Blockchain Law

It’s always cool to talk about sophisticated and progressive technologies and how they can revolutionize the world. However, the influence of human beings remains a major difficulty in achieving perfection in tech. Whenever technology has to be deployed to solve real-life and practical problems, it becomes a passive asset because, despite its intrinsic capabilities, it will always depend on how best it is utilized by people and to what extent it is manipulated either for good or for bad.

Hence, efforts are always made to reduce the friction in using tech products by ensuring as much automation as possible to reduce the effort man might need to put in and hopefully, achieve perfection. But the reality is, this perfection barely exists.

This conundrum also applies to blockchain-enabled solutions. How?

Cryptocurrency is a typical example; Bitcoin and other digital currencies have changed the way we think about money. By leveraging Blockchain technology, these currencies have become the face of the decentralized world. They have ushered in several solutions in finance like decentralized finance (DeFi) and other interesting solutions are being developed.

However, there remain persistent issues in these communities; Bitcoin is supposed to usher in a new era of equality. The existing fiat currencies are controlled by centralized bodies like the Central Bank and their modus operandi seem to favour the rich and the elites over others. It is therefore believed that by removing these central bodies, we can finally have equality, autonomy and decentralized control of money.

It cannot be argued that Bitcoin hasn’t brought us closer to this dream. The cryptocurrency had completely changed how we view money and has enabled more people to believe in the possibility of a value-based economy and a fairer world. But then the possibility of this equal and decentralized world still requires major efforts. As much as the crypto market is supposed to be fair, there still exist certain movers, shakers, and manipulators of the market. For example, there exist financial “whales” who can massively impact the market by either pumping or dumping a coin.

It’s hard to talk about a market without the presence of speculation and market information, but the impact of such human influences barely fit into what Blockchain and crypto were supposed to be about. Blockchain technology and cryptocurrency were supposed to change the way our financial markets worked and ensure that equality was truly possible by removing central and regulatory systems. It however seems that so far, bypassing central bodies has been the only well-achieved goal.

Hence, the human impact once again presents itself as a major issue in achieving technological perfection. However, in this case, it seems to be in a different dimension. The ‘freedom’ and lack of regulation by central authorities like the government, is proving to be the major problem with Blockchain-enabled solutions, and this means that we need the government or better laws to regulate these communities and structures.

The government is therefore needed to curb illicit activities like money laundering. Presently, there are even clamours for more regulation against ‘shitcoins’. Before, we look at the major blockchain laws, let’s consider the reason behind calls for regulations against ‘shitcoins’ and why it might be the next area of a major clampdown by the government.

The rise of shitcoins is arguably one of the most significant reasons for more calls for regulations in the crypto space. To be fair, shitcoins have made both rich and poor make huge amounts of money, but in reality, it defeats everything that crypto is supposed to stand for and is designed to favour the few who have inside knowledge about the shitcoin.

Shitcoin is a name given to altcoins who are only valuable because they are said to be valuable. They are coins that are merely controlled by speculation and have no significant or potential use case.

Cryptocurrencies are still struggling to be widely accepted and as such their use cases can be quite limited. Asides, flagship crypto like Bitcoin and maybe Etherum, which are being accepted as payments by some companies or have been legally accepted as official currency in El Salvador, other currencies struggle for practical use cases in the real world and are mostly restricted to use case in the crypto community.

This doesn’t render them insignificant as most of them have very useful indirect importance and have become major drivers in Decentralized Finance (Defi), NFT and other crypto exchanges.

Hence, these tokens are usually created for specific purposes and are intended to be influenced by conventional market dynamics like demand and supply. And although they might get pumped deliberately by investors, it is mostly done to make them more attractive and increase the community for that coin.

On the other hand, shitcoins are created to be pumped and dumped. These tokens are created, backed up by strategic awareness, pumped then suddenly dumped to make a lot of money for the creators and a few others. Shitcoins can be considered as a gambling tool because almost every owner of these coins is aware that they would be eventually dumped. This means that the value of these tokens is driven strictly by speculation and FOMO (Fear Of Missing Out). It can be therefore likened to a Ponzi scheme because certain people are programmed to benefit from the money invested by others while some would have to lose all their money when a token is dumped.

Blockchain Laws: Why We Need the Government

It’s really counter-intuitive to advocate for the government’s interference in crypto. One can point to the fact that the whole essence of blockchain and crypto is to bypass central bodies like the governments and its subsidiary regulatory channels like the central banks. However, as stated before, the influence and participation of human beings in the dynamics of the blockchain and crypto space are still quite unavoidable.

The technological innovations around crypto are not yet sufficient to completely remove the existing power that man (especially a selected few), might have over the blockchain space.

Hence, a critical analysis is required and the obvious results are clear: crypto will most likely fail without sufficient regulations. The signs are becoming clearer as more countries begin to clamp down on bitcoin and blockchain. It is becoming more apparent that certain states see Bitcoin as a fraudulent scheme and one that is being used by the elites who are looking for avenue to keep laundering or stealing money from the masses.

Although, one can argue and say: “Bitcoin itself was borne out of a rebellion against the then status quo and that the government was never in support of it, hence, any clampdown by the government is expected and as such not a valid reason to necessarily regulate the space”.

As much as that would be a brilliant argument against the implementation of such laws, the reality is that these are not just claims by the government to discredit crypto, these are facts and if these cracks keep widening, the entire community can come crashing down.

The introduction of these laws is not done to affect the intrinsic nature of blockchain and cryptocurrencies. The very essence of crypto would not be diluted because these laws are put in place for regulating aspects that are already loopholes in the system and have been left unattended. Most of these laws can even be temporary solution to these problems that can be discarded when technological features can be added to existing blockchain architectures.

