Cryptocurrency revolution — ready or not?
Cryptocurrencies, or “digital money”, are being cited as the next disruptive fintech innovation of our time.
Disruptive technologies overturn traditional methods and practices by introducing new ways of doing things. Some believe that cryptocurrencies will replace traditional fiat currencies (real notes and coins designated as legal tender and issued by a centralised bank or authority).
Cryptocurrencies currently sit in a legal grey space due to their lack of regulation. Being a direct exchange, cryptocurrency transactions remove the need for traditional intermediaries, such as banks. For the consumer the cost savings, convenience and ease with which a transaction can take place without physical paperwork makes a transition to a virtual currency economy an easy sell.
However, removing financial institutions and other traditional gatekeepers — which are subject to strict anti-money laundering (AML) and antiterrorist financing (ATF) regulations — from the equation, means that there are no requirements for the disclosure of parties or source of funds in cryptocurrency transactions, increasing the potential for their use in, and support of, criminal activity.
The US Silk Road case exemplifies the extent to which cryptocurrencies can facilitate criminal activity. Silk Road was an online black market that offered products and services ranging from drugs, false identity documents, computer hacking and even murder for hire. Payment was based on a cryptocurrency system, which, in being unregulated, concealed the identities and locations of its users and facilitated illegal transactions.
Despite the vices of cryptocurrencies, most governments around the globe have embraced the innovation and advantages that cryptocurrencies and their underlying technologies offer. Tunisia was the first country to launch a nationalised digital currency, while Japan has approved bitcoin (the most well-known cryptocurrency) as legal tender. Countries including China, Canada, Russia and South Africa have announced plans to introduce a national cryptocurrency.
While seeking to be a part of a possible cryptocurrency revolution, the efforts of global governments demonstrate their awareness of the need for regulation. Countries including the US, Japan, China, Australia, Singapore and Gibraltar have either amended or indicated that they will amend legislation to regulate transactions involving cryptocurrencies. Methods have varied from absolute de-risking, where certain cryptocurrency exchanges have been banned, to amending existing AML/ATF legislation. The latter has been the most common and expedient method of choice.
Legislative definitions of currency or virtual currency are being broadened to capture cryptocurrencies of all types. Consequently, businesses dealing with cryptocurrencies will become subject to the traditional AML requirements of ‘know your client information’, verifying source of funds, appointing an AML compliance officer, maintaining AML manuals and other requirements.
Australia, for example, has amended the existing AML regime by replacing its current definition of e-currency with a broader term, “digital currency”, which is defined as “a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender in any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfills the above functions only by agreement within the community of users of the virtual currency”.
Bermuda’s current AML/ATF legislative framework differs from other similar international laws in that it doesn’t narrow its application to virtual and traditional fiat currency. Instead, it broadly applies to “any property, whether or not situated in Bermuda”. Property is defined as “money and all other property, moveable or immoveable, including things in action and other intangible or incorporeal property”.
Arguably, cryptocurrencies could be caught as either “money” or “other intangible property” but the Bermuda Monetary Authority has yet to confirm its views on this. However, many believe the definition of “property” could be amended to expressly include cryptocurrencies. Amendments such as these would leave no doubt as to how cryptocurrencies are regulated in Bermuda from an AML/ATF perspective.
Some countries have taken the regulation of cryptocurrencies a step further by including “providers of virtual currency services” in their definition of regulated entities. More recently, legislative proposals have been presented to regulate the underlying technology of cryptocurrencies.
Another consideration has been to regulate cryptocurrencies from a securities and investment perspective. In Bermuda, this could involve amending the Exchange Control Act 1972 and the Investment Business Act 2003 to include cryptocurrencies in their definitions of “securities” or “investments” (respectively). However, some have taken the view that bringing all cryptocurrencies within the securities regime may be inappropriate, putting the jurisdiction at a competitive disadvantage in a situation where it may not be easy to draw a bright line.
These changes would help prepare Bermuda for the possible cryptocurrency revolution.
By including cryptocurrencies in the AML/ATF framework, our economy and community would be safeguarded against an unregulated financial industry.
Including cryptocurrency in securities legislation, provided care can be taken to avoid becoming uncompetitive, could demonstrate not only that Bermuda welcomes the notion of cryptocurrencies but that it is also well equipped to handle such business.
Attorney Alexis Haynes is an associate in the Corporate Department at Appleby. A copy of this column is available on the firm’s website at www.applebyglobal.com
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer