Saturday, November 5, 2016

Cryptocurrency As Information Network Economy Product: The Need Of Legal Regulation

Tatiana Koroliuk, 
Ph.D., associate professor, 
associate professor of macroeconomics and governance department of
 "Kyiv National Economic University"; e-mailKoroliuk.kneu@ukr.net
Marina Vlasenko, 
4th year student of specialization "Management of public institutions" of 
"Kyiv National Economic University"; email: Maryna_x@hotmail.com


The essence and features of cryptocurrency as a new type of electronic money, identified the advantages and disadvantages of functioning of cryptocurrency bitcoin on the market, the necessity and directions of state regulation

The development of goods and services market, globalization, information and computer technologies and Internet communications stimulate the development of financial innovations that not only influence the functioning of the financial sector, but also national economy in general. Cryptocurrency is one of these financial innovations of the XXI century.


Despite the widespread use and distribution in the world, the definition of economic and legal nature of cryptocurrency is ignored by both the scientific community and public authorities that is due to the novelty and underestimation of the role of the financial instrument.

In different information sources cryptocurrency is understood as a commodity, investment equity, and the form of fictitious capital, e-currency, electornic "golden" etc. However, first of all, cryptocurrency - is a type of electronic (digital) money based on cryptographic methods, characterized by a decentralized mechanism of emission and circulation, and acts as an alternative to paper money. As of 10.29.2016 the world has more than 700 varieties of cryptocurrency with a total capitalization of US $ 13.5 billion [1]. However, the greatest demand is owned by bitcoin with capitalization of 11.4 billion US dollars, the rest cryptocurrencies are derived from bitcoin.

On the official website "bitcoin" is interpreted as an innovative payment system and a new kind of money functioning without central government or banks, transaction processing and emission of bitcoins is collectively performed by the participants of Internet computer network [2]. In addition to its appointment as currency, bitcoin also exists as an independent payment system, the protection of which is carried out using cryptographic techniques [3], and differs from other payment systems by methods of issue, circulation and currency deposit. So bitcoin – is an experimental decentralized cryptocurrency that enables instant payments worldwide.

The main advantages of using cryptocurrency market are: decentralized nature of the issue and circulation of currency, no intermediaries, a floating currency exchange rate, used without commission and a high degree of transactions protection, instant payment and settlement of operations in the most remote parts of the world, no need for conversion into the currency of the settlement.
 
Along with the benefits, there are certain disadvantages of cryptocurrency functioning market: the need to connect to the Internet and underdeveloped Internet infrastructure (Internet exchangers, wallets), the anonymity of the person committing the transaction, the funds may be channeled to the financing of terrorism, crime, the use of this tool for the legalization of money gained by crime; the lack of registration of participants and accounting operations, respectively the control of issuance and circulation of currency; expansion of the money supply by quasi-money; lack of internal value of the currency and of any provision; inability to exercise fiscal control; vulnerability to market conditions and insecurity as an asset; way of withdrawal of capital from the national economy. Because of the instability of the rate, bitcoin is capable of creating "bubbles" in the economy, acting as pretext for speculation. 

Also, users do not guarantee the return of money that they have invested in the purchase of bitcoin since the day exchange rate may sharply fall (or rise sharply contrary), but this aspect also applies to fiat money at all. Use of cryptocurrency is based on the consent and trust of members; they don’t act as the debt obligation of the issuer. However, if this confidence is shaken, then the system can completely cease to exist.

Due to the widespread use of cryptocurrency in the world, also in Ukraine, there is the need to develop updated legal framework regulating its issue and circulation to minimize the risks and threats to the functioning of the national economy. As it turns out that the development of financial innovation ahead of the development of the state regulation system creates uncertainty, increased risks of financial and economic instability.

Let’s consider some aspects of bitcoin legitimize operations in the world. In Singapore in early 2014 it was reported that the country's tax authorities equated bitcoin operations to taxable transactions of goods and services [4]. In 2015 the European Court ruled that the exchange transactions of bitcoins to fiat currency is to be exempt from VAT. In China bitcoin is officially banned at the state level by People's Bank of China [5]. Officially bitcoin was legalized in California in 2014, it is a full means of payment. There is even an interactive map that shows the location of bitсoin ATM cash machines in the state. Bitсoin is officially used to pay for goods and services in Canada, the UK, in France the government allowed the Bitcoin Central bank to open deposits and transfer money both in euros and in bitcoin [6, c. 73-74].

