Cryptocurrencies and governments: why fight the inevitable?

Cryptocurrencies and governments: why fight the inevitable?

How different states become more open to cryptocurrencies, but do not rush to legalize them.

Oleg Krot, an investor, the Managing Partner of the international holding TECHIIA

Oleg Krot, an investor, the Managing Partner of the international holding TECHIIA

In October 2021, the President of Ukraine vetoed a bill on virtual assets.

The law implied the establishment of another supervisory body. Volodymyr Zelensky recommended not to spend the budget on it and to hand over the powers of the National Commission on Securities and Stock Markets.

Ukraine continues to lead in the ratings on the use and possession of cryptocurrency, but its legalization has been dragging on for years.

It opens the door to a parallel reality that threatens the traditional financial system. That is why amendments and discussions of legislators are expected and important.

Our country is not the only one that has these doubts. I'm not talking about the United States with its mix of undefined definitions, if I may. While the Securities and Exchange Commission considers cryptocurrency as securities, the Commodity Futures Trading Commission considers it as a commodity, and the Treasury — as a currency.

I'm not talking about Britain with its islands and, accordingly, very different attitudes to crypto.

Below I will talk about the attempts of countries that rarely share the same views on cryptocurrencies, and what unites us all in the search for the best solution.

Doubts of the french

The French Ministry of Economy explains that virtual money, unlike electronic money, has no legal status. Cryptocurrencies are not recognized as financial instruments and are not regulated by law.

The Financial Markets Authority regularly detects and blacklists fraudulent cryptocurrency sites. French officials see the risks of operations in three factors:

  1. the price of cryptocurrencies is very volatile and exposes buyers to significant financial risks;
  2. storage of cryptocurrencies does not provide any protection in terms of asset security;
  3. due to their anonymity, cryptocurrencies facilitate dodging the anti-money laundering rules or may be involved in the financing of terrorism or criminal activity.

French lawmakers are looking for legitimate ways to tax new resources. And full legalization seems to be any time soon.

As evidence of this, the American cryptocurrency trading platform Voyager Digital has chosen this country to register on the European market. Regulators have confirmed the transparency of the company's operations and issued it with a trading license.

The soon-to-be legalization is also confirmed by the Triple-A platform study: in France, cryptocurrencies are mostly owned by young, technically robust, and wealthy residents. It is difficult to imagine that people who will be economically active for the next 30 years will be deprived (for now) of a convenient financial instrument.

Cryptocurrencies and governments: why fight the inevitable?

Brazilian crypto heaven

In 2017, the Central Bank of Brazil issued an 8-piece press release, in which it called cryptocurrencies "so-called virtual currencies." The institution clarified that they do not regulate the functioning of such currencies in any way. Therefore, they do not give any security guarantees, ask not to be confused with digital money, and not to carry out risky transactions.

I can't help but mention the news that only in the first quarter of 2021, traders made deals worth $ 5billion on the largest cryptocurrency exchange in Brazil. To compare, for the whole of 2020 there were deals for only $1.2 billion.

For me, these are related things, but not everything is smooth here. For example, in 2018, large local banks suddenly closed the accounts of companies working with cryptocurrencies — due to violations of anti-money laundering requirements.

Afterward, there was an investigation of the Antimonopoly Committee. Officials were investigating whether there was a conspiracy between the banks to disadvantage crypto owners and traders.

The Brazilian example is one of the most iconic: without regulation, crypto owners have many benefits, but only until they come under scrutiny by the authorities.

Chinese crypto fuss

In late September, the Central Bank of China announced that any cryptocurrency transactions are illegal, stating that they have become a cover for fraud and other illegal activities. In June alone, police arrested more than 1,000 suspects.

Such measures have led to the massive withdrawal of money from Chinese wallets. According to preliminary estimates, more than $50 billion in cryptocurrency moved out to more loyal jurisdictions — for example, South Korea and Singapore.

Singapore requires you to be registered in the bank under your name, comply with financial legislation, and tax reporting.

The circulation of funds invisible to the state has become very large. Five years ago, China was estimated to trade 90% of the world's bitcoin. By this spring, almost half of all bitcoins were mined by Chinese farms: digital wallets in the country received cryptocurrency worth $150 billion in the first half of the year, second only to the United States.