More importantly, Blockchain regulations or policies do not necessarily have to be done by the government. There are already existing laws in the community like the mining rules and fork laws, hence, regulations that can be implemented in such an equal and consensus-based manner are and should be implemented by the community. However, the reality is that, as it stands, there are aspects of blockchain and cryptocurrency that require a third party to oversee some of these policies.

Some of the major areas that are being regulated by the government include:

Although, money laundering has been a financial crime that has been existent before the invention of Bitcoin, Cryptocurrency and blockchain has brought a new dimension to the heinous crime. The ability for blockchain platforms to be used for anonymous transactions and without the help of any central body like a bank has made it an efficient channel for people who have a deliberate intention of laundering money. Money laundering has become a major issue in the crypto space because people who perpetrate these acts have found ways of leveraging the data privacy and security feature of Blockchain to their advantage.

These people are able to cautiously select exchanges that can hide traces of transactions and convert their monies to cryptocurrencies. Therefore, it was only inevitable that the government should find ways to at least curb the use of blockchain and cryptocurrency for money laundering. Although these regulations have been found not to be perfect, they are at least ensuring that using these platforms for such illicit endeavours, is increasingly difficult.

The guidance of the Financial Action Task Force (FATF), provides crypto businesses with a clear framework on performing Anti Money Laundry compliances. The guidance of the FATF also ensures that these financial institutions comply with Know Your Customer (KYC) processes.

Also, in the United States of America; under the Bank Secrecy Act (the “BSA”), FinCEN regulates Money Service Businesses (MSBs). On March 18, 2013, FinCEN issued guidance that stated the following would be considered MSBs: (i) a virtual currency exchange; and (ii) an administrator of a centralized repository of virtual currency who has the authority to both issue and redeem the virtual currency. FinCEN issued guidance that stated as follows: “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations unless a limitation to or exemption from the definition applies to the person.”

ICOs (Initial Coin Offerings), has become even more popular due to cryptocurrencies. The increasing adoption of crypto has made it such that, attracting investors for ICOs, is now becoming easier. Token pre-sales registration involves selling coins to early investors before they are launched. These investors, believe that when these coins are finally launched, they would increase in value after a while and their investment can yield considerable ROIs.

The sale of cryptocurrency is generally only regulated if the sale (i) constitutes the sale of a security under state or federal law, or (ii) is considered money transmission under state law or conduct otherwise making the person a money services business (“MSB”) under Federal law

The Security and Exchange Commissions (SEC) has therefore moved inadequate capacities to enforce the securities laws against unregistered ICOs. However, there have been reservations against the actions of the SEC because ICOs often involve securities that cannot be offered to the public. Hence, it has been asked that why has the SEC not instead channel its efforts towards preventing investors from being defrauded?

However, this might be due to the fact that the SEC know that investors who may fall victim to fraudulent ICOs, have privacy rights that they can invoke. If a cryptocurrency turns out to be a good investment, the investor can keep the investment. But the investor can also get a full refund if it turns out to be a bad investment since anyone who purchases unregistered security has the right to rescind the transaction, if it turns out to be a bad investment. Besides, investors have the right to bring a fraud suit to recover damages if the company had misrepresented the project in a false way

Mining Crypto like Bitcoin is a very significant aspect of Blockchain and Cryptocurrency. It forms the basis by which more blocks are formed in a network and how more Bitcoins are created. The process of finding a nonce is what is popularly referred to as mining and it is an endeavour duly rewarded with Bitcoins. The process involves the solving of a difficult math problem to form a new block and the ‘miners’ are in turn rewarded with Bitcoin while the new block is verified by the community. This nonce has a special property and it must be less than a particular target value when it is hashed or combined mathematically with the content of the block.

However, this mining process requires massive computational power and immense energy is expended by these computers while mining these coins. In order to meet this computational power, special computers are used an immense amount of electricity is consumed. The electricity consumed is mostly supplied by fossil fuels, especially coal. There have therefore been arguments and studies that show that Bitcoin is contributing to global warming while the excess amount of electricity consumed when mining these coins has led to a clampdown in places like China where Bitcoin mining is majorly carried out. According to a study by the University of Cambridge (2021), it was estimated that if bitcoin were to be a country it would be ranked in the top 30 energy consumers because it approximately consumes more than 178 (TWh) annually.

However, the general rule is that, if you are able to own and use cryptocurrency where you live, you should also be able to mine cryptocurrency in that location as well. If owning cryptocurrency is illegal where you live, mining is most likely also illegal.

In March 2014, the IRS declared that “virtual currency,” such as Bitcoin and other cryptocurrencies, will be taxed by the IRS as “property” and not currency. This means that, as an individual or business owner who owns cryptocurrency, among other things, one would need to: (i) keep detailed records of cryptocurrency purchases and sales, (ii) pay taxes on any gains that may have been made upon the sale of cryptocurrency for cash, (iii) pay taxes on any gains that may have been made upon the purchase of a good or service with cryptocurrency, and (iv) pay taxes on the fair market value of any mined cryptocurrency, as of the date of receipt.

Every blockchain enthusiast would love to see a world where true decentralization is achieved. It would be beautiful to finally have completely self-regulated systems that promote equality, autonomy, trust and community. However, the present realities require the regulation of the space so that we can one day achieve this dream. Hence, Blockchain laws shouldn’t be necessarily seen as enemies of cryptocurrency, because most of them allow cryptocurrency to gradually become the technology it was designed to be.

Maybe we will still need them one day, maybe we won’t. But for now, they mostly do more good than bad.

Source: https://medium.com/geekculture/blockchain-law-184a52c1fc3c?source=rss——-8—————–cryptocurrency