WHAT IS CRYPTOCURRENCY: 21ST-CENTURY UNICORN – OR THE MONEY OF THE FUTURE?

Today cryptocurrencies have become a global phenomenon known to most people. While still somehow geeky and not understood by most people, banks, governments and many companies are aware of its importance.

While many South Africans use Bitcoin exchanges and own cryptocurrency, the majority of cryptocurrency companies are distributed throughout North America, Europe, and China.

South Africa’s contribution to the global cryptocurrency market is negligible.

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger.

Bitcoin, created in 2009, was the first decentralized cryptocurrency. Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a blend of alternative coin.

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. Some countries have gone so far as banning the handling of bitcoins by financial institutions. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.

In the United States the Internal revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes. This means bitcoin will be subject to capital gains tax.

Legal issues not dealing with governments have also arisen for cryptocurrencies. A primary example of this new challenge for law enforcement comes from the Silk Road case, where Ulbricht’s bitcoin stash “was held separately and … encrypted.”

The legal concern of an unregulated global economy

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.

Cryptocurrency networks display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency; however the very same lack of regulations has been critiqued as potentially enabling criminals who seek to evade taxes and launder money.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and (in some cases) impossible to track.

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.

Games, lotteries, online casinos and other online gambling sites that feature Cryptocurrency as either a method of payment or as the winnings paid have steadily increased as its popularity has grown and become widely accepted

Many online casinos and dice sites have launched to take advantage of the popularity of cryptocurrency however their legitimacy is often questioned because of concerns that they are not fair because of the computer algorithms used to run them. The service Provably fair was created to try and combat the fears of its users that they are not being cheated.

Cryptocurrencies have been compared to ponzi schemes, pyramid schemes and economic bubbles, such as housing market bubbles. It has been stated that digital currencies were “nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it”.

While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security. Regulators in several countries have warned against cryptocurrency and some have taken concrete regulatory measures to dissuade users. Additionally, many banks do not offer services for cryptocurrencies and can refuse to offer services to virtual-currency companies. While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen. One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud.

For more information on this or any other legal related queries please contact us at professionals@randles.co.za or 033 392 8000

By: Lindelani Masikane – Candidate Attorney

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