Ukraine has an organization Bitcoin Foundation of Ukraine, which is actively working on promoting bitcoin in Ukraine. Today a public discussion of the draft law on the bitcoin legalization is being continued in Ukraine. 

However, the National Bank plans to use blockchain technology to implement into the Cashless Economy project. Today, Privatbank launched the bitcoin for Ukrainian Internet shops, officially introducing its exchange rate of $ 670/BTC. In 2015 a first grocery store, which could accept bitcoin payment in 2016 was opened in Ukraine. One of the Verkhovna Rada deputees said in his declaration that the part of the money is kept in bitcoins [7]. One of the reasons for rejection of bitcoin by central monetary authority and bank is the fear of losing their profits. As bitcoin not only simplifies and speeds up financial transactions, but also significantly reduces the commissions/fees.

Thus, as the process of using bitcoin cryptocurrency is running since 2009 and is irreversible, the government should prepare a regulatory framework for its regulation. It is necessary to examine the mechanism of cryptocurrency functioning in terms of advantages and threats that can carry their use to the national economy, develop rules of issue and circulation of cryptocurrency, registration of participants and accounting of the transactions to determine the procedure for taxation. At fist it is a must to introduce administrative and criminal liability for "laundering" of money through bitcoin. 

Cryptocurrency is often used to purchase prohibited goods, and therefore the state should monitor these operations and set specific penalties. Bitcoin acts as an instrument of online business activity, and therefore, like any business activities should be regulated accordingly. Since it is possible to receive and send bitcoins only through specialized Internet-wallets, the state should regulate the use of the second. The experience of New York State shows that local authorities introduced a license for bitcoin wallets in accordance with international financial requirements, the so-called bitcoin-license [8].

Despite the fact that most countries in the world don’t recognize bitcoin as a full means of payment (we can assume, through ignorance, unexplorence and conservatism of views), we believe that Ukraine may receive a number of benefits at the national level of the implementation of this system of payment. 

Bitcoin can become as alternative to dollar and euro in international payments. Special attention of public authorities must be paid to blockchain technology study, which built actually bitcoin market, including opportunities to use in anti-corruption policy, the development of Smart City, Smart Contracts and more. If to provide full transparency of bitcoin transactions, develop institutional field of cryptocurrency market functioning and to reduce the existing shortcomings, the use of the payment system at the same time is able to increase the effectiveness of public policy.

Lliterature

1.      Crypto-Curancy Market Capitalizations [Electronic resource]. –  Access mode: http://coinmarketcap.com/all/views/all/  (Access date 29.10.2016)
2.      Official site of Bitcoin [Electronic resource]. - Access mode: https://bitcoin.org/uk/ (29.10.2016 р.)
3.      Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. — 2008. — 9 p. [Electronic resource]. - Access mode: https://bitcoin.org/bitcoin.pdf (Accessed 30 October 2016)
4.      Singapore plans to legalize Bitcoin [electronic resource]. - Access mode: http://www.plusworld.ru/daily/singapur-planiruet-legalizovat-bitcoin-574/
5.      Central Bank of China has forbidden banks operations with Bitcoin [electronic resource]. - Access mode:  http://www.vedomosti.ru/finance/news/2013/12/05/cb-kitaya-zapretil-bankam-operacii-s-bitcoin#/ixzz2myQN49z2
6.      Molchanov E. Global service nature of modern crypto-currencies / E. Molchanov, Y. Solodkovskyy // International Economic Policy. – 2014. - № 1(20). – С. 60-79, с. 73-74.
7.      Official website of online magazine ForkLog [electronic resource]. - Access mode: http://forklog.com (30.10.2016)

8.      Michael J. Casey "NY Financial Regulator Lawsky Releases Final BitLicense Rules for Bitcoin Firms" // The Wall Street Journal. - 2015. - Режим доступу: http://www.wsj.com/articles/ny-financial-regulator-lawsky-releases-final-bitlicense-rules-for-bitcoin-firms-1433345396

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