Challenges Concerning Regulation of Virtual Currencies

The principal purpose of financial regulation is to identify threats and risks arising from financial activities and mitigate them if required. There are various threats which could possibly arise out of Virtual Currencies (VCs) and it is apparent that regulation could bring positive changes to the functioning of VCs.

What Should Be Considered Whilst Designing Regulation?

One of the most important aspects while deciding on the way in which VCs should be regulated, is to uphold competition policies, as to create an equal playing field for VCs and Fiat Currencies (FCs). The different level of intensity may lead to actors exiting FC usage consequently to lower transaction costs. If lower transactions costs would be the only aspect, which is brought by VCs, it would not pose any problems.

However, they are conveying substantial risks such as hacking, susceptibility to fraud, the variation of price, possible irretrievable loss, lack of safeguarding mechanisms, restricted acceptance, low convertibility and many more naming which would hamper the aim of this article. Overall, trading solely in VCs may be acceptable in the future, but only after a complete framework promising stability has been established. Otherwise, fraud incidents which constantly echo in the news will never stop and all participants of the network will be endangered.

Problems with VCs Regulation

Nature. VCs are based on the notion of self-regulation emphasizing that there should not be any central authority, which will have the power to regulate the way in which VCs are overseen. Today, the financial regulation is based on the core component of imposing compliance requirements by a centralized entity upon private institutions, which in their turn must implement those rules. VCs are presenting unique problems because they do not have any centralized entity by which such regulation may be imposed and do not provide any intermediaries through which it could be implemented.

Moreover, VCs are leaving governments with no headquarters which could be shut down in case of non-compliance. Thus, VCs are countering traditional ways of enforcement and adding new challenges which should be dealt with in a distinct way. In principle, countries may be able to find and prosecute actors who got engaged in illicit activities. However, they will not have adequate measures to disrupt the whole criminal network, as it will be left beyond the reach of the regulatory authority. The epitome from the past would probably be Silk Road, where numerous criminals were left without any sanctions or penalties imposed upon them, and their victims were not retributed in any way.

Lack of legal clarity. There is difficulty with the definition of VCs because they can be seen both as commodities such as food, wood, etc and as securities which are any tradable financial instruments. VCs are a unique string of numbers that can be accessed only by the owner. Because of the peculiar nature which is possessed by VCs, they must be defined in a novel way and should be treated as a completely distinct instrument.

In the US, the Internal Revenue Service (IRS) tried to grant Bitcoin and other VCs the status of property for tax purposes. However, such an approach was inconsistent as it did not follow the precedent and it did not consider, on the one hand, their potential and, on the other hand, the dangers introduced by VCs.

It is apparent that VCs are presenting regulatory challenges to the legislators since they have combined properties of money, commodities, and securities. It poses trouble with determining which national agencies should be responsible for the oversight. Finding a consistent classification for VCs, even within the same jurisdiction has proven difficult. The reason for it lies in the fact that different national authorities may classify them according to their own policy priorities.

So, What Should We Do With Virtual Currencies?

Because of their novelty and nature, VCs should be treated as a separate instrument all across the globe. The EBA already tries to reach it by providing a distinguishing definition to the VCs. Since they recognized it as a new and original instrument, the regulation should be done in the same novel manner. It may be reached by establishing a discrete regulatory framework. In no way this technology should be prohibited and forgotten. It should be treated with caution, whilst helping it to prosper by establishing safeguards in the form of regulation protecting those most vulnerable, their users.

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Disclaimer: This feature was contributed by Georgijus Kocegarovas, and is published in its original form without any major editing. The views expressed by the author are his own, and do not necessarily reflect those of the lawless.tech editorial board.

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