1. A search for safe and confidential payment instrument; Cryptocurrency
1.1. Why? What is wrong with money as we know it?
The move from bartering to money took not even many years, but even period of revolutions. Since the Lydians, money has been managed by institutions called the States, a man-made abstract institution, where everyone accepts their existence. At the present, virtual and crypto currencies are quickly swooping into the markets to replace “traditional money”.
Why cryptocurrencies are moving at such a high pace since their very first foundation in 2009, namely Bitcoin, is actually a natural question struggles most of us since then. In brief, most basic reasons are fees and bureaucracies of intermediary institutions, and surely the security issues, but is that really all?
In case of disintermediation of the traditional model, transactions will be conducted free of charge within just a few minutes which creates a great advantage. Apart from that, it is alleged that security advantages are countless. From its decentralized characteristic, unlike as it is in institutional banks, governments are not able to seize them practically. Moreover, if a Bitcoin account holder does not eager to disclose its all payment information, there are many ways to make the transactions anonymous and the account uncrackable. Last but not least; unlike the credit cards, account information that is required to perform the transaction is not totally disclosed to the others, so the intermediaries, traders and other third parties are not practically allowed to learn or manage your account details and conduct any fraudulent action.
1.2. How it actually works and what’s its initial effects will be?
Existing Cryptocurrencies such as Bitcoin or Ethereum runs on the Blockchain, which is a technology having many applications and considered as the new disruptive revolution in digital world, but in recent years made its boom through Cryptocurrencies. Blockchain on Cryptocurrencies are decentralized ledgers that contains all the crypto transactions and verified by the computers called miners, sort of a group of public ledgers who are rewarded in Bitcoins in exchange of their services. In brief, block or technically “Node” stands for a processed Crypto code, where the Chain stands for the digital network. For the newcomers, all these miners etc. may sound like a science fiction movie storyline but it’s not. Yet we also advise you to watch at least the groundbreaking tv series titled Mr. Robot, if it suits your interest of course.
It is crystal clear that Cryptocurrency will affect traditional money, in other words, fiat money, adversely if it keeps growing at this rate. Regulated financial bodies will be affected from this disruptive revolutionary technology, in case they do not take the necessary steps to make this technology available within their provided services or regulate its flow somehow.
2. The rise of Cryptocurrency and Brave New World!
As it was expected, the significant rise of Bitcoin and the other alternative coins, called Altcoins such as Ethereum, Litecoin etc. ignites the global financial giants and encourage them to invest, or at least not to ignore the potential gains tendered by Cryptocurrencies. However, existed cryptocurrencies and regulated financial establishments are serving at cross purposes and many expected rivals already started a war against Cryptocurrencies even including their law firms with their articles on blockchain. Thus, financial establishments nowadays aim to create new type of Cryptocurrencies that would provide both security and scalability at the same time which may also preserve their upper hand against Brave New Crypto World. We are currently witnessing such approaches especially from money management units of technology leader countries.
It’s not all roses of course, there are several potential risks surrounding Cryptocurrencies which are mostly known as a matter of public; money laundering, terrorist financing, unpredictability, excessive volatility, and the presumptive loss of established financial players. Despite the rapidly increasing value of cryptocurrency, unlike the fiat currencies, it has (yet) no guarantee for being able to exchange to a real-value in the future since its power derives from a decentralized public ledger technology (“DLT”). Still, in case the rise of cryptocurrencies continues, supervisory charge in global financial market of central banks will be adversely affected. In this regard, we will no doubt face with different approaches and developments concerning Bitcoin in the near future in an increasing pace and variety.
Apart from the above risks, Cryptocurrency may give rise to various other legal risks in terms of peer-to-peer transactions. A new group of troubles, some of which are cyber security issues, and the chargebacks for wrong payments may rise. While using traditional money transfer methods, there are ways to chargeback your money that has been wrongly transferred. However, chargeback methods are not available until such regulations and technical requirements adapted. To overcome the risks which may arise from the lack of explicit legal solutions, users may and usually use digital wallets offering to buy numerous types of Cryptocurrencies within a reasonable duration while claiming to have sufficient cyber security measures implemented.
3. Are we legally ready for the expected effects of Cryptocurrency, especially the disruptive and unexpected ones?
3.1. Current Status in Major Jurisdictions at a Glance
3.1.1. Turkey
Although Turkish legislations still remain silent regarding Cryptocurrency, there are some opinions and ideas stated by several governmental institutions which at least shows that there may be a development in that regard in the future.
