Why You Should Be Concerned About Cryptocurrencies

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Rise of Crypto: What Should We Be Concerned About?

How will we ensure that a delicate balance is achieved when regulating cryptocurrencies? Dr Christian Ellul, is a lawyer who specialises in blockchain and crypto advisory and according to him: “I am an advocate for regulation, insofar as I believe this is the only way we will ensure cryptocurrencies become universally accepted, useable and beneficial to all. We must however ensure there is no over-regulation or any draconian legislative measures that will kill the very nature of its decentralisation.”

The European Parliament stated that Cryptocurrencies will not challenge the economic power of central banks; what is your opinion on this?

Our belief is that the main FIAT currencies will still be the principal medium of exchange for many years to come due to their widespread acceptability and legal recognition. The current volatility of cryptocurrencies makes them impractical substitutes for the more stable FIAT currencies.

In the medium term, we see cryptocurrencies increasingly being used in less developed or more unstable countries where currency volatility, as well as uncertainty, already exist.

In the future, however, with adoption, acceptability and especially a less volatile cryptoenvironment, cryptocurrencies will act as a check on central banks. The moment people will lose faith in a FIAT currency, usually due to the questionable actions of central banks, they can fall back onto these decentralised currencies, which by their very nature, cannot be controlled or influenced by a central authority.

Tax and cryptocurrencies: how does it work?

Currently Malta, like many other countries, does not have any specific tax laws, regulations ,rules or guidelines in relation to the tax treatment of cryptocurrencies and therefore the general principles of taxation would need to be applied. This is not easy since generally the biggest problem in understanding the manner in which cryptocurrencies are to be taxed falls to be a matter of classification. Are cryptocurrencies to be seen as a currency or legal tender or as a separate asset class? Are they commodities or a payment method, amongst other things? Although it is generally understood that cryptocurrencies are currently seen in Malta as an asset class, unfortunately we believe that a one size fits all approach does not seem to be a long-term solution since there are many types of cryptocurrencies that possess different characteristics. For example, where Litecoin (LTC) can today be seen as more of a mode of payment, Bitcoin (BTC) can today be seen as more akin to a holder of value, i.e. an asset. The same lack of clarity exists currently in relation to VAT. The EU VAT Directive, as implemented into Member States’ domestic VAT laws including Malta, does not contain any provisions on cryptocurrencies, which means that today there is uncertainty as to how virtual currency exchange transactions should be treated for VAT purposes. We believe we will see the passing of more regulations and possibly specific tax rules on cryptocurrencies as time goes by, both domestically and at an EU level. In fact, it is understood that guidelines should shortly be published by the tax authorities in Malta in relation to the tax treatment of cryptocurrencies.

What do you think tax lawyers need to be aware about when concerning the rise of crypto?

I believe that an attempt at classifying all cryptocurrencies in the same manner and hence taxing them similarly might not be the best way forward. As explained above, there are numerous types of cryptocurrencies and crypto assets and many of them have different features, including for example tokens issued on different blockchains which can range from utility tokens to security tokens. I believe more monitoring and analysis from an EU or international point of view whether in the form of specially set up committees or task forces will help ensure a uniform adoption of certain minimum standards within the European Union or internationally. Similarly, recently in February 2020, representatives from the European Commission and 35-member countries of the Financial Action Task Force (FATF) have agreed to revise its criteria in relation to virtual currencies. This included AML recommendations aimed at improved understanding of actual risks posed by misuse of cryptocurrencies. I believe we will be seeing more and more of such initiatives all aimed at ensuring the correct mainstream implementation and use of cryptocurrencies. Tax lawyers should therefore keep themselves busy reading up on legislative developments in relation to what we believe to be a relatively new and very dynamic market .

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CHRISTIAN ELLUL

Director

Dr Christian Ellul, is a lawyer based in Malta and specialized in international tax. As a director of E&S Group, the first corporate and tax firm to tokenise its services, he has together with the rest of his professional colleagues, focused in the last year primarily on blockchain and crypto advisory work.

8 Important Words You Should Know About Cryptocurrencies

Cryptocurrency remains one of the most valuable currencies in the world. However, it’s so easy to get swept up in the minutia of cryptocurrency jargon. Here is a list of terms to help you better understand the concept.

