Blockchain and cryptocurrency regulation

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Presented in Berlin, June 2017

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Blockchain and cryptocurrency regulation

  1. 1. B L O C K C H A I N A N D C RY P T O C U R R E N C Y R E G U L AT I O N D R A N D R E S G U A D A M U Z , U N I V E R S I T Y O F S U S S E X
  2. 2. A P O L O G I E S …
  3. 3. … A N D A S T O RY
  4. 4. L E G A L I S S U E S • Legal status of cryptocurrencies • Contract formation • Criminal and fraud issues • Regulation strategies
  5. 5. L E G A L S TAT U S O F C RY P T O C U R R E N C I E S
  6. 6. C RY P T O - C U R R E N C I E S ( C C S ) • A cryptocurrency is a digital or virtual currency that uses cryptography for security. • Impossible* to counterfeit. • It’s not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
  7. 7. I S I T A PAY M E N T S Y S T E M ? • CCs don’t fit well with existing payment systems: • Two party systems: cash, barter • Three party systems: Paypal, escrow • Multi-party system: credit cards, debit cards, cheques,
  8. 8. I S I T A C U R R E N C Y ? • Depends on how national law defines currency, and whether it allows only one legal tender. • Some countries allow circulation of foreign currencies, or even alternative currencies. • Some countries allow one legal tender, and several legal currencies. • Question is who can create new value.
  9. 9. U S L A W • In the United States, only the US Dollar is legal tender (31 U.S.C. § 5103). • Similarly, only the Mint and the Federal Reserve can produce coins and currency, which are the only means of legal tender. • “Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both.” 18 U.S.C. § 486
  10. 10. L I B E R T Y D O L L A R • Currency issued by company in Idaho supported by gold and silver certificates. • Libertarians flocked to use it. • Creator got charged and convicted of issuing his own currency.
  11. 11. I S I T E L E C T R O N I C M O N E Y ? 
 D I R E C T I V E ( 2 0 0 9 / 1 1 0 / E C ) • 1. electronically, including magnetically, stored monetary value; • 2. as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions; • 3. the transaction is an act, initiated by the payer or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee; • 4. which is accepted by a natural or legal person other than the electronic money issuer.
  12. 12. I S I T A C O M M O D I T Y ? “The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.” 7 U.S. Code § 1a
  13. 13. I S I T A S E C U R I T Y ? • Any tradable financial instrument of any kind. • "Any note, stock, treasury stock, bond, debenture, certificate of interestor participation in any profit- sharing agreement or in any oil, gas, or other mineral royalty or lease […] • debt (banknotes, IOUs) • equity (stock) • derivatives (futures and options)
  14. 14. I T ’ S A C O M M O D I T Y • The US Commodity Futures Trading Commission (CFTC) declared in 2015 that Bitcoin is covered by the Commodity Exchange Act. • “The definition of a ‘commodity’ is broad. Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”
  15. 15. B L O C K C H A I N S
  16. 16. W H AT I S A B L O C K C H A I N ? • A blockchain is quite simply any open, cryptographic, decentralised ledger. • The ledger is public and decentralised, and since anyone can check past, present and proposed transactions, there is increased reliability in the system.
  17. 17. W H AT I S A B L O C K C H A I N ?
  18. 18. B L O C K C H A I N F U T U R E • Verify banking transactions. • Verify bets. • Verify music uses to give royalties to artists real time. • Identify a work owner. • Verify contracts.
  19. 19. C H A R A C T E R I S T I C S • Proof of Work. Reward for running the program to verify transactions. • Authentication. This is the main function of a blockchain, the implementation must be designed to validate transactions securely and unequivocally. • Decentralization. The blockchain must be decentralized, so copies of the entire ledger cannot be held centrally. This presents a few technical problems, such as the increasingly unmanageable size of the blockchain as more transactions accumulate.
  20. 20. C A N A B L O C K C H A I N B E U S E D T O C O N D U C T A C O N T R A C T ? • Yes, if the parties can express properly offer and acceptance (and consideration), and other formalities according to national law. • Art 9 E-commerce Directive 2000/31/EC: “Member States shall ensure that their legal system allows contracts to be concluded by electronic means.”
  21. 21. H O W E V E R …
  22. 22. C R I M E A N D F R A U D
  23. 23. FAV O U R E D C U R R E N C Y O F T H E D A R K S I D E
  24. 24. H O W E V E R …
  25. 25. D A R K N E T
  26. 26. D A R K N E T
  27. 27. D A R K N E T
  28. 28. U L B R I C H T A N D S I L K R O A D
  29. 29. H O W E V E R
  30. 30. A H I S T O RY O F F R A U D A N D H E I S T S • Allinvain 25k BTC theft (June 2011). • 78k MyBitcoin theft (July 2011). • Bitcoin Savings and Trust ponzi scheme (2011–2012), est. 263024 BTC. •