According to current legislations, companies that seek to operate electronic payment system business in Turkey have to act in compliance with the Law No. 64931 which regulates the electronic payment intermediaries and related services. However, existing Cryptocurrencies do not carry the requirements for being included in the scope of this Law. No. 6493, and thus Law No. 6493 is actually not applicable to Cryptocurrencies and their service providers which was also made clear by Banking Regulation and Supervision Agency (“BRSA”) in one of their nonbinding public statements.
Other governmental organizations also announce their opinions on the topic such as Capital Markets Board of Turkey (“CMB”) which expressed their positive approach on Bitcoin and other Cryptocurrencies by stating that; Bitcoin is safe and could become very important and disruptive in the near future.
The Central Bank of the Republic of Turkey (“CBRT”) is also planning to research the characteristics of Cryptocurrencies with the collaboration of BRSA, CMB and Undersecretariat of Treasury which clearly shows that CBRT is certainly not ignoring the reality of Cryptocurrency and Blockchain technology.
3.1.2. European Union
Until very recently, there is a clear disagreement within EU where policy makers refuse to mandate any supplementary rule and have decided to wait for the European Parliament, to take a step in this direction while all related institutions are having the same common opinion, which was building upon the idea that Cryptocurrencies are in fact not a substitute for fiat money, but can be deemed as an alternative payment instrument.
On September 13, 2017, the European Parliament came up with a new proposal allowing Cryptocurrencies regulated by EU Member States in terms of combating fraud and counterfeiting of non-cash means of payment. EU Parliament defines virtual currency, as we say the Cryptocurrency, as a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.
Proposed directive aims to regulate the cryptocurrency in its 5th Article by allowing Member States to intervene the unlawful gains or punishable criminal offences in which crypto currencies are involved. It has also required Member States to ensure that intermediary Cryptocurrency exchanging or service platforms must be licensed or registered before relevant authorities. similar to the system already built in New York under Bitlicense explained below. Therefore, with the adoption of this directive, EU Member States would be able to regulate Bitcoin in direction with their own needs and policies but it remains a big question mark whether already aggrieved bitcoin traders would be entitled to bring their claims before EU courts or not. Even some of the EU Member States have already granted licenses to Cryptocurrency intermediaries, like in Luxembourg; abovementioned proposal might be a huge step in terms of regulating all service providers with this regard.
3.1.3. Asia
Most of the countries that prohibited the usage of Cryptocurrencies are located in Asia; Bangladesh, Kyrgyzstan, and partly China. Although China has not adapted a mandatory rule on prohibiting Cryptocurrency, central bank of China, namely The People’s Bank of China (“PBoC”) has recently outlawed the Initial Coin Offerings2 (“ICO”)With ICOs, entrepreneurs offer new type of Cryptocurrency and publish its features on a Whitepaper, and people who seek to obtain it before the release day should buy tokens in exchange. Furthermore, PBoC has banned all other activities of such ICOs, but not limited to just issuing new digital coins; which give rise to a sharp fall in Bitcoin values in a short span of time at first although it has successfully regained its value, which again clearly demonstrates the strengthened status of the Cryptocurrency market even in China which is one of the primary giants of the market. Still, despite the foregoing, China still shows desire to adapt and take a role in Blockchain game since the Ministry of Industry and Information Technology established a Blockchain Research Institute.
As a bold exception to Asia, Malaysia’s government clearly stated that they will not ban Cryptocurrencies, but instead will regulate the market later this year while Japan, as a major driver of most of the Cyber-related topics, is working closely to catch the virtual currency market train. Japanese banks, unsurprisingly in line with their national policy, seek to create a new and authentic form of Cryptocurrency that would also secure the main qualities of regular Cryptocurrencies, namely, J Coin.
3.1.4. United States of America
As expected, legal practice related to cryptocurrencies revived and evolved in USA, but the federal government still has not adapted a federal law in this regard while some several states have introduced their own regulations. In some states, even the Blockchain has started to be accepted as a proof of transactions. Moreover, in Delaware, the best-known US state especially by foreigners since it is a safe haven for commercial activities, enables maintaining all corporate documents, shareholder lists and other corporate records, using the Blockchain technology which is for sure an important step towards the future.