The Chinese government understands that bitcoin allows citizens to transfer money or make investments without government control. And this is unacceptable in the local realities.

A total ban might also be a solution when it is not possible to quickly find a way to take control of the phenomenon. But we know the ingenuity of the Celestial Empire in economic approaches, so there will definitely be a new chapter in its crypto-history.

Salvador’s experiments

This summer, this small Central American country was the first in the world to recognize bitcoin as a legal tender. Price tags, payments, including taxes can be made in the new currency. And what’s important, exchanging bitcoins for regular money will not be subject to capital gains tax.

This is a very bold step. If cryptocurrency was recognized as an asset, it would become a commodity with a value of X, paid in national currency. But recognizing bitcoin as a means of payment equivalent to ordinary money, without exaggeration, can become a threat to national security.

On the one hand, the El Salvador diaspora sends home remittances equivalent to 20% of GDP each year using services such as Western Union. If bitcoin makes its way up, it could significantly reduce the cost of intermediary services, which is estimated at up to $400 million a year.

On the other hand, there are mistakes and shortcomings on the part of government agencies. Even Salvadorans loyal to innovation could not use the state cryptocurrency due to technical malfunctions.

The fact is that the state promised to pay citizens 0.00065 BTC, but failed to cope with the load on the system.

Due to overload, it had to be turned off. First on some devices, then completely. Fraudsters took advantage of the low level of protection — they simply stole a state bonus from people.

Perhaps this is one of the reasons why two-thirds of citizens opposed such an innovation, even protesting against it. This event also sparked discussions with the skeptical IMF, on tranches on which El Salvador's economy depends.

Recognition of bitcoin is good for people but puts government planning on shaky rails. And nobody knows for now how this dilemma will be resolved for El Salvador's economy, especially if the bitcoin exchange rate goes up and down again.

Crypto is a new gold bar

With these examples, I would like to emphasize that the world is feverish in trying to reconcile two parallel realities.

In ordinary reality, the money is issued by the state — and it is a tool of management, control, and coercion. The world financial system is regulated and self-contained. Any money movement can be tracked and money laundering can be fought against.

Cryptocurrency is in virtual reality, and its value is based on human faith. With decentralization and anonymity, it has become a way to escape control. Crypto owners chose it as a means of exchange themselves, not on the instructions of the state. Over the years, the area has become so large that its existence can no longer be ignored.

The European Commission's spring report says: "In May 2021, there are about 9,000 different cryptocurrencies, with a market capitalization of almost 2 trillion EUR, driven mainly by Bitcoin, the most popular cryptocurrency. In May 11, 2021, the market capitalization of Bitcoin (about EUR 850 billion) ranks as the sixth-largest, higher than Facebook Inc. (about EUR 700 billion) and lower than Alphabet Inc. (about EUR 1,250 billion)."

Let's translate it into human language. A critical number of people and huge sums of new money have accumulated in the "parallel" world.

But the owners can not fully use them in the ordinary world — there is no direct tool for business, you can not transfer bitcoin to a dollar account and vice versa. There are only exchanges for individuals, and those are good, as long as the financial regulator does not raise its head.

This is a big problem for those who have a lot of cryptocurrencies and no way to spend them. In this sense, cryptocurrency is like gold: you can fill out your entire apartment with gold bars, but you can't pay with them in a store, build a road with them or buy a factory. Therefore, their owners are ready to part with a piece of freedom in exchange for another freedom — to use virtual property in the real world.

States are solving a difficult task — how to connect the two worlds, but not destroy each other. Cryptocurrency as a phenomenon is already independent enough not to disappear if even millions of people stop believing in it. But its behavior remains unpredictable, and it is very bad for the financial system.

Therefore, for example, under Ukrainian law, which is being finalized, cryptocurrencies are considered virtual assets. They are similarly defined in Japan. This is a good solution for the financial system because then a new product will appear on the market that can be bought or sold, and not a medium of exchange equal to fiat money.

Ukraine can find itself at the forefront in terms of the legal use of cryptocurrencies. Like African countries that skipped the era of wired internet and immediately took a step towards LTE, we can become a hub of innovative opportunities for the world. And this is yet another alternative way to attract investment into our economy, isn’t it?

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