Cryptocurrency: Regulatory Trends And Challenges Business 360

Cryptocurrency: Regulatory Trends And Challenges

At a time when digital trading in Nepal is at an all-time high, it is not surprising that cryptocurrency has been one of the focal points of discussions and debate in the country. Bearing exponential returns and untaxed dividends, at a time when the economy’s struggling owing to the pandemic, cryptocurrency piqued the interest of a large number of people. While the idea of a digital currency is a fascinating topic, and the financial returns seem incredibly lucrative, the fact still remains that in Nepal cryptocurrency is a relatively new concept and only very few individuals understand the underlying process and the governance surrounding it.

Akshya Aryal is an Associate with Pioneer Law Associates and focuses his practice in the areas of Corporate Law, Taxation, Securities and Private Equity Law.

What is blockchain and why is it relevant?

One cannot understand cryptocurrency without understanding blockchain. Blockchain is a type of database which collects and stores information electronically. However, one key difference between a typical database and a blockchain is the way the data is structured. A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and when filled are chained onto the previously filled block, forming a chain of data known as the ‘blockchain’. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled. When a block is filled it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact time stamp when it is added to the chain.

To hold this information, cryptos consist of thousands of computers, but each computer or group of computers that hold its blockchain is in a different geographic location and they are all operated by separate individuals or groups of people. These computers that make up the network are called nodes. In this manner, the blockchain is used in a decentralised way.

One of the major reasons as to why cryptocurrencies are so widely popular is due to its transparent characteristic. By virtue of the decentralised nature of blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that one could track the movement of the cryptocurrency. If a cryptocurrency server were to be hacked, it would not be very effective. While the hacker may be entirely anonymous, the crypto units that they extracted would be easily traceable and if these hacks were to be moved or spent somewhere, it would be known.

Why is it challenging to regulate cryptocurrency? 

The main idea behind blockchain technology that underpins cryptocurrencies is that it involves no way to pinpoint a ledger’s actual location. Another challenge faced by the regulators relates to data theft and financial frauds surrounding cryptocurrencies. Further, the blockchain’s promise of anonymity, and its apparent freedom from regulations, can invite many users who are involved in illegal activities, including money laundering, to use cryptocurrencies for their financial transactions. Also, cryptocurrency technology’s distributed peer-to-peer network architecture is widely considered to contradict the privacy law traditional notion of a centralised, controller-based data processing system.

Cryptocurrencies also attract tax complications. In many jurisdictions, cryptocurrencies are considered to be property not currency. This distinction means that taxpayers cannot use cryptocurrency as a functional currency. Taxpayers must determine their cryptocurrencies’ fair market value on each transaction date. As a result, properly reporting cryptocurrencies to the revenue authorities is burdensome for individual taxpayers because they must diligently record the price at which their cryptocurrencies were bought and sold. Individual investors are liable to pay capital gains taxes on any profits they realise via cryptocurrencies.

Regulation of cryptocurrency in Nepal

Nepal Rastra Bank declared cryptocurrencies such as bitcoin as illegal, on August 13, 2017. It directed that no individual is permitted to participate in the trading, owning and transacting in cryptocurrency. On September 9, 2021, NRB issued a notice declaring that all activities related to cryptocurrencies are deemed illegal (transacting, trading or mining). Individuals involved in the same (as well as abettors) shall be prosecuted under the provisions of Foreign Exchange Regulation Act, 2019 (1962). However, in practice, mining and trading activities are at an all-time high in Nepal.

The Future: Where is cryptocurrency headed?

In September 2021, El Salvador became the first country to accept bitcoin as legal tender. However, some governments still fear that cryptocurrencies can be used for circumventing capital controls, money laundering, or illegal purchases. Another radical issue that many governments are sceptical of are the circumvention of the traditional banking system by crypto users. The currency is created in cyberspace when so-called ‘miners’ use the power of their computers to solve complex algorithms that serve as verification for transactions.

Cryptocurrency is expected to be widely used as legal tender in the future. However, governments will not allow this without heavy regulation. The roles of banks may diminish and may be focused more on borrowing and lending without having to act as intermediary of all monetary transactions, as is the case now. However, due to the fact that mining of cryptocurrencies is a tedious process, it will take many years to mine enough cryptocurrency to replace already existing tender (in form of cash or digits). If cryptocurrencies are adopted as legal tender, we may see more and more government introduced tokens so that central banks retain their regulatory power.

Having said all this, the universal adoption of cryptocurrencies is a radical unprecedented change and such changes take several years to receive overall acceptance and adoption. For the time being, experts suggest that for the next 15-20 years, cryptocurrency will be mostly treated as a commodity and not a currency.

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