Over the last 7years, crypto-currencies
have evolved tremendously and has increasingly established itself as a payment
system globally. Today, crypto-currencies are a Multibillion-dollar venture
with dual potential as both an investment and an electronic medium of exchange.
Increasingly, mainstream retailers are announcing plans to accept bit-coins.
Bit-coin ATMs are growing in prominence; the first bit-coin debit cards were
launched by an Hong Kong domiciled company called Xapo in the year 2014 and the
first Bit-coin derivative transactions have been executed on a US-regulated
exchange. Yet, there remain numerous risks and challenges associated with
crypto-currencies. In addition to experiencing significant volatility in
exchange rate and susceptibility to attacks from illicit users and
cybercriminals; the crypto-currency marketplace remains largely unregulated.
Governments around the globe are taking widely divergent actions- or taking no
action at all- to define and regulate crypto-currencies. This article is an
attempt to provide some context for the crypto currency landscape, including
regulatory and law enforcement developments.


Crypto-currencies are decentralized
peer-to-peer payment systems that are digital representations of value and can
be transferred, stored and traded electronically. At their core, they are
distinct from other digital payments (e.g PayPal, Facebook Credits, airline and
hotel miles) because they provide intermediate party. They do not have legal
tender status; they operate with no central authority or banks, and their issue
is carried out collectively by a distributed network. While the transaction
between buyer and seller is direct, the identities of the parties are encrypted
and therefore no personal information is transferred. However, crypto-currency
transactions such as bit-coin transactions are not fully anonymous. A
transaction record of every bit-coin and every bit-coin user’s encrypted
identity is recorded on a public ledger. As a result, it is most appropriate to
characterize bit-coin and many other crypto-currencies as pseudonymous as
opposed to being anonymous. This pseudonymity, combined with its efficient and
decentralized nature, makes it appealing to both consumers and criminals alike.

Today, there are several hundred (if not
thousands) of crypto-currencies in existence with a current market
capitalization as at April 2018 of over $200bn. The bit-coin system is the most
prominent and perhaps most dominant crypto-currency. Other mineable crypto-currencies
with sizeable market capitalization include ButsharesX, Peercoin and Dogecoin.

While these descriptions provide a helpful
understanding of what crypto-currency is, they do clarify the role of
crypto-currencies in the modern financial system. Are they a commodity, a
currency? Policy makers and regulators are still trying to answer these
questions. The department of Treasury’s Financial Crimes Enforcement Network
(FinCen) has defined crypto-currency as a medium of exchange that operates like
currency in some environments, but does not have all the attributes of real
currency, does not have legal tender status in any jurisdiction.

In its recent ruling, the Internal Revenue
Service (IRS) held that crypto-currency would be treated as property, not
currency, for tax purposes. And a Former Acting Commissioner of the Commodity
Futures Trading Commission (CFTC) stated his belief in May 2013, that bit-coins
would be likely to be considered a commodity under the Commodity Exchange Act.

In March 2018, the Bank of England’s Head of
Finance Stability Board Mr. Mark Carney while in agreement with the U.S.
Securities and Exchange Commission (SEC) to classify crypto-currencies as
securities subject to laws governing how they are issued and traded stated inter
alia thus “For many reasons the crypto assets in your digital wallets are
unlikely to be the future of money, but that is not meant to dismiss them.
Their core technology is already having an impact. Bringing crypto-assets into
the regulatory tent could potentially catalyze innovations to serve the public

 Carney posited that the crypto
ecosystem should be held to the same standards as the rest of financial system,
which will bring great privileges, but also greater responsibility.


Crypto-currency and wokings of its
respective platforms have all the semblance of a Ponzi scheme, this similarity
will be treated
anon. Owing
to the fact that Crypto-currencies transcend traditional Sovereign jurisdictions,
financial regulators globally, have diverse opinions and approaches on the
phenomenon, and are struggling to agree on market standards, amid fears of
crypto-currency bubble.

