Cryptocurrencies are variantly known as virtual currencies, digital currencies, private currencies, private moneys, cryptocoins, crypto-tokens, cybermoney, cybercash, digital assets among others. The first cryptocurrency is called bitcoin. Bitcoin was reportedly invented by Satoshi Nakamoto, a Japanese-American (whose identity became a mystery, after he disappeared from online cryptography forums during the spring period of 2012). Nakamoto also invented bitcoin blockchain, the technology platform atop which the financial technology (fintech) bitcoin was implemented. When Satoshi Nakamoto was leaving the online Bitcoin community, he left the bitcoin source code repository and network alert key to Gavin Andresen, to oversee affairs.
Cryptocurrency Transactions and Evolving Consumer Protection Laws
After the invention of bitcoin (the cryptocurrency), alternative cryptocurrencies (altcoins) like Bitcoin Cash (BCH), Bitcoin Gold (BTG), dash, ether/ETH (ethereum), ethereum classic, dogecoin, litecoin, ripple, and more than a thousand others, have since swept the Internet landscape. Some of these alternative cryptocurrencies often add new features to improve upon the open-source Bitcoin software architecture. Others have different properties and objectives, but are all decentralised private currency operations neither controlled by a central bank, nor any government-regulated minting and mining farm anywhere in the world.
Cryptocurrencies are in constant price competition in various exchanges across the world. Distributed Ledger Technology (DLT) is another name for “blockchain”, and is a publicly distributed book of accounts. It is secured with cryptographic encryptions, hashes and trillions of mathematical calculations. The blockchain technology records peer-to-peer electronic cash transactions in the area of digital payments and business operations, without the need for transaction authorisation by a central authority, who, traditionally, keeps the transaction ledger (hence the need for consumer protection).
Bitcoin is thirteen times more valuable than an ounce of gold, and is the most valuable of the cryptocurrencies. Bitcoin exchanges at over $15,000 (at the time of writing) to 1 bitcoin in cryptocurrency exchanges across the world. It is fast-upsetting the modern global finance, even as 2018 promises yet another year of more massive adoption and large-scale mainstreaming process.
In March 2017, the Winklevoss brothers’ application to have their Bitcoin Exchange-Traded Fund (ETF) listed was turned down by the United States Securities and Exchange Commission (US-SEC), “citing a lack of market surveillance and regulation”. Undaunted, the digital currency payment solution revolution rages on, as the New York Stock Exchange (NYSE) filed an application last year, seeking approval for eight Bitcoin Exchange-Traded Funds (ETFs).
Certain Money Services Businesses (MSBs) have included on their charts and indices, the bitcoin futures contracts. The futures contract allows market participants, and other retail investors to speculate, by betting on the future bitcoin market price and value, without actually having to buy, or own any of it.
Consumer Protection : Prospects of Cryptocurrency Regulation
Though cryptocurrencies have been touted and represented in different lights, their nature qualifies them as money. They have been used as a unit of account, medium of exchange, and store of value. Dictionary.com further leads credence to this, as it 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 also serve as exchange media. Certain governments have either been reluctant (or even refused) to regulate cryptocurrencies or ignored to look their way altogether. This, according to them, among other reasons, is because cryptocurrencies do not yet enjoy a widespread adoption; are “thinly traded”, and thus, constitute no substantial threat to the global, financial services industry stability.
There have been proposed regulations and promulgated regulations in very recent memory, coming from Russia, Japan, China, Singapore, Malaysia, Belarus, Gibraltar, United States and certain other jurisdictions. These are affecting cryptocurrencies, and the exchange activities that they generate. Some of these legislative efforts are being put in place, in some cases, after hostile government reactions to the cryptocurrency phenomenon. And yet, some governments have put in place, the Regulatory Sandbox Licence (RSL) prerequisite, to encourage blockchain and Distributed Ledger Technology (DLT) businesses develop. It is on record that some of these countries have earlier banned cryptocurrency exchange activities, including Initial Coin Offerings (ICOs) and token sales.
In all grit and honesty, the prospects of government effectively regulating cryptocurrencies pose a both real, and physical challenge; since these are mere mathematical algorithms, which arguably cannot be patented, and will also pose a huge challenge in an emerging, regulatory framework environment. Cryptocurrencies can be privately mined by anyone on a personal computer or on a mobile, if they have Internet access. They do not necessarily need a government-controlled central authority to issue the cryptocurrencies. Thus, cryptocurrencies essentially, are not public moneys to be publicly regulated.