Cryptocurrency remains one of the hottest topics in recent years. The combination of technological innovations, software prowess, and business acumen attract a wide variety of people.

However, it’s so easy to get swept up in the minutia of cryptocurrency jargon. Right now, that jargon is what’s keeping the general public from understanding how it works. If the average investor struggles to understand the language behind an idea, then why do cryptocurrency fanboys swear that everyone will support it within the next decade?

In the words of United States Senator Thomas Carper, “Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”

This list of terms starts at the very basics of the industry to explain key phrases and words you’ll probably hear a lot as digital currencies get more popular.

Cryptocurrency

Let’s start with understanding the key concept — cryptocurrency. In short, cryptocurrency is a medium of exchange that uses cryptography to transfer funds. It was designed to be anonymous and (surprisingly) secure. It’s completely decentralized and thus relies on a massive public ledger (called a blockchain) in order to validate transfers and maintain the ledger. There are no fees and no extensive regulations which pique the interests of those exhausted by financial squabbles within their own countries.

Cryptocurrencies might be brilliant for those willing to take a risk on investing, but major banks have stayed relatively clear of them. Cryptocurrencies make it hard for central banks to influence the price of credit in an economy. They take away a regulatory body’s ability to gather data about economic activity. Many banking executives expect cryptocurrencies will also hinder a central banking agency’s ability to control exchange rate and other major functions of monetary policy.

Cryptocurrencies — especially bitcoin — have garnered a reputation in pop culture as being the go-to transaction for illicit activities like drug deals. (And, due to the extensive anonymity offered by the very nature of cryptocurrencies, we can neither confirm nor deny the validity of that association. )

Still don’t get it? SciShow did a brilliant explanation of Bitcoin (but Cryptocurrencies as a whole) which you can watch below.

Bitcoin

In 2008, Satoshi Nakamoto created the world’s first (and arguably most important) cryptocurrency. He never intended to invent an entirely new currency system; he just wanted to make a “peer-to-peer electronic cash system” unconnected to anything else. The most important contribution of Bitcoin’s initial founding was that it developed a decentralized digital cash system after decades of failed attempts.

Bitcoin remains the most popular and most frequently traded cryptocurrency to date. In March 2020, the value of Bitcoin outweighed the value of an ounce of gold, $1,268 compared to gold’s $1,233. The value peaked at nearly $5,000 earlier last month.

Altcoins

These are basically any cryptocurrency that isn’t Bitcoin. It’s a blend of “alternative” and “bitcoin.” All altcoins also use decentralized control and a similar blockchain transaction setup. Popular altcoins include any initial coin offering (ICO) group. Ripple, Litecoin, and Ethereum are big names amongst altcoins.

Forks are what happens when two bitcoin roads diverge in an internet woods, to borrow a Robert Frost poem. It’s when developers don’t agree on how to improve the program, and thus the codebases split. The blockchain can handle this split but, since the realm of cryptocurrency isn’t regulated, the developers sort out values on their own.

The most famous fork was in August 2020 when bitcoin split to form another cryptocurrency — Bitcoin Cash. As with operations in any new bank, resulting companies take time to draw in users. Two new forks could be on their way before 2020. The proposed Bitcoin Gold claims to have a new algorithm and a truly decentralized market. The other fork would be Segwit2X and looks to boost the capability of bitcoin. Ethereum is also planning on its first fork within the next year.

Address

An address is a name by which you send and receive bitcoin. It’s like an email address as users send bitcoins to a person by sending it to one of their addresses. However, unlike email, people have many different Bitcoin addresses and different addresses are used for each new transaction.

Mining

It’s one of the most popular words associated with bitcoin and other cryptocurrencies. Bitcoin mining is how new money is added to the public ledger (see ‘blockchain’ further down). However, mining for gold in real life might be easier than mining for cryptocurrencies given the increasingly difficult puzzles. Anyone who has access to the Internet and decent hardware can mine. In an oversimplified explanation, participants have to solve an incredibly difficult puzzle. The first person to solve gets to put a new block on the blockchain and win the rewards. Essentially, miners invest time, money, and technological effort into hopefully ‘striking it rich’ on solving one of the hash algorithms and adding to the blockchain.

