It is easy to understand why the terms ‘Blockchain’ and ‘Bitcoin’ often get confused – Blockchain does indeed serve as a platform for cryptocurrencies; without Blockchain there would be no Bitcoin. However, it must be emphasized that the scope and potential of Blockchain extends far beyond the world of cryptocurrencies. Although initially created for Bitcoin, Blockchain provides a more secure and transparent way of processing all kinds of data and therefore, the various applications and uses of this technology are endless. This ingenious technology has created a new form of online platform, and comparably, just like the Internet gave us the ability to send emails, shop online and so much more, blockchain can be applied to voting procedures, record keeping, financial instruments and that’s just the tip of the iceberg. The distinction between the two is crucial, as whilst digital currencies have been met with certain aversion and scepticism on account of their volatility, Blockchain has demonstrated its undeniable potential for revolutionising the way we can manage data and do business.
Other inherent features of this cryptographic database are that it is peer-to-peer and consequently, it does not require an intermediary to overlook transactions. The digital database is itself distributed and decentralised, meaning that it can run on a number of computers and be updated in real-time. As it is not stored in one computer or on one network it is also much more resilient to cyber-attacks, reducing certain risks such as bank system failures.
To put it quite simply, Bitcoin just like any other cryptocurrency is a digital coin, which one can transact through the Internet and this has been made possible through the use of Blockchain technology. Bitcoin is undoubtedly the most widely known cryptocurrency, though others do exist. Ethereum, for example, is both a digital platform as well as a currency (called ‘Ether’).
Modern society is currently experiencing a ‘cryptocurrency boom’ and Bitcoin and Ether are just two of the many cryptocurrencies out there. However despite their increasing popularity, a number of questions as to the nature and treatment of cryptocurrencies remain unanswered – are these digital coins a type of commodity or a currency? And more importantly, how will they impact the global market? Several jurisdictions have already promulgated laws regulating cryptocurrencies and the varied regulation has significant repercussions. By way of example, Japan classified cryptocurrencies as a payment method, while the US classified them as commodities. The European Union on the other hand has elected to take on an ‘innovation first’ stance and is yet to pass any specific legislation as to the status of cryptocurrencies. However in Skatteverket v David Hedqvist (Case C-264/14), the Court of Justice of the European Union held that the purchase and sale of Bitcoins were exempt from VAT since the exchange of Bitcoin for traditional currency was considered to be a supply of services. By means of this conclusion, the Court is giving this cryptocurrency the status of a means of ‘payment’ rather than a form of ‘property’ and thus accordingly, the legal tender exemption should apply (Council Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax, Article 135(1)(e)).
The resulting discrepancy may severely hinder the way that Bitcoin and other cryptocurrencies could be traded and exchanged, thereby obstructing their global uptake and in turn, their intended benefits. If Bitcoin and other cryptocurrencies are being used in an array of transactions such as the payment of fee tuitions and meals in restaurants, why are regulators all over the world finding it so difficult to classify cryptocurrencies? One possible answer is that unlike other fiat currencies, Bitcoin has more than one function. In that way, cryptocurrencies can be used as an alternative to ordinary fiat currency, and they have also been compared to a speculative asset and thus should be regulated like a security. Whilst Bitcoin shares a number of intrinsic qualities associated with ‘money’, it lacks the fundamental attribute of general acceptance and widespread use. It is impossible to regulate something without first understanding the role it plays and thus why and how it can be ‘controlled’. This inconsistency has made it very difficult for regulators worldwide to keep pace and come up with one generic piece of legislation to regulate cryptocurrencies of all kinds. Moreover, regulators may find it difficult to legalise cryptocurrencies as the creation of Bitcoin was intended to be a method of bypassing regulation and all forms of centralised authority following the disastrous effects of the financial crisis of 2008 leading to severe distrust in the current banking system.
Even if one country or continent is successful in finalising a piece of comprehensive legislation, there is no guarantee that others will employ a parallel view. A global, uniform view is crucial for the successful utilisation of cryptocurrencies. As things stand, it seems that this is nowhere close to happening as whilst some countries have reacted aggressively by imposing cryptocurrency and ICO bans, other countries like Malta have welcomed the development of cryptocurrency and blockchain technology with somewhat open arms. Needless to say, various attempts have been made as governments from all around the world have tried their best to challenge and/or facilitate the integration of both cryptocurrencies and blockchain technology. Regardless of any conflicting views, a standpoint must be taken in order to facilitate of the continuous development of cryptocurrencies and blockchain technology.
This article forms part of a weekly series called “Unravelling Blockchain”. The previous article can be found here: http://www.camilleripreziosi.com/en/news-resources/1/2455/blockchain-dissecting-the-legal-issues
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