There are no official seals, watermarks, or signatures on freshly-mined cryptocurrencies. They are virtual coins and tokens done in software, with cybersecurity features and functionalities. These are intangible moneys privately mined, and mostly used on the Internet. Tim Swanson’s book title, “The Anatomy of a Money-like Informational Commodity: A Study of Bitcoin” captures the essence of cryptocurrency, as a cryptographic hash sequence of encrypted data secured on a blockchain.
The government-side critics and sceptics have argued that cryptocurrencies are used for drug dealing, terrorist financing, money-laundering, and other criminal activities. While this may be true, the assertion, or criticism does not set free, the fiat currencies from equally being used as financial tools for these same nefarious purposes. Currency and cryptocurrency are financial tools which are both vulnerable to illegal and criminal use. Cryptocurrencies have been used to launder fiat currencies, and the users of cryptocurrencies are wont to avoid paying taxes whenever tax-deducible transactions take place, since these transactions take place in virtually private, “unregulated” realm. In the final analysis, cryptocurrencies are not effectively regulated by governments of nation-states, most of who are struggling to understand the ongoing Distributed Ledger Technology (DLT) revolution.
How Can Governments Regulate Cryptocurrency for Consumer Protection?
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 consumer protection measures are some of the inexhaustible long-term regulation strategies applicable to cryptocurrency transactions in Nigeria, and across various other jurisdictions, though they were not made in anticipation, contemplation of the blockchain, or any Distributed Ledger Technology (DLT) in the legislative mind.
(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. and to protect consumers. As stated, it is immaterial that the extant 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 applied to combat traditional financial crimes, arising from fiat money transactions; is extended to combat criminal cryptocurrency activities. This is a direct consequence, as nature itself abhors vacuum, especially in legal thoughts, legisprudence and jurisprudence. Only exceptions again, are situations where matters of first impression or conflict may arise. According to a Thomson Reuters article which “looked at governmental attitudes toward cryptocurrencies” by jurisdiction, the following words best capture the Nigerian government’s attitude:
“On January 19, 2017, the Central Bank of Nigeria “officially outlawed digital currencies.” The CBN cited reasons like money laundering and terror financing to prohibit banks to use, hold or transact virtual currencies, and they should ensure “existing customers that are virtual currency traders have effective AML/CFT controls.”.
Prospective cryptocurrency users would have to scale the AML/CFT legal hurdles before they can legally buy or trade in the crypto-market. This happens at the entry level into the cryptocurrency ecosystem, and even while trying to “cash out” into fiat currencies. Unlike their cryptocurrency counterparts, fiat currencies are the mainstream, government-made, and -regulated currencies having a countless number of real world use cases. It is noteworthy that anything less than going through vetting process for prospective cryptocurrency users obviously, presupposes that any attempted transaction in a cryptocurrency would eventually fail. In another governmental effort, the European Union (EU), as part of its anti-money laundering and combating against terrorist financing, made proposed amendments to its 4th Anti-Money Laundering Directive (4AMLD), where “virtual currency exchange platforms as well as custodian wallet providers” were included in the list of obliged entities.
This AML/CFT-compliant cryptocurrency transaction scenario is known as Bidirectional Flow Arrangements, where fiat currencies are exchanged for cryptocurrencies on a cryptocurrency exchange. This is possible when one’s conventional bank account is linked with their cyberspace crypto-wallet account. A cryptocurrency exchange like Luno.com requires the basic KYC/AML before one can buy, sell, offer or exchange on its platform. The Luno exchange is available in over 40 countries. Other cryptocurrency transaction arrangements, as categorised by the European Banking Authority include Closed Arrangements, where only cryptocurrencies are exchanged for cryptocurrencies; no fiat currencies involved. The last category is the Unidirectional Arrangements, where though cryptocurrencies are convertible into fiat currencies, the fiat currencies cannot be converted back into cryptocurrencies.
There are benefits about the means devised by the government, one of which is to ensure that the real face and identity of cryptocurrency users are revealed, while the mask of anonymity is removed. The anonymity issue has been very heavy on the cryptocurrencies, especially bitcoin. Even though monero, zcash, and a certain of others, are the real privacy coins whenever it comes down to cryptocurrency anonymity comparative analysis. The Bitcoin anonymity philosophy throws its integrity into suspicious circumstances. This is because it makes the system look like it either has something to hide or the technology is built in some kind of conspiracy-fashion against the conventional governance structure; or that it is a total derision of government’s undue interference with private lives, and failure of its fiat currencies during the 2008 global financial fiasco.
