Cryptocurrencies - releasing the genie

Last year, the Prime Minister was enthusiastic about the fact that Malta may become one of the first countries to welcome blockchain technology.

In his opinion, this is not just about virtual currencies such as Bitcoin, but because it can be so versatile that it can, for example, be implemented in the Lands Registry and the National Health Registries.

You could ask if we are the first to embrace this technology, and the answer is that we certainly started early – following the adage that ‘the early bird catches the worm’, but there are a number of countries that have already welcomed the novel revolution. To start with, we can mention Switzerland. In fact, Switzerland’s Economics Minister Johann Schneider-Ammann has recently proclaimed his vision of Switzerland expanding from its current Crypto Valley base in canton Zug external link to become known as a “Crypto Nation”.

The fly in the ointment is that, having started early in the game, Switzerland has also been exposed to scandal – which erupted at a newlyformed $100 million German cryptocurrency project that threatened the reputation of the nascent crypto scene. In this case, the dispute may end up creating negative publicity in the Berlin courts.

Another country that started early is Poland. Again, here there is a fear that the Government wants to restrict the access of Poles to the constantly growing market of cryptocurrencies by imposing tax regulations. The controversy erupted when Prime Minister Mateusz Morawiecki tarnished bitcoin and other virtual currencies as ‘Ponzi schemes’. Having said that, the Polish government strongly welcomes blockchain – the technology underpinning bitcoin – saying it can be a useful innovation with the potential for broad applications in the banking industry.

Closer to us in the Mediterranean is Gibraltar. Its DLT regulations, which came into effect on 1 January this year, bring forward a licensing regime to intermediaries using DLT that can store or transmit customer assets. However (the same as here in Malta) they have not as yet extended coverage of the regulatory framework to ICOs.

Moving to the East, we find that both India and China have experimented with the new industry. Recently, there has been a negative attitude from the Indian Central Bank, which is now precluding residents from purchasing any cryptocurrency through their bank accounts. It also bars banks from providing services to businesses “dealing with or settling virtual curren- cies”. Simply put, this means that traders will no longer be able to deposit or withdraw fiat currency at cryptocurrency exchanges. India justifies this total ban on the grounds that it may be used in anti-national, illegal and nefarious activities such as the funding of terrorism, illegal trading in arms and drugs, bribery, money-laundering, tax evasion and payment of ransoms.

Moving on to China, we note that the blockchain technology has received full endorsement from China’s President, Xi Jinping. China recognises blockchain technology as part of a technological revolution with the potential to reshape the global economic structure.

Back to Malta, we have been seeing a respectable number of investors wishing to set up a virtual currency base. The latest is Binance, one of the largest cryptocurrency exchanges in the world, which plans to engage up to 200 people according to its CEO Zhao Changpeng. Another applicant is a high profile blockchain business based in Berlin. The CEO of Neufund Zoe Adamovicz, said: “We want to kick-start the creation of crypto-friendly laws with Malta’s DLT framework initiative already serving as a great foundation. We hope to influence a positive change in the banking industry with other upcoming projects”.

This technology is now about to start being regulated and we recently saw the issue of three Bills. The first Bill established a new authority that will be certifying technological arrange- ments in DLT, the second Bill will offer the legal framework through which this can be done, whilst the third Bill will be regulating virtual currencies, ICO, exchanges and related services.

It goes without saying that virtual currencies have become a phenomenon that has reached a mainstream audience. They have become so ubiquitous that ‘bitcoin’ has been accepted into the popular vernacular of ordinary people across the world. Readers make ask what Bitcoin is. It was invented in 2008, languished as a niche currency with little adoption until 2013, and then exploded in value thereafter and shot up exponentially in value in the last three years.

As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash whilst also allowing transactions at long distance, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and servicebased digital economy.

It is noted that, unlike bank transfers, crypto asset transactions can be cleared and settled quickly without the need for an intermediary. The advantages are especially apparent in crossborder payments, which are costly, cumbersome, and opaque. In account-based systems, the traditional way to transfer a claim is by recording it in an account with an intermediary, such as a bank.

In contrast, value or tokenbased systems involve simply the transfer of a payment object such as a commodity or paper currency. If the value or authenticity of the payment object can be verified, the transaction can go through, regardless of trust in the intermediary or the counterparty. As a matter of fact, fiat money is recognised in the country that issues it. The uniqueness of a virtual currency is that in itself it does not entail prior authorisation by a centralised entity.

So how does one start to trade? One can earn or purchase virtual currencies. The issuance and management of a virtual currency is dictated by elaborate open source code algorithms that necessitate the property of uniqueness. One appreciates that cryptocurrency operates by means of a combination of public and private keys which is the confirmation of the existence of a discrete virtual currency unit. The private key is more or less a secret code that is stored in the owner’s digital wallet which is created by means of software or a platform intended for virtual currency trading and used for the acquisition of goods and services.

In conclusion, many agree that government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage they may derive from lighter regulation. Time will tell if we will succeed in creating a well-regulated market and establish standards for the harnessing of this technological marvel.