What legal framework could there be to regulate a decentralised currency? By Malcolm Superville from The University of the West Indies and Best in Category winner for the vLex International Writing Competition category: Money, Law & Technology.
By Malcolm Superville
Regulating cryptocurrencies is focally a matter of legal classification, but the root of a cryptocurrency’s regulatory difficulty is its complete, illimitable decentralisation. What cryptocurrencies are classified as ultimately determines how they will be treated and thus, regulated, but whatever classification adopted will be patently ineffective once the decentralisation of cryptocurrencies remains absolute. Cryptocurrencies are systems of cryptographic currency that secure the transfer and exchange of digital tokens across distributed consensus networks. They are created by mining — solving automatically generated mathematical puzzles toward processing user transactions — which collects, then adds transactions to distributed blockchain ledgers in chronological sequences of blocks comprising the complete record of all transactions.
The animating force driving a cryptographic system is its decentralisation. Decentralised cryptocurrencies lack any central authority controlling its creation or circulation because it needs to be free from any single point of control that could be attacked or corrupted — but this complete decentralisation is its most critical flaw. Cryptocurrencies are supposedly better than traditional monetary transmission and payment service systems because there should be an aversion to the monopolies central banks and mainstream financial institutions share in issuing money and providing financial services. But this is not necessarily the case.
Rather, developers of decentralised cryptocurrencies create the illusion of existing without any central point of control when really, there is an asymmetry between those who can only submit changes to cryptographic software, and the core team of developers who actually have the power to decide which changes will be incorporated. They lull the cryptocurrency community into a false sense of financial empowerment by leading them to believe that cryptocurrencies is a better monetary system; but in reality, these transactions are exceedingly technical and risky, and cryptocurrencies are so expensive that they are hardly affordable.
The idea that ‘the lack of central points of oversight, planning and control makes decentralised cryptocurrencies less susceptible to catastrophic failure’ is just an excuse to preclude governmental intervention and place unsupervised power into the hands of the core developers of cryptographic currencies. Decentralisation shrinks at the top, but pre-eminently centres around the self-serving money motivations of an oligarchic minority team of developers, not democratically elected, but chosen based on their expertise, that take matters into their own hands, for their own benefit. And it is only when this mere façade fades that the truth can be uncloaked: (i) that decentralised cryptocurrencies are more susceptible to catastrophic failure because these unsupervised developers cannot realistically be trusted to hold themselves accountable; and (ii), left unregulated, decentralised cryptocurrencies are little else than anonymity-enhancing middlemen who conceal and further deepen the transcontinental flows of illicit activity on the dark web.
It is therefore immaterial that regulating cryptocurrencies is primarily a matter of legal classification. Each classification will prove inadequate and inefficient, and any attempt at regulation will be materially crippled once the animating force driving cryptocurrencies remains unlimited– its complete decentralisation.
First, if classified as money, regulating cryptocurrencies becomes a matter of extending banking laws. Since cryptocurrencies were held as ‘stores of value, units of account and a medium of exchange’ that can be likened to money; it may be possible to regulate the use of cryptocurrencies if the definition of money transmission services expands to include, ‘any other value that substitutes for currency by any means.’ But this cannot account for virtual-asset transactions through peer-to-peer networks because anonymity-enhancing cryptocurrencies use private blockchains that have the potential to undermine the AML/CFT controls used to identify suspicious activity through tumblers, mixers, and peel chains that disguise and obfuscate the source, owner, or path of crypto-funds.
Next, if considered a commodity, cryptocurrencies would possess intrinsic value that could make it the subject of tax, thereby mitigating the extent to which cryptocurrencies could be used in tax evasion schemes. Because crypto assets were held to be ‘a conglomeration of public data, private keys and system rules’ constituting information forming a species of intangible, subterranean property, ordinary tax principles could be applied to virtual currency transactions. But this cannot account for the trade in, or exchange of non-convertible virtual assets on peer-to-peer networks where the identity of customers conducting digital transactions are concealed and made increasingly unidentifiable through pseudo- and anonymisation.
Then, even if seen as a payment service, exchanges in cryptocurrencies could be considered a means of payment, and would be regulated through a rule-based electronic payment system that dictates rules for credit transfer and direct debit transactions between the payment service providers of a payer and payee. But it is difficult to define payment service provider using decentralised cryptocurrencies because transfers of funds ‘occur directly from the payer to the payee, will be confirmed by miners on the blockchain, and will be made with no centrally managed single institution authorised to serve as a payment service provider.’
Uselessly pandering over what cryptocurrencies ought best to be legally defined as just creates a divisive academic polarity that wastes time neglecting the meat of the matter — that no regulatory framework for cryptocurrencies can be sustained unless its complete decentralisation is limited. But it is almost certain that decentralised cryptocurrencies can be fettered if they become state-owned.
State-sponsored cryptocurrencies are arguably better because it could galvanise some decentralisation against the degree of centralisation necessary to incorporate the essential features of cryptocurrencies while still ‘governing the blockchain, the conduct of miners and other intermediaries that partake in maintaining a cryptographic ecosystem.’ The creation and circulation of state cryptocurrencies through national central banks could ‘control money growth, inflation and capital flow, minimise the probability of fluctuation in exchange rates, and ensure accountability and liability from any obligations arising from virtual financial transactions,’ so it is probably the best bet to address the regulatory difficulties of decentralised cryptocurrencies.
In summation, the central touchstone to regulating cryptocurrencies hinges on what they are classified as, but classification is immaterial if decentralisation remains absolute. Curbing the unfettered decentralisation of cryptocurrencies may be possible if some centralisation is introduced, but the best single point of control arguably comes from the state.
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