No borders, no regulations and no government control may be both a benefit and a problem for cryptocurrencies users.
It’s been years since the first cryptocurrency – bitcoin – was publicly presented. Today, there are more than 640 kinds of cryptocurrencies, and their number keeps swelling. Cryptocurrencies market capitalization is 18 billion USD, 15 billions of which is bitcoin capitalization. It’s been long since the number of Bitcoin transactions raised beyond 200 000 per day. Digital currencies changed the businesses and the lives of many people, who either made fortune or lost everything investing in digital money or cryptocurrency businesses. Just take the ZCash alone, when its price decreased by hundred times in less than a week. However, most countries have not decided what to do with the legal status of digital currencies and the regulation of transactions involving the said currencies.
Facility and Investment
A cryptocurrency may be both an investment and a facility invested in. Let us consider both cases.
When prospective investors buy any company’s digital tokens, they use cryptocurrencies as an investment (for example, bitcoin). Such tokens may be either a cryptocurrency or an asset. In fact, the difference between a cryptocurrency token and an asset token lies in the technical aspect: unlike any cryptocurrency, no asset has its own blockchain (a distributed database). This means that token assets are issued through the special blockchain platforms, e.g. Nxt.
There are two types of token cryptocurrencies: fork and altcoins. Fork is a copy of an existing cryptocurrency with minor alterations in a code, while altcoin is a new cryptocurrency with a unique code and blockchain.
Tokens may both confirm the involvement of their holder in the project (system) and the holder’s right to participate in a company’s profits. They may be offered for sale through cryptocurrency fundraising: the ICO (the Initial Coin Offering) or a crowdsale. As a rule, the instruments that regulate such relations are the public offers available on websites, including Token Sale Agreements, ICO Rules, or standard terms of website use containing crowdsale provisions.
The ICO is in fact similar to the IPO, and crowdsale is similar to crowdinvesting used in the world of cryptocurrencies. However, IPOs and crowdinvesting are as a rule governed under national regulations, while ICOs and crowdsale are not.
It is difficult to determine which laws should be applied to ICOs, since in the first place, cryptocurrency activities are mainly carried out within the informal economy, and in addition, the status of cryptocurrencies is still in the legal vacuum (the “grey zone”).
In some jurisdictions, tokens are considered as equity shares, provided that not only they confirm the interest of their holder in the system, but also the holder’s right to participate in the company’s profit. In this case, securities and stock market regulations are applied, and cryptocurrency funding may be governed under the IPO regulations.
However, as a rule, companies that attract investments that way, include the provisions in their token sale agreements (or any other similar instruments) specifying that tokens may not be deemed as equity shares or any other securities. In addition, by joining such agreements, the users confirm that they have enough expertise to participate in cryptocurrency funding and use cryptocurrencies, and as well indemnify companies against any claims.
The key advantage of cryptocurrency funding is the quick, easy, and anonymous investments. The main drawback is the lack of regulation. Therefore, there are certain risks for companies carrying out ICOs or crowd sales, and such companies provide no guarantees to their investors. At the same time, quickness, easiness and anonymousness are not always good, while the lack of regulation is not always bad.
Pros and Cons of Cryptocurrencies
A cryptocurrency becomes an investment facility when an investors buys it for the further commercial resale. Cryptocurrencies are extremely volatile. For example, the price of bitcoin can increase or decrease by 10% (or more) in one day.
In 2010, you could buy 1 bitcoin for only 0.5 USD. In early 2017, the price of 1 bitcoin was 1000 USD. Another example is ZCash. At the end of October 2016, the price of 1 ZEC was 50 BTC. Today, it costs 0.04 BTC.
However, to gain any profit, you should convert bitcoin to fiat money. Such exchange may be carried out on any cryptocurrency exchange. In many countries, they are legitimate and operate under local regulations, e.g. in Canada, companies providing cryptocurrency exchange services must be registered with the Financial Transactions and Reports Analysis Centre of Canada. In addition, they are obliged to abide by the anti-money laundering laws and regulations. Otherwise, banks may not open current accounts for such companies.
Unfortunately, not all exchanges carry out their operations legitimately. It’s an open secret that certain exchanges closed and never gave back the money to their users. Every so often, people use exchanges just to convert cryptocurrencies to cash. Consequently, exchanges are not responsible for anything and have no obligations to pay back the money in case of force majeure.
Instead of exchanging digital currency into fiduciary money, one may use it as a payment instrument. For example, Dell accepts bitcoin payments for purchases made from its official website, so you can buy your next Dell laptop with bitcoin. However, the company does not technically accept bitcoin. Instead, customers convert their bitcoins into USD on a cryptocurrency exchange that partners with Dell (probably, under the agency agreement).
In addition to the lack of tax regulations regarding the taxable income in cryptocurrencies, this can be explained by the fact that digital currencies are mainly considered as a means of exchange, rather than a legal tender.
In general, all the pros and cons of using cryptocurrencies for investments (as an investment facility) and payments may be described in three words: borderlessness, lawlessness, and governmentlessness, or in other words, no borders, no legal regulation, and no government control.
Nazar Polyvka and Vladyslav Likhuta specially for “Ukrainskyi Yuryst“