Legal Status of Cryptocurrency in the World

The history of cryptocurrency in the world extends back less than 10 years, but the idea of potential replacement of existing traditional currencies (the so-called “fiat money”) is already gaining popularity among progressive social classes. This may be convincingly proved by dry numbers: in 2008 exchange rate of hardly known Bitcoin (BTC) was 1 USD to 1 309.03 BTC, i.e. more than a thousand of bitcoin cost only one dollar. Exchange rate of bitcoin as of the date of this article was 2 467,3 USD to 1 BTC.

This article will cover the reasons for growing popularity of cryptocurrency as well as its legal status.

In general, cryptocurrency may be defined as a subset of electronic means of exchange of anonymous and decentralized nature, which is based on cryptographic algorithms.

More precise definition of digital currency was given by FATF (Financial Action Task Force on Money Laundering). According to this definition, digital currency is a value-expressing instrument which may be digitally traded and which functions as:

  • Means of exchange;
  • Unit of account;
  • Means of holding value.

The most well-known type of cryptocurrency is Bitcoin. It is a compound of two English words bit and coin. There are also other types of cryptocurrency, including Litecoin, Namecoin, PPcoin, etc., which are sometimes collectively called Altcoin (alternative coin), but their popularity and market cap are nothing compared to Bitcoin. That is why it’s reasonable to examine only this currency, taking into account that all other decentralized payment systems are based on similar principles.

Bitcoin was designed by a single programmer or a group of programmers under the name Satoshi Nakamoto. In November 2008 they published the White Paper which described the functioning mechanism of Bitcoin and its protocol. Bitcoin is an open source decentralized peer-to-peer digital currency.

Key differences of Bitcoin from fiat money are as follows:

  • Bitcoin is a system based on a decentralized peer net that functions without a centralized clearing house or another intermediary. Bitcoin net is not controlled by a single institution like the central bank controlling fiat money circulation. Each computer, that “gains” bitcoin and processes transactions, is part of this net. It is notable that “semilegal” and non-regulated by any legislation Bitcoin system is one the most successful examples of Blockchain technology implementation, which Russian state companies are introducing with lesser success. In fact Blockchain is a public ledger spread among all users of Bitcoin net. Each user of Bitcoin-wallet stores a data base, which contains records of all transactions ever performed in the system. It provides transparency of each transaction and a possibility to verify the origin of each Bitcoin by any interested user.
  • Resistance to inflation. Unlike fiat money that may be emitted in order to expand money supply, Bitcoin system is designed in such a way that it’s limited by a maximum of bitcoin-coins. According to a preset algorithm, only 21 million coins are allowed for emission. By now about 75% of coins have been emitted.
  • Users may have several bitcoin-addresses, however, they are not connected to names, actual addresses or other ID details.
  • Although bitcoin transactions are mostly anonymous, they are also transparent. In fact bitcoins are just transaction records between different addresses in Bitcoin system which build a chain of blocks. Every user of the Net is able to see how many bitcoins are stored at each public Bitcoin-addresses
  • Impossibility of transaction cancellation. It’s impossible to cancel bitcoin transaction, unless a recipient sends coins back to a sender.

The abovementioned features of cryptocurrency (anonymity, in particular) were undoubtedly appreciated by persons with knowingly illegal agenda. Thus, cryptocurrency is widely used in trade deals of restricted or even banned items.

This matter became particularly important after the closure of anonymous online trading platform SilkRoad on October 2, 2013, which was part of Onion zone of the anonymous net Tor and carried its business from 2011 till 2013. Sellers and buyers used bitcoin as their currency, because this payment instrument guaranteed anonymity. This platform served trade transactions for about 1.2 billion USD.

Such usage of digital currencies has become a matter of careful study from regulatory authorities all over the world.

According to FINMA Report (Swiss Financial Market Supervisory Authority) on hearing to the final edition of their anti-money laundering directive, due diligence obligation while transferring digital currencies equals the same obligation while transferring money and valuables. By implication it means that digital currencies will be regulated by Swiss Law On Anti-Money Laundering. Due diligence obligations, including identification of a counterparty and verification of a beneficiary owner, include digital currency circulation in Switzerland from January 1, 2016.  Thus, new due diligence obligations will include online-sellers that accept bitcoin as payment.

In accordance with the current Swiss legislation, the usage of cryptocurrency itself (emission, purchase and disposal) is permitted and not qualified as illegal. However, at the beginning of 2017 as part of the campaign against terrorism financing German politicians suggested to create the system of international legal regulation of digital currencies that would offer viable procedures for law-enforcement authorities during investigation and opportunities for implementation of injunctive measures.

