law and it cannot prohibit something which is not prohibited by law.
Other cases are:
Some notable case laws related to bitcoin and cryptocurrency:
1. United States v. Ulbricht (2014): The court also stated that bitcoin is recognized as money and is capable of being used for unlawful purposes.
2. CFTC v. McDonnell (2018): In the case the court was in a position to declare that the cryptocurrency is a commodity in the eyes of the Commodity Exchange Act.
3. Robert Faiella v. United States (2015): In that regard, the court concluded that bitcoin cannot be considered “funds” for the purpose of money laundering.
4. Hashfast Technologies LLC v. Garzilli (2014): The judgement was made that the bitcoin is not a tangible object and hence the user has ownership rights of intangible property.
5.Airfox and Paragon Coin_(2018): In ICO regulations, the penalties The provided by the SEC included fines for sales of tokens that were conducted without the requisite license.
6.Ponzi Scheme Involving Bitcoin (2019): A defendant was charged with the promotion of a Ponzi like scheme involving bitcoin by the SEC.
7. Rajbhushan Omprakash Dixit v. Union of India (2018): The Bombay High Court has called for the government’s stand on the legal status of cryptocurrencies.
8. Kunal Barchha v. Union of India (2019): The Supreme Court released ‘no’ against a petition to block cryptocurrencies from circulation.
These case illustrate the on-going legal issues and efforts of elaborating the status of bitcoin or cryptocurrency in the law.
Conclusion
In conclusion, it can be said that legalization of Bitcoin and other cryptocurrencies is a difficult and rather ambiguous task. To counter this, there is need to address some of the legal questions and concerns that accompanies the use of cryptocurrency. This includes realizing the goals of regulatory certainty, developing more industry associations and advancing legal professionalism.
Data protection legislation is still a novel concept in various jurisdictions and regulation differs from one country to the other, and the guidelines and frameworks are not well defined. But there are attempts being made to set much defined rules and policies like the EU’s 5th Anti-Money Laundering Directive and the FATF’s non-EU recommendations as well.
Cooperation with industries is needed to disseminate the know-how, identify new ideas and to compete effectively. Industries are seeking self-regulatory organizations to regulate them and organizations such as the Blockchain Association are rising to meet this need.
Moreover, legal innovation is also needed to respond to such peculiarities of cryptocurrencies and blockchain. There is a development of efficient forms of contract such as smart contracts, methods of dealing with efficiency and disputes such as new forms of dispute resolution such as arbitration.
The crisis is global, and therefore requires international discussion of problems and solutions, moreover, the means of implementing solutions are global, hence, international cooperation required due to the need for stabilization of rules and preventing the shifting of regulations to more favorable jurisdictions.
Consequently, trying to find the place for Bitcoin and other cryptocurrencies in the world of law and finance is not a problem that can be solved solely by enhancing the regulation of these assets or improving their relations with traditional monetary tools. In this way, it is possible to organize work in the financial sector in such a way that would allow one to develop secure, efficient, and innovative systems based on cryptocurrency and block-chain.
Author: Himanshi, a student at Khalsa College of Law
