CRYPTOCURRENCIES — THE NEXT STEP IN THE VALUE EXCHANGE EVOLUTION
This article will enhance your understanding of the legal nature of this transition.
The development of innovative technologies has always led to a disruption of every aspect of the economic and legal structure of our society. Have you thought of why people prefer having Bitcoin instead of USD and vice-versa? The introduction of digital currencies which are based on blockchain technology started a very significant conversation around the perceived value of traditional currencies. Each side of the dispute states that there is no real factor backing the price of the other means of exchange. Actually, the theory that the monetary system is just a “habit” which is deeply rooted in our society has some very valid grounds. Why is money so special that it became one of the main drivers of our lives — we are buying/selling our time, efforts, expertise, goods and estates? By reading this article and the next to come, you will gain some insights in the legal nature of Bitcoin and traditional currencies and how it all comes down to the mechanisms behind the value creation and exchange.
Today we are witnessing yet another step of the evolution of the monetary system — the introduction of virtual money and cryptocurrencies. The latter are similar to the fiat currencies as all of them are used as means of payment and have certain value. Obviously, there are many differences as well. Cryptocurrencies are not legal tender in many countries around the world, although they all have the potential to become such. The best way to understand the legal nature of cryptocurrencies is to gain awareness of how they work, what are the relevant specifics and how the different governments and legislations see cryptocurrencies.
It’s clear that the money is a world-common instrument to measure the value of goods and services. However, we tend to forget that at different stages of the evolution of our society the means of exchange were very distinct from one another. Once the value of the previous “form of money” is no longer recognised or suitable for the contemporary needs, we tend to change it. The same process took place during the transition from precious metals to metal coins and paper money — notes. From legal stand point, all of these different versions started with a broad community-wide acceptance. Accordingly, the next step was always the recognition at the state level. And here comes the hard part — it takes time and effort to overcome the established system. Further, sometimes it takes a lesson (often crisis or depression) to realise that the old system is no longer functional.
The regulatory framework is often not accommodated for the purposes of covering the necessities of the contemporary globalised community. In this regard, the evolution of blockchain technologies resulted in numerous challenges for the public authorities around the world. The reason for these difficulties is the complete decentralisation and diverse tools for creation, storage and exchange of digital assets having a perceived by the parties to the transaction value. This led to the initiation of undertakings mirroring regulated activities without falling into the definitions of such. On the other hand, the constantly growing adoption of blockchain assets for payment, capital raising, and investment purposes created a whole new unregulated market with significant capitalisation for something often “based on thin air”.
The core issue here is the approach that has to be undertaken by the regulators when assessing the legal nature of a blockchain based setup. It has been proven that from formal regulatory standpoint many assets and underlying schemes do not meet all criteria by law and thus do not fall under regulation while they demonstrate the same effects as currencies and financial instruments. It is therefore suggested that in terms of achieving an effective ‘substance over form’ approach the involved parties shall consider the mechanisms (legal and economic) pursuant to which the value of the respective digital asset is generated.
As you will see in further detail in the subsequent texts, the mechanisms driving the willingness of an individual or entity to acquire a digital token are the following: (1) market supply and demand increasing the value of the asset; (2) underlying business activities or physical commodities or objects with volatile price with expectation of higher return of investment. The first category relates to the evolution of the means of exchange and the payment services industry while the second raises issues in the financial industry. It is further established that virtual currencies falling in the first class are differentiated from fiat currencies by the status of legal tender the latter have. Consequently, it was established that the virtual currencies may not have a status of financial assets but qualify as capital for investment purposes due to the enhanced network of individuals and entities accepting them as means of payment and exchanging them for fiat money.
In the next articles you’ll be able to find out what the different issues in blockchain are and what kind of solutions are available.
