25 Apr
2018

Cryptocurrencies – Will Regulation Create More Value?


cryptocurrencies

 

Cryptocurrency: Does it need to be regulated?

Society has transitioned from the time that people would barter to buy goods and procure services. It was a matter of time before people realised that bartering was not a viable way to obtain goods and services. This is because the value placed could be very subjective. In certain instances, the value given away was more than the value received.

Legal tender such as currency became the preferred form of transactions, as it was valued through exchange rate measures. Currency as a legal tender is controlled by each country’s central bank. For the most part, citizens are assured that governmental authorities will take steps to ensure that the value of the currency remains positive. However, the financial crisis in 2008 led to consumer confidence in financial institutions decreasing. Therefore, consumers sought other ways to store and keep safe their valuable asset of money. The financial crisis led to the emergence of cryptocurrency, a form of tender that is unregulated and falls outside the control of financial institutions and the central banks.

Do you believe in cryptocurrency?

Cryptocurrency is ultimately based on a belief system, and with the crypto community agreeing on its value. Factors such as supply and demand are the main consideration that determines its value. Despite value being determined by the crypto community, crypto owners have confidence and trust in the blockchain. Crypto owners believe that their currency is more secure and has more value than the legal tender controlled and regulated by governments. Some people are unable to believe how others can have confidence in an esoteric system.

There are some jurisdictions that have taken active steps to regulate cryptocurrency. The United Kingdom, as an example, has set up several crypto organisations to bring more legitimacy to the industry. When you think of crypto you think of Bitcoin, but there are actually over 1500 crypto-currencies globally.

CryptoUK

Seven influential cryptocurrency companies (Coinbase, eToro, CryptoCompare, CEX.IO, BlockEx, CoinShares and CommerceBlock) in the United Kingdom have created a unique organisation called CryptoUK.

CryptoUK is open to members and supporters that are willing to sign up to a code of conduct and seeks to self-regulate members and supporters. In fact, CryptoUK plans to carry out its activities side by side with the British government, which will allow them to prevent money laundering and hacker attacks on crypto platforms.

In addition, there are some securities rating agencies (for example Weiss Ratings) that have taken it upon themselves to offer the first ratings on cryptocurrencies. No doubt ratings are likely to give sceptics some confidence in the value of the cryptocurrency, but until such times as cryptocurrencies are not rated, the value will continue to be determined by:

• supply and demand;
• security of the blockchain;
• the difficulty of “mining” to get more coins;
• use of the cryptocurrency as a form of payment or investment;
• media attention; and
• the value of fiat currency (fiat money, although considered a legal tender by governments, is not backed by a physical commodity such as gold or silver like traditional currencies. The value of fiat money is based solely on the faith and credit of the economy).

Existing regulation

Despite popular belief cryptocurrency, although not regulated in a traditional sense, is in fact regulated through its community of users. Peer-to-peer regulation exists. Governments are only now intervening on the basis of taxing it as income or gains from trade and investment and with the intention of driving down the rate of fraud and other illicit activities that may be funded by crypto.

Legitimate regulation on cryptocurrency may increase confidence on existing users and possibly induce an investor appetite for potential users and thereby cause a rise in demand and, as mentioned above, the more demand for and confidence in the commodity, the more value it will earn.

By Christine Rodrigues, partner, and Craig de Bruyn, candidate attorney, at Hogan Lovells (South Africa)

 

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