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The Cryptocurrencies—Regulation, Taxation, and Consumer Protection

by Boulevard Aladetoyinbo
Senior Associate, Infusion Lawyers

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Cryptocurrencies are variously known as virtual currencies, digital currencies, private currencies, private moneys, cryptocoins, crypto-tokens, digital assets, and the likes. The first cryptocurrency is called Bitcoin. Bitcoin is reportedly invented by Satoshi Nakamoto, an individual or a group of individuals whose identity remains unknown to members of the public since 2008. Nakamoto also invented the Bitcoin blockchain technology. When Nakamoto was leaving the online community, the Bitcoin source-code repository and network-alert key was left to Gavin Andresen, a Massachusetts-based software developer who got involved in Bitcoin in 2010 to oversee affairs.

After the invention of the Bitcoin, other alternative cryptocurrencies or altcoins like Dash, Ether, Dogecoin, Litecoin, Ripple, and the rest, have since swept the Internet landscape. Some of these alternative cryptocurrencies often add new features to improve upon the Bitcoin. Others have different properties and objectives. Though these cryptocurrencies compete among themselves, all cryptocurrencies are based on the Distributed Ledger Technology (DLT). DLT is a publicly distributed book of accounts and the technological basis for cryptocurrencies. It records user-to-user transactions in the area of digital payments and business operations without requiring a central point that authorizes each individual transaction. The Bitcoin is more valuable than an ounce of gold and is the most valuable of the cryptocurrencies. Bitcoin now exchanges at over $2,000 to 1 Bitcoin in various exchanges and FinTech startups across the world. And it is upsetting the modern global finance already.


The Cryptocurrency Regulation Prospects
Though cryptocurrencies have been touted and represented in different names, their very nature qualifies them as money. Dictionary.com defines money as “any circulating medium of exchange, including coins, paper money, and demand deposit”. Cryptocurrencies are tradable commodities—same as fiat currencies—used for debt settlements and serve as exchange media. Governments have either been reluctant (and mostly refuse) to regulate cryptocurrencies or ignore to look their way altogether. In all grit and honesty, the prospects of government regulating cryptocurrencies are quite a tough one. This is because cryptocurrencies are private moneys. Because they are not issued by the government-controlled central banks of countries all over the world, cryptocurrencies are not public moneys to be publicly regulated. They are private moneys mined on a computer network for peer-to-peer transaction purposes.

There are no official seals, high watermarks, or signatures on fresh-mined cryptocurrencies. Tim Swanson’s book title, “The Anatomy of a Money-like Informational Commodity: A Study of Bitcoin” just about captures the exact nature of cryptocurrency, being a sequence of encrypted data secured on a blockchain.

Watchers have said drug dealers use the cryptocurrencies for drug dealings and other criminal activities. The cryptocurrencies have been used to launder fiat money, and the users of cryptocurrencies are wont to avoid paying taxes whenever tax-deducible transactions take place. This is because the cryptocurrencies are not effectively regulated by governments of countries at the moment.


How Should the Government Regulate Cryptocurrency Transactions?
Though the government does not issue the cryptocurrencies, it does have an obligation to regulate them for both common good and order in the human society. The following are the some of the inexhaustive long-term regulation strategies in operation already. 


1. Anti-Money Laundering
Since it has become imperative that cryptocurrencies need regulation, governments have standing laws to the purpose. In a country like Nigeria for instance, some of the relevant laws are Central Bank of Nigeria (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations 2013 and Money Laundering (Prohibition) Act 2011.

These laws seek to both fight and prevent money laundering, electronic fraud, terrorism financing, etc. It is immaterial that the laws were not made with cryptocurrencies in mind. No reference to cryptocurrencies was made in the laws. Only references were made to the old money (fiat money). The same legal principles and provisions in the statutes apply to fight financial crimes arising from fiat-money transactions will be transposed to cryptocurrencies willy-nilly, except certain situations where matters of first impression or conflicts may arise.

Cryptocurrency users would have to scale legal hurdles before they can legally use a cryptocurrency. Anything less than going through the vetting process obviously means that any attempted transaction in which cryptocurrencies are envisaged will fail. There are benefits about the means devised by the government, one of which is to advise and devise further means to ensure that the real face and identity of cryptocurrency users are revealed, while they remove the mask of anonymity, which has plagued the cryptocurrencies, especially the Bitcoin. The Bitcoin anonymity philosophy throws its integrity into suspicious circumstances since that makes it looks like it either has something to hide or the technology is built in some kind of conspiracy fashion against the government, or a total derision of the government’s undue interference in private lives, and failure of its fiat money during the 2008 global financial fiasco.


2. Know Your Customer (KYC)
Banks, financial institutions, and other players in the financial services industry are required to “obtain and verify the identity of the customer”. This can happen “before or during the course” of conducting the financial transactions. This is the meat of section 25 of the CBN Regulations 2013 and section 37 of the Cybercrime (Prohibition, Prevention, etc) Act 2015.

The KYC and AML are effective anti-money laundering strategies adopted in many jurisdictions all over the world. Of late, United States Congressmen had demanded to know from the Internal Revenue Service (IRS) the identity of two customers who transacted with Bitcoin on the exchange startup, Coinbase. The customers want their anonymity protected by Coinbase, and thus, Coinbase has been foot-dragging on releasing its customer-transaction records to the IRS. It is a requirement of the anti-money laundering law and policy that these money-business outfits must both demand and document the “basic customer information” as a conditio sine qua non before any business relationship. Drastic regulatory discipline does follow, where otherwise is done. There are Anti-Money Laundering Compliance Officers (AMLCOs) to ensure that things are regularly done.


3. Taxation
Taxing cryptocurrency transactions as a control strategy may not be as easy as it seems. From all indications, the above suspected tax-fraud matter evidences this. It is fast-shaping up to be a potential tax-crime investigation as there is a reasonable suspicion that in the high-volume Bitcoin transactions, no tax was paid. But furthermore, it is not quick and easy levying taxes on cryptocurrency transactions, except with the full cooperation of the exchange startups and other financial-services industry players, plus putting in place strict regulations and control.


4. Consumer Protection
The primary obligation of any responsible government has always been to foster and preserve a free and fair economic space where businesses and ventures thrive while the ultimate consumers’ interests are protected even as they consume business products.

To this end, governments’ efforts are more than ever geared towards regulating the cryptocurrency phenomenon so that the human society is not at the end of the day plunged into anarchy and sheer lawlessness where no central authority but private individuals produce, regulate, manipulate, and transact with the new money, which is the most essential controlling power, next to politics.

The Consumer Protection Council Act is one of the various legal ways the government seeks to protect or rather protects the consumer’s interest with public-oriented guidelines while it proffers real-time solutions and redresses to damage done to product consumers.


Do you plan to or already invest in blockchain or any cryptocurrencies? Are you a FinTech startup involved in cryptocurrency exchanges? If you have any doubts about your investment and how protected you are under the law, take steps to protect your investment.

© Boulevard Aladetoyinbo 2017
All rights reserved. Do not republish without a written permission by either the author or Infusion Lawyers.

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