Major concerns of state authorities are caused by a possibility to use this currency for illegal activities: terrorism financing, money laundering, purchase of prohibited goods, such as drugs, weapons, etc.

Meanwhile, Russian authorities have not defined their attitude to cryptocurrency.

At the beginning of 2014 the Central bank of the Russian Federation made an announcement according to which “considering an anonymous nature of “digital currency” emission by an unidentified number of persons and its usage for transactions, natural and legal persons may be involved (involuntarily as well) in illegal activities, including money laundering and  terrorism financing. The Bank of Russia warns that rendering exchange services of “digital currencies” for roubles and foreign currency or goods (work, services) to Russian legal entities will be regarded as potential involvement with doubtful transactions in accordance with anti-money laundering and terrorism financing legislation”.

The Central Bank is supported by the Office of the Prosecutor General, according to which “anonymous payment systems and cryptocurrency, including the most well-known Bitcoin, are quasi-money and cannot be used by natural and legal persons”.

There are Russian court judgments where these ideas are developed. Thus, according to the judgment of Nevyansky municipal court of Sverdlovsk Region dated January 13, 2015, free access to information on electronic currency results in the active usage of cryptocurrency in trading of drugs, weapons, counterfeit documents and other illegal activities. These facts alongside with a possibility of uncontrolled cross-border transfer of money and their consequent cash-out lead to a high risk of potential involvement of cryptocurrency into schemes aimed at money laundering and terrorism financing. As a result, hereby 7 web-sites connected with Bitcoin are included into the unified register of banned web-sites, including bitcoin.org.

After the release of these statements many online-shops and other companies that had accepted Bitcoin for payment before, stopped accepting cryptocurrency for the fear of potential prosecution.

In June 2015 the Russian Ministry of Finance proposed to the Government a more rigid edition of the bill on the responsibility for the usage of quasi-money, which banned such cryptocurrency as bitcoin.

Thus, it was proposed that punishment should be detailed and the Code of the Russian Federation on Administrative Offences should be completed by the following articles “Emission of quasi-money” and “Circulation of quasi-money”. As a result, a fine for the emission of digital currencies for natural persons shall amount 20–40 000 roubles. Officials shall be fined 40-80 000 roubles, legal persons – 300-500 000 roubles.

For deliberate distribution of information that allows emitting digital currencies or performing transactions with them, the Russian Ministry of Finance proposes to impose fines for natural persons amounting to 5-30 000 roubles, for companies amounting to 100-300 000 roubles. But the most serious punishment from the ministry’s point of view will await natural persons, officials and legal persons for creation and distribution of the relevant software. In this case fines for natural persons shall amount to 30–50 000 roubles, for officials – 60-100 000 roubles and for legal persons from 500 000 to 1 million roubles.

Circulation of cryptocurrency will also carry punishment for criminal offence. In particular, emission of quasi-money, purchase for distribution purposes and its distribution are subject to a fine in the amount of up to 300 000 roubles or in the amount of convict’s wages or income for up to one year or compulsory community service up to 360 hours or correctional labor up to one year. In case of conspiracy to commit this offence, the accused are subject to the following penalties: a fine in the amount of up to 500 thousand roubles or in the amount of convict’s wages or income for up to two years or compulsory community service up to 480 hours or correctional labor up to two years.

Also the Russian Ministry of Finance prepared amendments to the Federal Law No. 149-FZ dd.  27.07.2006 On the Information, Information Technologies and Information Protection, imposing a procedure of access limitation to web-sites that emit quasi-money and perform transactions with it.

In fact this bill not only bans cryptocurrency circulation, but also attempts to block the possibility of its usage.

Thus, although long-term future of cryptocurrency seems vague, nowadays its popularity is growing, particularly due to huge media coverage. This innovation has already spawned a whole market of companies involved with exchange, storage, security of cryptocurrency, aggregation of transactions for online shops and other services demanded by consumers.

Unfortunately, some analysts emphasize only the usage of cryptocurrency for illegal purposes. It’s a typical reaction of a certain concerned conservative segment of analysts, comparable to a similar reaction to the introduction of electronic money, mobile payment and other innovative instruments that now have become common and even conservative with the introduction of current innovations. In essence, decentralized private currencies are hardly more susceptible to be used for illegal purposes than national money, whether cash or non-cash (which is supported by crime statistics). The major peculiarity of bitcoin and its analogues is that their creators managed to fully get rid of a central issuer, which is possibly the only difference from state guaranteed currencies, revolutionary as it may be.

In long term perspective this technology in any form is likely to continue its existence. In order not to push it beyond legal coverage and make it susceptible to criminal activities, both government authorities and credit institutions must thoroughly consider opportunities for beneficial cooperation with this innovative ecosystem.

Roman Moskovskikh

Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

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