  31. 31. M T G O X • Former Magic The Gathering card exchange outfit run by Mark Karpeles, fugitive from French authorities. • At some point MtGox handled 90% of all BTC transactions • MtGox reported in February 2014 that it may have lost nearly $500m (£300m) worth of BTC • Filed for bankruptcy protection in Japan and US • Karpeles refuses to attend hearings, should be in jail
  32. 32. D E C E N T R A L I Z E D A U T O N O M O U S O R G A N I Z AT I O N ( D A O )
  33. 33. D A O “ T H E F T ” • DAO operates a pool of millions of USD worth in Ether (ETH). • Only those participating in contract verification can withdraw funds according to terms of participation. • On June 17 2016, a bug in the code allowed malicious party to syphon funds from common pool (estimated 3.6m ETH, about $50 million USD at the time). • Hard fork from developers “turned back time”.
  34. 34. R E G U L AT I O N
  35. 35. P R I C E H I S T O RY C H A R T
  36. 36. P R I C E H I S T O RY ( U S D ) • $0.08 August 2010 • $1.00 February 2011 • $10.11 June 2011 • $1242 November 2013 (first bubble) • $2899 June 11 2017 • $2351 June 15 2017
  37. 37. S H O U L D W E ?
  38. 38. S O M E P R O B L E M S W I T H B I T C O I N • Hoarding • Deflation • Completely dependent on intermediaries • Unregulated markets attract fraudsters and hackers • Susceptible to hacking attacks • You lose it, it’s gone forever, no recourse, no appeals
  39. 39. N E E D F O R R E G U L AT I O N • Regardless of Bitcoin’s legality, there is a lot of money changing hands. • Exchanges need to be regulated as financial institutions • Taking money, giving credit and keeping accounts is a highly regulated endeavour in Europe (and elsewhere). • History of fraud and exchanges going bust.
  40. 40. R E G U L AT I O N S T R AT E G I E S • (1) ‘Virtual sovereigns’: virtual currency providers will serve as regulators by enforcing the terms of their contracts with users to prevent cyber-fraud and ensure proper behaviour. • (2) Prohibition: governments could try to prohibit the use of Bitcoin. • (3) Selective Prohibition: government minimise the real-world impact of virtual currencies by banning the sale of real-world goods for virtual currency. • (4) ‘Real-World Assisted Virtual Currency Self-Governance’: governments provide support for mechanisms whereby users of virtual currencies can agree upon and enforce their own ‘community standards’ and rules of conduct.
  41. 41. W I L L T H E R E B E R E G U L AT I O N ? • No will to regulate at the moment. • Governments aiming to ensure it is covered for tax purposes. • Many central bank authorities have issued warnings about Bitcoin and crytpocurrencies.
  42. 42. E U R O P E A N PA R L I A M E N T B R I E F I N G 2 0 1 4 • “Due to the anonymity embedded in the system Bitcoin has the potential to be used for money laundering and tax evasion. However, research so far shows this potential has not yet been taken up on a significant scale.”
  43. 43. S A P I N R E P O R T I N F R A N C E ( 2 0 1 4 ) 1. Limit anonymity by making it mandatory for intermediaries and exchanges to require proof of identity upon opening an account. 2. Clarify the taxation of virtual currencies with the publication of a set of instructions for consumers and regulators. 3. Propose a European-wide approach to Value Added Tax (VAT). 4. Propose, after discussion with industry, to cap payments in virtual currencies, similar to existing caps on cash payments. 5. Regulate at European level platforms that exchange virtual currencies against the official currency.
  44. 44. E U R O P E A N B A N K I N G A U T H O R I T Y ( 2 0 1 5 ) • “VCs are not legal tender, which means the following features are not fulfilled: (a) mandatory acceptance, i.e. that the creditor of a payment obligation cannot refuse currency unless the parties have agreed on other means of payment; (b) acceptance at full face value, i.e. the monetary value is equal to the amount indicated; and (c) that the currency has the power to discharge debtors from their payment obligations.”
  45. 45. U S S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N ( S E C ) • SEC looked at creation of a derivatives market for BTC. • Report includes scathing indictment of BTC’s stability. • The SEC concluded that the combination of volatility and lack of regulatory oversight make the proposed creation of a derivatives market a risky endeavour that it cannot support, although it opens the door for a future examination of this decision.
  46. 46. S O M E O T H E R R E G U L AT O RY R E S P O N S E S • China banned their banks paying new money to their exchanges, stifling the market and severely reducing its implementation. • US authorities issued guidelines that BTC exchanges should comply with money laundering regulations. • HMRC has detailed BTC status for tax purposes. • Authorities have expressed concern, and mostly adopted “wait and see” strategy.
  47. 47. C O N C L U D I N G …
  48. 48. @ T E C H N O L L A M A Thanks