On the 3rd of January, 2009, there was a statement on the Genesis Block (first block to be mined) included by Satoshi Nakamoto. It reads: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. It was in reference to the unsustainable, global eco-financial system, based on a fractional reserve banking system. This was the first block, where the first bitcoin codebase transaction was performed, and Hal Finney, in a peer-to-peer electronic cash transaction, received 50 bitcoins from Satoshi Nakamoto. In the Bitcoin community, it was recently reported that people still send bitcoins, especially fractions in satoshi, to Dorian Prentice/Satoshi Nakamoto’s public wallet address.
(2.) Know Your Customer (KYC)
Banks, financial institutions, and other players in the financial services industry in Nigeria, are required to “obtain and verify the identity of the customer”. This can happen “before or during the course” of conducting a financial transaction. This is the business-end of section 25 of the CBN Regulations 2013 and section 37 of the Cybercrime (Prohibition, Prevention, etc) Act 2015.
KYC and AML are effective anti-money laundering strategies adopted in many jurisdictions all over the world. It is a requirement of anti-money laundering law and policy that money business outfits must both demand and document the “basic customer information”, as a conditio sine qua non, before a 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, under the relevant extant laws, in the Nigerian legal system for instance.
Situations across cryptocurrency exchanges on the Internet of value, is not different, as customer information documentation prior to transaction plays a pivotal role in the identification process, and thus preventing potential cases of money-laundering, or any other associated crime whatsoever. It most importantly prevents the abuse of financial tools, and rather preserves their both responsive and responsible use.
Application of taxation principles to cryptocurrency transactions as a control and public policy strategy is faced with certain challenges in various jurisdictions. In United States v. Coinbase, the United States Congress had demanded from the Internal Revenue Service (IRS)–the agency responsible for tax collection and tax law enforcement—both identity and data of customers who transacted with bitcoin on the cryptocurrency exchange, Coinbase. The customers want their anonymity protected by Coinbase. Coinbase refused to hand down its customer transaction records to the IRS to aid its investigation of the potential tax fraud allegation.
At the summons and ruling hearings, a district court judge ruled that Coinbase complies with the summons from IRS which demands that Coinbase identifies 14,355 customer accounts. These accounts have had almost 9 million recorded transactions, within a period of one year. All these were suspected, unreported bitcoin transactions. According to the US federal tax principles, any bitcoin transaction above $20,000.00 is taxable, and thus, must be reported to the IRS, for tax computation and analysis.
For the purpose of taxation, the European Court of Justice (ECJ), United States and German tax authorities categorise convertible virtual currencies as commodities. Though there is a dearth of regulations in various jurisdictions, for the purpose of regulations; the extant tax principles are applicable to cryptocurrencies, subject to permissible exceptions which may be thrown up, in respect of peculiar circumstances. Even so, the good old tax law principles may apply wholesale.
(4.) Consumer Protection Laws
Consumer protection in cryptocurrency transactions without a tailor-made legal framework, poses a number of challenges, which include unspecified statutory prison term stipulations for associated scams, or other deterrence and rehabilitation techniques through law and public policy. Yet, the extant criminal statutes are rendered applicable, since strictly speaking, though the advent of the cryptocurrencies and their underlying blockchains are a novelty, in and of themselves, they do not introduce any new set of crimes, which were not already known to exist in the fiancial system. Though there are not many new bespoke laws, even in the most cryptocurrency innovation-conscious countries, the good old laws, as mentioned already, apply.
Earlier in 2Q of 2017, it was reported that a South Korean lawmaker advocated that consumer protection provisions be added to the proposed cryptocurrency regulation bill in the country. It goes beyond saying, that the government has a primary obligation to foster and preserve a free and fair economic space, where businesses and ventures thrive, while the ultimate consumer’s interest is protected, even as they consume market products. Market participants in the cryptocurrency and Initial Coin Offerings (ICOs) markets, retail investors and institutional investors alike, all require a modicum of consumer protection, to secure confidence, and in essence promote the nascent cyber-commerce, so that transfer of value over the Internet can come full circle.
To this end, governments’ efforts should forever be geared towards regulating the cryptocurrency market activities, 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, to which comes next, politics closely.
In a country like Nigeria, 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.