Signature

The bitcoin signature is one of the most important safety nets in cryptocurrency. In transactions, there are two types of keys — a private key and a public key. Those keys are specifically linked to one user, and the private key is only known by that user. To send a transaction, the private key ‘stamps’ the transaction which creates the public key. That public key creates the address by which the transaction is sent. The sender signs the message with the signature and the key to the peer-to-peer public network for validation. The signature is mathematically unique and varies just as your own signature has slight differences each time you sign for a purchase at a store.

“In a physical signature, you’ll typically affix, let’s say, a sequence of characters representing your name or identity to a document,” said Khan Academy’s Zulfikar Ramzan. “This process effectively binds your identity to that document and more so by formulating the characters in your name, and maybe some particular to a unique or peculiar way that’s unique to you. The hope is that nobody will be able to forge your name on that document. Now in a digital signature scheme, it turns out you can achieve these kinds of properties mathematically.”

Blockchain

It’s the public ledger for all bitcoin transactions. It lets information get distributed for the sake of accountability but not copied. Fans of bitcoin call it the “backbone of a new type of internet.” Think of it like a spreadsheet that anyone can get a copy of across a network of computers. This spreadsheet will update with recent transactions for everyone to see. That’s a blockchain in a nutshell.

For many, blockchain technology is the most effective and useful thing to come out of cryptocurrencies. The database isn’t stored in one centralized location, meaning there’s no incentive for hackers as everyone has this information and can verify it. The data is literally accessible to anyone with internet. Writers Don and Alex Tapscott said, “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Still want to know more about bitcoin and other cryptocurrencies? Check out Khan Academy’s course on bitcoin. It’s an excellent and free cryptocurrency primer.

Brexit – Why Investors Across The Globe Should Be Concerned

The result of the vote to pass Theresa May’s Brexit deal is finally known, following the previous delay. However, this is just the start of a period that could see the United Kingdom plunged into financial chaos. As the world waits to see the result of Jeremy Corbyn tabling a no confidence vote, it’s not just British firms and investors that are feeling nervous.

Although the pound is currently doing better against the dollar, the situation is still in a state of flux and it’s difficult to know which way things will go. There are so many possible results still at the table, with a renegotiated ‘soft’ Brexit being favored as slightly the most likely outcome by the majority of experts. Given the high level of uncertainty that still exists, there are several ways in which the situation is affecting finance and stock market investment across the globe.

Fintech business watching developments

There is a substantial fintech business market in the UK. The choice of the country as a base has been highly influenced by the ‘passporting’ situation which makes it easier for companies to trade across borders throughout the EU. Depending on what happens with the UK exiting the EU, this advantage could potentially disappear and increased regulatory demands could make it likely that fintech companies will move their interests elsewhere.

Strain on the British banking system

If the UK crashes out of the EU without a deal in place, there is a very real risk British banks could be faced with customers wanting to withdraw large sums of money quickly. Banks are stockpiling funds to prepare for this possibility and other financial implications are being seen that could affect businesses and individuals globally. For instance, money transfer company Transfer Wise has stated that it will limit the amount of GBP funds that can be transferred.

Effect on the US stock market

According to CNN business, the effect on the US markets of the defeat of May’s deal has been minimal. In fact, if the vote had gone in May’s favor the effect could have been more substantial with The Guardian reporting that the S&P could have fallen by 5% should the deal have been passed. However, that is not the end of the story. If the vote of no confidence which has been tabled results in May’s resignation, it’s likely that the UK could face a further general election. Even if this does not happen, the current government has just three days to develop a further plan for a Brexit deal.

This period of volatility in the UK could lead to serious problems for the Pound, depending on the eventual outcome. It could also lead to trading issues for UK based businesses, given increased regulatory concerns and potential hold ups at EU customs points. This is likely to mean that investors in the US, and across the globe, will reconsider their investments in British companies. It’s hard to tell whether these issues will come to pass but it’s a possibility that any serious investor needs to be aware of.

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