I. Preamble
It is said that the first coins to circulate, in Lydia, Asia Minor, in the early 7th Century B.C., were by an alloy of silver and gold. Before those coins, precious metals were used in trade. And even earlier than that: bartering. Twenty-seven centuries later, currency has a completely different form. And value. And use. And utilization. Almost a decade ago, cryptocurrencies appeared …
II. Cryptocurrencies
Bitcoin, Ethereum, Tether, Ripple, Litecoin… And many more!
Many confuse (or identify) genus with species. Especially cryptocurrencies with Bitcoin. Is there a reason for that?
David Chaum, an American cryptographer, conceived, in 1983, the idea of cryptocurrencies.
The year 2008, though, was the turning point.
In 31.10.2008, a person (self)introduced as Satoshi Nakamoto, published a study titled: “Bitcoin: a Peer to Peer Electronic Cash System”. In their study, they were calling for the creation of the first “Decentralized Digital Currency”. The writer was opposing conventional currencies. They claimed (and not unjustly) that the operation of conventional currencies is based on everyone’s trust in the banks. The writer argued against the banks, pointing out problems deriving from fluctuation and expressing lack of faith in the banking system.
Even in our recent history, Satoshi Nakamoto was (unfortunately) proven right (Cyprus 2013, Greece 2015). The crisis in trust is what, I presume, aided (and keeps on aiding) the further establishment and development of cryptocurrencies. Especially in those countries with a low quality banking system.
Bitcoin was/is one of many cryptocurrencies: of those that exist and of those that will be developed.
But Bitcoin is the one that stands out from the rest. It is the most popular and “successful” one after all; The increase of its price (at least in the past): rapid.
ΙΙΙ. What exactly are the cryptocurrencies?
By approaching, in a previous article, blockchain technology from the business point of view, we concluded that cryptocurrencies are: “digital currencies based on an open source software”. We also mentioned that they: “allow for the transfer of value between transacting parties, eliminating the need for the mediation of a central authority (e.g. a Bank or a State). Being digital, those currencies do not take a physical form. All cryptocurrency transactions are confirmed by the users of the decentralized monetary system and are recorded in a blockchain. Cryptocurrencies resist inflation. And, with the technology that currently exists, it is impossible to forge them. The characteristics described render all transactions taking place with cryptocurrencies cheaper, faster and safer compared to transactions that take place using traditional currencies and payment networks.”
IV. Are there opponents to cryptocurrencies?
Cryptocurrencies have “rocked the boat” of international economy, especially of the financial sector.
Internationally acclaimed economists (i.e. Allan Greenspan, Paul Krugman, Nouriel Roubini) have turned, with great vigor, against cryptocurrencies. Countries and international organizations have done the same. None of them, though, managed to halt their development, not even by a little bit.
Why is that? We already mentioned (under II) that there is a crisis in trust…
V. Accepting them (out of need) …
The changes cryptocurrencies have already started bringing are very important. It is not possible to pretend they don’t exist. Neither to say that they are exclusively tied to criminal organizations. Cryptocurrencies are one of the objects of Fintech (financial services provided exclusively through innovative informatics and communication technologies).
Most importantly: with countries and international organizations having now accepted the situation and the future, are trying on the one hand to understand cryptocurrencies and on the other to regulate them.
VI. Are there disadvantages?
Technological advancements are put into use, in order to maximize the benefits of cryptocurrencies. Furthermore: to broaden the scope of their use, make them easier to handle and safer.
Of course, they do have disadvantages. But can they be of such an extent that those who trade (with) them are significantly affected?
Two disadvantages could be identified as the major ones. The first concerns the potential for “transaction volatility” (ind. The famous Mt. Gox case: in 2014 hackers “stole” from Mt. Gox’s stock market, 850,000 Bitcoins). The second is the absence of regulation on cryptocurrency transactions.
VII. Specifically: the risk of theft
According to what is today known, it seems technically impossible to “hack” cryptocurrencies. But what about the “wallets” that contain them?
Various types of digital wallets (digital / cryptocurrency wallets) are used to store cryptocurrencies. Such are Online Wallets, Desktop Wallets, Smartphone Wallets, Hardware Wallets etc.
These wallets are just software programs. We can easily match them with (known) bank accounts. This particular storage medium seems to be what is targeted by hackers hoping to steal cryptocurrencies.
An Online Wallet, for example, although very easy to use and available anytime via the Internet, has a private key. If someone hacks the company that manages the server in which the key is stored, they gain access to that wallet.
Accordingly, a Desktop Wallet -stored in a user’s computer- is at risk if the computer is “hacked”.
Protection of Information
There are also Smartphone Wallets, Hardware Wallets (which seem to be the safest storage method) and Paper Wallets. Each of them is at (potential) risk.
So it becomes clear that the security of cryptocurrencies depends on the protection of confidential information – such as private keys.