At the same time, illegal usage of cryptocurrencies has manifested itself early in US with Silkroad case, which was briefly an online grey market for illegal transactions and revealed the usage of Bitcoins in criminal transactions. It should be pointed out that, grey market is actually a legal concept but unfortunately can be easily associated with illegal transactions due to lack of audit or control mechanism, so it exposes legal risks naturally.
Following numerous activities and cases across US, many states have approached to regulate Cryptocurrency market where in 2015, New York Department of Financial Services issued their first virtual currency license. Even though licensing cryptocurrency services is troublesome since it’s a complete digital process, instead of a messy money transmitting market, it should have deemed better than a nothing, at least for now. Now, virtual currency intermediaries are able to engage in industry by obtaining Virtual Currency License (also known as BitLicense) from New York State Department of Financial Services. Moreover, US Congress still demonstrates their close interest to the topic where it was proposed that the transactions of such virtual currencies under $ 600 should not be subject to tax and further developments will surely follow that in near future.
3.1.5. Other developments
Foregoing developments are not the only developments of course and there are many other countries paying great attention to Cryptocurrency. Some of the Swiss municipalities accepted Bitcoin as a payment method for tax duties and installed Bitcoin ATMs across their districts, UK authorities published a paper that approaches Cryptocurrencies positively in respect of economic growth, while Russian law-makers stated that a Cryptocurrency Law will be passed by the end of the fall 2017. These developments suffice to prove that Cryptocurrency revolution is already started and will take a great place in future financial eco-system, and it may happen sooner than expected regardless of counter opinions or lobbies against the winds of change.
4. A New Type of Contract in Legal World? “Smart” Contracts
Blockchain, since it is a distributed ledger technology, might have countless of use cases. In the meantime, it has inevitably started to create new dimensions in legal world. Smart contracts are not actually contracts; they are pure codes that works on “if-then” concept with using Blockchain and Cryptocurrency, with use cases like real estate or government services. Within this concept, one who seek to be provided with services should pay with a Cryptocurrency and, in exchange, the service provider should give the required digital key or digital code according to the Smart contract. If one party fails to perform its “digital” obligation, the Cryptocurrency will be refunded or the digital key will be expired. For now, one who wants to conclude such contracts should use an Ethereum, since only it has the requisite Smart contract capabilities. Although the implementation of this topic is considered within a very narrow scope, we may face with many other implications in near future.
5. What is next? Is this the end of Money?
Although it is not possible to foresee even short-term developments in financial markets, it is undisputed that laws and legal practice always adapt itself to evolving world. How will such adaptation come to light will be revealed very shortly in our opinion and governments and authorities will definitely regulate the Cryptocurrency market in one way or another and Turkey also will most probably take EU system as a model similar to cyber security strategy adapted in 2016 which was based on Cybersecurity Strategy of the European Union adapted in 2013 by the European Commission.
At first, in terms of money laundering, the international regulation societies should incorporate a new establishment that will supervene and secure but not adversely mandate the Cryptocurrency market. Cyber security is the real question at this point, thus the authorities should take this idea into serious consideration.
Furthermore, since banks are the major players of financial market, they should at least implement new consumer and trade friendly approaches adapted to Blockchain technology or cryptocurrency flow to avoid the possible global legal struggles of the famous grey market,
Besides these, Bitcoin wallets and other Cryptocurrency intermediary service providers could be licensed under what would authorities need at a minimum requirement level to avoid the outcomes of strict regulations which will lead to a sharp increase grey market areas
Cryptocurrency followers are waiting for the above-mentioned EU regulations and other major jurisdiction’s approaches to reach to fruition in order to foresee developments ahead. Not a single day goes by without noticing a headline or news regarding new approaches and regulations on Cryptocurrencies and thus one who seeks to get in to this brave new world or at least keep up with the already-arrived future should closely follow the day-to-day economic and legal developments in this regard.
1. Law on Payment and Security Settlement Systems, Payment Services and Electronic Money Institutions. Turkish version: http://www.mevzuat.gov.tr/MevzuatMetin/1.5.6493.pdf English version published by Banking Regulation and Supervision Agency: https://www.bddk.org.tr/websitesi/english/Legislation/129166493kanun_ing.pdf
2. ICO is a process of offering new type of Cryptocurrencies, which can be considered as a mixture of initial public offering and Crowdfunding and the most popular ICO is the one which was performed by Ethereum.
By Efe Kınıkoglu, Partner, Moral Law Firm
