Satoshi Nakamoto, the unidentified author of the Bitcoin white paper, described the cryptocurrency as a, “peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.”
Those “financial institutions” that Nakamoto wished to bypass when conducting online commerce referred not only to banks and online payment processors like PayPal but also governments. Indeed, it was this lack of supervision and central control that meant that, in the early days of Bitcoin, the two main demographics that adopted the cryptocurrency were radical libertarians and international criminals. In fact, “Silk Road,” an online market located on the dark web that sold narcotics and firearms, adopted Bitcoin as its currency of choice. According to the FBI 1.2 million transactions were carried out which generated approximately 10,000,000 Bitcoins worth of revenue.
However, as the price of Bitcoin began to increase, mainstream investors and speculators began to participate in the cryptocurrency markets.
The response from government officials, particularly in the early days of Bitcoin was often confused. For example, Chuck Schumer, the United States Senator for New York, blasted commerce that used Bitcoin in 2011 as, “an online form of money laundering used to disguise the source of money, and to disguise who`s both selling and buying …drug[s].” Schumer, alongside fellow Senator Joe Manchin, then demanded that the American authorities “crackdown” on online market places that accepted Bitcoin.
It is fair to say that as politicians became more knowledgeable on cryptocurrencies, much of that initial hysteria has subsided.
For example, on February 6th the heads of the SEC and CFTC testified in the American Senate in front of the Senate Banking Committee. Commentators were surprised at the balanced and intelligent exchange that took place. As popular cryptocurrency blog coindesk.com noted at the time, “it was perhaps the measured and sophisticated nature of the dialogue that most stood out to observers.”
The chairmen of the SEC, Jay Clayton, remarked that:
The cryptocurrency and ICO markets, while new, have grown rapidly, gained greater prominence in the public conscience and attracted significant capital from retail investors. We have seen historical instances where such a rush into certain investments has benefitted our economy and those investors who backed the right ventures. But when our laws are not followed, the risks to all investors are high and numerous – including risks caused by or related to poor, incorrect or non-existent disclosure, volatility, manipulation, fraud and theft.
To be clear, I am very optimistic that developments in financial technology will help facilitate capital formation, providing promising investment opportunities for institutional and Main Street investors alike.
Describing cryptocurrencies as “financial technology” which will “provide promising investment opportunities” is symptomatic of the shift in opinion that lawmakers and other government officials have undergone over the past few years.
The United States is, of course, not alone in attempting to impose regulations on cryptocurrency. Given the technological complexity of Bitcoin and its peers, many governments have opted to shoe horn crypto assets into existing legislation.
For example, in Hong Kong, a government official stated:
Hong Kong at present has no legislation directly regulating bitcoins and other virtual currencies of [a] similar kind. However, our existing laws (such as the Organised and Serious Crimes Ordinance) provide sanctions against unlawful acts involving bitcoins, such as fraud or money laundering.”
The European Central Bank indicated that traditional financial sector regulation is not applicable to Bitcoin because it does not involve traditional financial actors. Other countries within the European Union have suggested the existing legislation can be used to cover cryptocurrency trading and commerce.
A British government policy paper asserted that:
in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.
However an EU ruling did subsequently overturn this ruling. This was a case originally referred from the Swedish Supreme Administrative court, the “högsta förvaltningsdomstolen” involving the case of the Swedish national, David Hedqvist, who wanted the court to decide, from the perspective of tax, what the exact status of cryptocurrency transactions were.
In some Islamic countries, religious scholars have suggested that Bitcoin is religiously forbidden or “haram”. Egyptian cleric Grand Mufti Shawki Ibrahim Abdel-Karim Allam issued an Islamic decree or fatwa banning the use of the currency.
Elsewhere in the Middle East, Israel has banned companies involved in cryptocurrencies from trading on the Tel Aviv stock exchange over fears that terrorists are using these currencies to finance their activities.
One great difficulty that governments around the world are facing as they try to regulate this market is that there is still a great confusion as to how to officially categorise cryptocurrencies. Some argue they are commodities, others that they are currencies whilst still more assert that they are neither. Governments cannot construct serious and watertight legislation without an agreed and permanent definition.
So whilst prominent figures such as Christine Lagarde, head of the International Monetary Fund, can claim that regulation is “inevitable” it remains to be seen what the form and scope of this regulation will be.
Bitcoin was invented to circumnavigate centralised and powerful government institutions. Indeed, much of the Bitcoin white paper was devoted to describing the innovative technological methods that would allow the Bitcoin network to be decentralised. Governments across the globe are rapidly coming to the realisation that the regulation of decentralised virtual networks is a great challenge. Time will tell as to whether they will have the technical ability and will to overcome it.
- The original Bitcoin white paper.
- A discussion in the American Senate concerning cryptocurrencies
- Article explaining the recent ban on Bitcoin by Egyptian religious scholars
- An article discussing cryptocurrencies with the head of the IMF, Christine Laggard
- A paper laying out Hong Kong’s stance on cryptocurrencies
Yehudah is currently studying Banking and International Finance at the Cass Business School in London. Yehudah is particularly interested in how cryptocurrencies can increase economic freedom and prosperity in the developing world.