Legal Definition of Cryptocurrency and
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Legal Definition of Cryptocurrency
Before regulating blockchain technology and its most important part, cryptocurrencies, the law should make recognize it as a money, commodity, security or anything else to apply rules on it. At this point, most possible description of cryptocurrencies is money. However, determining of cryptocurrencies as money causes many problems and interrogation points.
First, lawmakers should compare the concept of the f the money and features of cryptocurrencies. In this part, we will investigate the concept of the money and common points between cryptocurrencies besides negative aspects.
Money is an instrument of commerce and the measure of value. In history, three different types of money were used.
These are:
- Commodity Money,
- Representative Commodity Money
- Credit Money
Commodity money was the first money. Items used as money has the same value in exchange were the first representative of money. The first commodity monies appear to have been grains. However, using grains was not easy as money because it could rot or so unwieldy. Eventually, metal coins have used. (Wray, 1990)
Representative money could be unvalued or little value but can be exchanged for silver, gold or its silver equal value. In the nineteenth century, American Banks issued some pieces of paper known as bank notes, which enable to exchange them for gold or silver coins.
Credit money is the third type of money. By credit money or debt money, mean any money, except representative full-bodied (commodity) money, that circulates at a value greater than the commodity value of the material from which it is made. (Goldfeld, 1986)
Credit money is like a representative commodity money, which could be little or unvalued. But unlike it, credit money cannot be exchanged for gold or silver coin. All of the money currently used in the world is credit money. Even using credit cards causes a change in the amount of credit money. Using credit cards means that there is no physical money transfer. We call electronic money to describe these nonphysical monies.
Electronic money
Electronic money is nothing but an electronic representation of national currencies. (David Evans and Richard Schmalensee, 2005) In the perspective of cryptocurrencies, all cryptocurrencies are digital money. The most common mistake is accepting the digital currency as electronic money. Electronic money is not currency itself as digital currency, because it represents national currencies. However, digital currencies have no their own value in the international monetary system.
Digital currency is stored electronically, and also transferred via electronic gateways. First examples of digital currencies appeared in the 1990s.
One of the first digital currencies was E-Gold, which was backed by gold in 1996. Another one was Liberty Reserve, make possible to convert dollars or euros to Liberty Reserve Dollars and Euros and exchange these currencies freely with one another with some transaction fee. The common feature of both systems was centralized. In addition, these systems were used for money laundering and other illegal actions. Finally, both currencies were shut down by the US Government. US Government was able to shut down these digital currencies, because of centralized systems.
In this respect, we should consider what is the possibilities of digital currencies as Bitcoin can eventually replace fiat currencies like US dollars or not.
However, cryptocurrencies have a limited number of units like Bitcoin (Max Issued 21.000.000). It causes value increasing in case of massive using of Bitcoin as fiat currencies.
On the one hand, to accept cryptocurrencies as a money, it could be as electronic money. To be accepted as electronic money, cryptocurrencies must have these conditions:
- Stored electronically,
- Using as payment by people and companies besides issuance companies,
- Issued in exchange for a fund, which accepted by the law,
First, cryptocurrencies are stored electronically. It meets this expectation.
Second, cryptocurrencies, especially the first one Bitcoin have been widely accepted in the world, or at least one company ( Pharmamedic accept ICW ) The cryptocurrency countries let using cryptocurrencies for many services even for tax payments ( in the UK Barclays accept crypto ) . This wide use of cryptocurrencies exactly meets the second expectation referred to as electronic money.
The problem appears in the third condition of electronic money. To accept cryptocurrencies as an electronic payment, it must be funded behind by licensed fund institutions. However, cryptocurrencies have no licensed funding behind them. Ripple has deposited 60 % of all XRPs to an escrow account to give the confidence to coin market. iCashweb has deposited in Pharmamedic World Ltd 25% of all ICW as guarantor.
Moreover, with this step, investors take the guarantee to avoid releasing a big amount of coins, which causes an extreme value to lose.
In order for tender to be considered a currency, it must meet three criteria: first, it must be able to be used for transactions, secondly, it must be able to be used as a unit of account, and the last condition is it must be able to store value. (Kiyotaki, 1989.)
The first requirement, it can be used for transactions easily is met expectations by cryptocurrencies including ICashweb, Bitcoin, Ether, Ripple, and others. There are thousands of websites ( Pharmamedic ) and stores that accept Bitcoin or other cryptocurrencies.
However, it is just a transaction on the Bitcoin blockchain. As we mentioned above, there are many blockchains, which open source to make transactions. After comparing with national currencies, this number could be quite low.
To meet the second requirement, cryptocurrencies can be used as a unit of account. At this point, there are several debates on it. The first debate is related to cryptocurrencies’ limited number. As we mentioned above, many cryptocurrencies have a limited number of units.
Van Alstyne points out that fractional ownership of a Bitcoin is possible; therefore, the 21 million is not a limiting number. In addition, Bitcoin is fungible. All Bitcoins are created equally, and they can all be interchanged. Last, it is countable and subject to mathematical operations. (Van Alstyne, 2014)
The other debate on meeting units of accounts is the volatility of coins and tokens. From my point of view, the biggest challenge for cryptocurrencies to be used as money in daily life is volatility. It creates a problem in valuing goods and services. However, there are still some national currencies, which have high volatility. But, there is not any debate on whether we should consider these national currencies as a currency or not. As result, there is no reason to use it as a unit of account for cryptocurrencies.
The third requirement is the storage value of the account to be accepted as a currency.
Bitcoin suits as a unit of account, we focus on the storage of value and the means of trade purpose. In the case that a user wants to trade it Bitcoin against goods or services, both counterparties of the transaction must come up with a similar valuation of the currency at the same point in time. In order to use Bitcoin to store value over time, users need to quantify their expectations about the future value of the currency. (Glaser, 2014.)
The sharp increase in Bitcoin and mainstream cryptocurrencies at the end of 2017 and then falling down to more than %50 showed that time is still so early to store of value for cryptocurrencies. Because of lacking any inspection body against speculations in the crypto markets causes high volatility. Moreover, failures of dominant coin-token exchange platforms cause high volatility. In this respect, regulating these exchange platforms can be a good step to avoid volatility.
Many currencies have suffered from high levels of volatility, but the main difference between these currencies and Bitcoin is that Bitcoin is not backed by a government. It is clear that the legitimacy of Bitcoin as a currency will remain ambiguous for the foreseeable future. (Carrick, 2016)
Conclusion
As a result, there are many debates on the Legal Definition of Cryptocurrency as a money-currency and electronic money. However, the biggest obstacle of cryptocurrencies to use as money is volatility. In case of reaching a stable value of the crypto market, it proves storage of value and it can be good proof to lawmakers to regulate cryptocurrencies as money or electronic money. www.icashweb.com
