Can Virtual Currencies be regulated? Good or Bad?
Virtual Currencies, unlike regular currencies (those that are specific to one country or a group of countries by default, and are exchanged for one another in foreign exchanges), are managed by their developers and has a span that is beyond the hold of a single country / continent and over a period of time, those that are promising, have possibilities of being accepted as a global currency solution.
In this context, like regular currencies have certain criteria, that will impact the rise and fall of it’s value when being exchanged with one another, these Virtual Currencies have their own criteria, in terms, of currency supply (that depends on mining capability, rate of block generation), demand and several other factors, and for a consumer to acquire / realize the ownership, specific Virtual Currency Exchanges are in place, and those will facilitate the trade among different Virtual Currencies and also between a specific Virtual Currency (like Bitcoin) and a real currency (like USD / EUR / INR) too.
While accepting Virtual Currencies is an inevitable thing, the timing of the act and the way, Virtual Currencies are going to be regulated, may give it the head start in terms of usage, as accountability in terms of activity of respective stake holders and integrity of the system, will reduce the risk of lesser liquidity and ensure value retention, thereby, acting as the primary drivers of the acceptance of the particular virtual currency among it’s audience over a period of time.
While the main advantage of Blockchain based Virtual Currencies is Immutability, when compared to regular currencies, the answerability of the involved parties w.r.t. taking the responsibility and accountability of the situation is very important and these Virtual Currencies have to be brought under the purview of the regulatory of the land / lands (if it is a cross border transaction), to ensure the Validity of the transaction and for smooth handling of the disputes in the process.
Keeping the Global Possibility of reach under consideration, each Virtual Currency, that aspires to serve as a legally valid solution, have to operate independent of a specific country regulator’s control, wherein regulators of all participating countries have representatives and all operations have to happen based on consensus, and while the data in the Blockchain grows in size, as years pass by, a continuous and periodic comprehensive transaction validity check have to be performed by multiple authentic parties (regulators / banks / fin tech companies) and all results have to correlated, to double ensure the integrity of the system, thereby, guaranteeing the Validity and Value retention of the transactions, giving assurance to the stake holders and consumers / businesses for past transactions, while, also providing the required encouragement and confidence to everyone to do transact using this particular Virtual Currency in the future.
Being the most accepted and popular Virtual Currency, among the existing, when Bitcoin is taken as an example, while the current model of Consensus (Proof of Work) is not perfectly Scalable, to serve the global scale requirements, it has to be enhanced, and Scalable approaches are to be adopted, to retain the interest of Consumers / Businesses and Investors and to thereby expand further, as one of the possible Global Currency solution.
While Privacy in areas of communication, finance, personal life is important, staying out of the scope of Financial Regulators and Law Enforcement is never an accepted situation, w.r.t. the Virtual Currencies, and Accountability and Integrity are two keywords that has to be taken really seriously, if any of the Virtual Currencies, are to become the next de facto Global Currency Solution.
Any Virtual Currency that claims anonymous and untraceable are never to be considered, as legal tender, as the chances of misuse and no consumer protection is at dangerously higher levels, irrespective of the motive of such Virtual Currency system maintainers. Monero is one such example in this direction, not sure, how it will turn out in the future.
Some of the preliminary requirements that are to be considered when regulating Virtual Currencies are:
- Know Your Customer (KYC) norms have to be followed and information of the Consumer have to be collected with all nationally recognized ID and Address Proofs.
- Vetted and Licensed Businesses and Virtual Currency Exchanges only have to be allowed to operate in this space.
- All Purchases / Sale of Virtual Currency at Exchanges has to happen in a from / to bank account or Wallet Scenario.
- All transactions are to be accounted and taxed, as per the local taxation laws of the particular country (while respecting Double Taxation agreements between several nations), based on the value of the transaction and the cause of the transaction, as it happens with regular currencies.
- All Anti-Money Laundering (AML) and Counter Terrorism Funding (CTF) rules are to be strictly followed by Banks and Fin-tech Companies, who will provide the means, and the whole ecosystem is monitored by regulators using individual and collective efforts on a strict compliance basis.
- No more allowance for Purchase / Sale of Virtual Currencies using non-digital and Cash based options, as a mandatory requirement.
- Assessing the financial landscape of Consumers / Businesses / Virtual Currency Exchanges on regular basis, and to profile them, and to later add this to the national level Credit Score databases as additional parameter and consideration, to have a more comprehensive outlook of the respective entity in terms of their latest Credit Score.
P.S. This article was originally posted on Linkedin Pulse on May 30, 2017. https://www.linkedin.com/pulse/can-virtual-currencies-regulated-good-bad-raghu-veer-dendukuri/