In December, 2013, the Chinese Central Bank
and four other regulatory bodies jointly issued the Notice on Precautions
against the Risks of Bit-coins (the Joint Chinese Notice). In an Echo of the
IRS ruling, the Joint Chinese Notice defined Bitcoin as a virtual commodity and
found that it was not a currency, and therefore should not be circulated and
used in the Market as such. Banks and payment institutions in China may not
deal in bit-coin but the Central Bank clarified that it was not prohibiting
trading in crypto-currencies, however, it is apparent that the Chinese investor
interest in Bit-coin has been tempered. In September, 2017 the Chinese
government quickly moved to ban Initial Coin Offering (ICO), viewing them as
illegal means of financing. It also launched an investigation into 60 local
platforms dedicated to managing them; South Korea Followed suit, introducing an
ICO ban later that month. It is however an entirely different story in many
other developed economies with strong legal frameworks, including Australia,
Canada, the European Union, Hong Kong, Singapore, the United Kingdom and the
United States. Regulators in these jurisdictions are now looking to treat a
coin that functions like a security in a similar way as it would be under their
existing domestic securities laws. Japan, an early adopter of ICOs, has
more than ten regulated bit-coin exchanges, controlling a large chunk of global
market. A key topic in various jurisdictions is to try to put ICOs under the
umbrella of the Local Securities laws, but there is no best practice yet
globally. Recent survey has revealed that ICOs are looking to avoid being
defined as a security, so trying to regulate them seems to conflict with the
purpose of ICOs and Crypto-currencies. Such inconsistency is breeding
uncertainty among marketers.

In the United States, the SEC has taken actions
in two forms: various enforcement actions and the issue of investor advisory
notices. Recent actions indicate that even in the absence of new regulations
specifically addressing crypto-currency, the SEC has significant existing
authorities to regulate a wide range of matters involving bit-coin. The first
SEC enforcement action relating to crypto-currency occurred in July 2013, when
the SEC charged Trendon Shavers of Texas with defrauding investors in
Bit-coin-denominated Ponzi scheme. Shavers, the founder and the operator of
Bit-coin savings and trust, offered and sold bit-coin-denominated investments
online, raising at least 700,000 Bit-coins in what was allegedly a Ponzi
Scheme. In September, 2014, a US Federal Judge found that the SEC established that
the Company was a Ponzi Scheme, and ordered Bit-coin Savings and Trust and
Shavers to Pay a combined $40.7m. In so finding, the court held that the
Bit-coin investments at issue qualified as investment contracts and securities
under the Securities Act of 1933, as amended, and the Exchange Act of 1934, as
amended. The finding that Bit-coins are properly treated as securities is
likely to have broad implications in the future. In conjunction with the civil
enforcement action, SEC issued an investor alert at the same time, warning
investors of the dangers of Ponzi schemes and other potential scams using
crypto-currencies. In the alert, SEC expressed its concern that heightened use
of crypto currencies may entice fraudsters to lure investors into Ponzi and other
schemes in which these currencies are used to facilitate fraudulent or simply
fabricated investments or transactions.

Numerous other measures have been taken
including suspension of companies using mobile platforms to facilitate bit-coin
trading. However, the New York department of financial Services (NYDFS)
has adopted one of the most aggressive stances when it comes to
crypto-currencies, and it became the first state in the US to propose a robust
regulatory framework for crypto-currencies. In 2014 the NYDFS requested
proposals from firms to set up regulated exchanges from crypto-currencies all
in a bid to strengthen oversight including robust standards for consumer
protection, cyber security and anti-money laundering compliance.

In 2014, the Canadian Parliament adopted an
amendment to its proceeds of crime (Money Laundering) and Terrorist Financing
Act that will treat crypto-currency as Money service businesses for the
purposes of the Canadian Anti-money laundering law. As a result, companies
dealing in Crypto-currencies will be required to register with the Financial
Transactions and Reports Analysis Centre of Canada, implement compliance
programmes, maintain records, report suspicious or terrorist-related property
transactions and determine if any of the customers are politically exposed

In Nigeria, there is no clear legal or
regulatory framework (to the best of the writer’s knowledge) with respect of
crypto-currency. Although during the MMM saga the MPC issued a statements
warning members of the public not to be vulnerable to Money-doubling Ponzi
Schemes which are unapproved and unregulated by the CBN, this includes the
numerous Bit-coin related investments which are fast emerging in Nigeria
promoted by some Nigerian based platforms and some foreigners
alike.  In a whole, there is a consensus across the various
jurisdictions that crypto-currencies are susceptible to all manner of crimes
because Bit-coin transactions can be very difficult to trace, and often cross
multiple legal jurisdictions, it is hard for law enforcement to track or seize
criminal profits. The FBI has published its concerns about Bit-coin,
particularly the lack of regulation for offshore services that may be used by
criminals as a safe haven for criminal conduct. Albeit, so the attraction
to the numerous investing public is not diminishing, this perhaps increases the
conundrum associated to the subject matter. click this link to
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Partner @ Karina Tunyan & Company

Source: LinkedIn 
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