Various solutions are being developed by specialized companies to protect cryptocurrency holders. One of them is Xapo, which deals with Bitcoins security issues. “If the vulnerability is in hackers being able to access private keys and passwords that allow them to masquerade as the owners of the bitcoins and transfer them away from their rightful owner, then the solution, Xapo reasons, is to make private keys and passwords inaccessible. Xapo has built a network of underground vaults around the world holding confidential information like private keys and cryptographic materials. They are physically stored on servers that have never touched an outside network, including the Internet. The servers are guarded using biometrics and men with guns.” (“The Industries of the Future”, 2016). As Alec Ross observes there, “Some things never change”!
VIII. The legal nature of cryptocurrencies
Transactions with cryptocurrencies, despite the risks involved, are a reality. A reality that has made its appearance in the Greek economy as well. More and more businesses (including pharmacies, hairdressers, accounting and law firms, etc.) are being added to those that accept cryptocurrency payments, especially Bitcoin (: a simple online search leads to concrete, impressive, results). Unfortunately, however, the relevant transactions in our country are completely unregulated.
It is really problematic that the views of (presumably) experts on the legal nature of cryptocurrencies do not coincide. This fact already poses significant problems. One of them relates to the inability to comply with any existing rule of law in order to temporarily, at least, fill the legislative gap.
It is true, cryptocurrencies are not money – in the strict sense of the term [as, for example, banknotes and coins are]. But the fact is that cryptocurrencies are used as payment instruments. Thus, it seems reasonable to think that they fall into the category of money – in the broad sense (such as other means of payment).
Law in U.S.
The case law of the US courts is already moving in this direction. In the case of the Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust, the Texas District Court dismissed the party’s claims, which held that Bitcoin was not a currency. It considered that money falls under a broad concept (according to Greek terminology) and therefore there is the possibility of extinguishing financial obligations by paying Bitcoins. The same designation was used by a different US court, the District Court in New York (Case of Robert M. Faiella and Charlie Shrem). In contrast, the US Tax Authority (IRS) classifies Bitcoins as assets (circular No. 21 – 2014).
Law in Europe
Now looking at Europe, the judgment in Case C – 264/14 (Skatteverket v David Hedqvist) is noteworthy. In this ruling, the Court of Justice of the European Union states that Bitcoin is one of the so-called ‘two-way’ virtual currencies, which users can buy and sell at exchange rates and differ from electronic money (as defined by the 2009 Directive / 110 / EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of an electronic money institution). The Court ultimately proposes the concept of service as the most appropriate one. On this basis, any person attempting to trade with Bitcoin is rightly treated – from a tax point of view – as a provider of onerous cause. In addition, with regard to the issue of legal nature, the European Central Bank has relied on the fact that virtual currencies are not widely used in transactions, are not issued by central banks of the States and do not incorporate currency values recognized in accordance with the above as legitimate means of payment by some state entity. It therefore argued that virtual currencies do not fall within the concept of money or currency. Therefore, neither in the broad sense are they money. Instead, they are defined as simple digital representations of value …
Rules
It is argued by some that cryptocurrencies are securities and financial instruments. However, this view does not appear to be well founded. Cryptocurrencies cannot be traded in any organized and controlled multilateral trading system. On the contrary, it is commonly accepted that this is a decentralized monetary system, the rules of which are set by its users.
It is thus incurred from the above that it is absolutely essential to agree on the legal nature of cryptocurrencies. And this is a necessary prerequisite for the (absolutely necessary) regulation to ensure that they are treated as uniformly as possible.
IX. The need for (uniform) legislation
Although the developments in the field of cryptocurrencies are rapid, our country is not taking any actions in regulating them. Fortunately, this inaction is not generalized. The State of New York has already, in 2014, initiated a regulation of al cryptocurrencies, filing a bill titled “Regulations of the Superintendent of Financial Services Part 200 VIRTUALCURRENCIES” or “BitLicense”. Canada, Israel, Switzerland, Turkey, the United Kingdom have identified Bitcoin as money (in the broad sense). Cyprus, in the framework of the National Strategy for Decentralized Technologies (Blockchain), provides for regulations, inter alia, on cryptocurrencies. But there it is already possible to pay a lawyer in Bitcoin.
The need for legislative initiatives in this area (and) by our country is absolutely essential. However, transactions involving the use of cryptocurrencies are mainly cross-border. In this context, perhaps the need for a European or, better, international dialogue on the issue becomes more urgent, so that the individual regulatory frameworks do not decisively diverge from one another.
X. In conclusion
“Is there an algorithm for trust? New trading methods make it obligatory to rewrite the contract between company, citizen and state” (:Alec Ross, 2016).
Cryptocurrencies are a reality.
Most have accepted that reality. Some are already taking advantage of it. Among them, businesses. (Unknown how, but) In Greece AS WELL.
Any further delay (legislation-wise) is to the detriment of the national economy.
And of businesses.
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (December 1st, 2019).
