Cryptocurrency: Legal or not?
The hottest topic in the financial world today, cryptocurrency! What is this phenomenon that is taking the world by storm? How does this particular innovation help the world? Is it another of those short-lived fads? Or worse, a scam waiting to happen in the form of a get rich quick scheme? Is it actually legal to trade with these? All these questions and more, we’ll try to address most of them.
So, what exactly is this cryptocurrency? The mythical unicorn of the 21st-century, or the money of the future?
Let’s go back to the basics to answer this particular question.
What the world now calls cryptocurrency is actually digital or virtual currency. It works exactly like traditional money that is, it is designed to be used as a medium of exchange. Transactions using cryptocurrency are secured and verified through cryptography. The creation of new units of a particular cryptocurrency are also controlled using the same process.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, US-Senator
How it all started:
The first ever cryptocurrency Bitcoin, was introduced in early 2009. Bitcoin was the brainchild of an anonymous programmer or a group of programmers called Satoshi Nakamoto. Bitcoin is a ‘peer-to-peer electronic cash system’ which is completely decentralized. This means that there is no central governing authority or servers involved like banks to verify transactions. This concept is quite similar to peer-to-peer networks to share files.
But Satoshi Nakamoto didn’t really set out to bring cryptocurrency to the world. It was a fortunate accident which is like a side product of another invention. Bitcoin’s inventor whose identity remains unknown, never intended to invent a currency. The goal was to create digital cash, something everyone who attempted had failed at. And as a result of this we now have the first and still most important cryptocurrency. A “peer-to-peer electronic cash system” without a central authority.
This decentralized digital coin which lived in obscurity has risen to be the top most valuable cryptocurrency in the market. It has a current market cap of $139 billion.
While it was the first cryptocurrency in the market, it didn’t stay the only one for long. Before long, people started introducing newer cryptocurrencies, some of which claimed to be better than Bitcoin. And now there are over 1,800 cryptocurrencies in the market. All these other coins are called “altcoins.”
So what’s all the hype about? How is transacting with these cryptocurrencies safer than traditional money? After all, being a completely virtual process, what’s the proof that the transactions aren’t hack-able or alterable?
The answer to the questions above is Cryptography!
And yes, they sound similar because the basis for the word cryptocurrency comes from cryptography, cryptocurrency is built on cryptography. You can rest assured that your Bitcoin transactions are secured using complex cryptographic technologies.
For example, when transacting with traditional currencies you sometimes need to provide your signature. But forgery is always possible, however intricate and complicated your signature may be! But cryptography takes the forgery aspect out with the help of “digital signatures”. These digital signatures are achieved using “keys,” a public key and another private key.
Everyone knows the public key, as the name itself suggests. It is the unique identifier for your cryptocurrency wallet. You use the Private Key to send your cryptocurrency out of your wallet. And you should never reveal this key to anyone unless you want your cryptocurrency stolen!
So the chances of your Bitcoin address getting compromised is as possible as aliens visiting earth!
Properties of Cryptocurrencies
Most of the cryptocurrencies out there share similar properties, but these are not set in stone. Transactional and monetary properties are the two main properties of cryptocurrencies.
Irreversible: Nobody can reverse a transaction that’s already confirmed. Not even Satoshi Nakamoto! So, once you send your cryptocurrency, it’s done, sent! Period! If you’ve been unfortunate enough to send it to a scammer, then god help you! Same goes for a hacker stealing them from your computer, you don’t have a safety net. Once your money is gone, it’s gone!
Pseudonymous: Most people believe that cryptocurrency transactions are anonymous. According to them because it’s on the Blockchain no one can read it. But in truth, they’re not anonymous but pseudonymous. The transactions and accounts aren’t connected to the owners’ real-world identity. Meaning, your Bitcoin wallet address does not have your physical address, name and number. Your coins are on so-called addresses, which are actually chains of around 30 random numbers and characters. While the transaction flow can be analysed, connecting the real world identity of users with those addresses is not necessarily possible.
Fast and global: Transactions happen over a global network of computers and they’re confirmed and completed in a matter of seconds (mostly*). Your wallet address does not have your physical location, so transactions cannot be traced to your home. So you can send cryptocurrency from wherever you want and nobody will be any wiser about your location.
*Transactions on certain networks like the Bitcoin and Ethereum take longer to be confirmed and completed because of their popularity.
Secure: While most of the world is of the opinion that cryptocurrency involves risks, it’s not really true. Traditional banking systems have also been compromised by hackers. So cryptocurrency is probably as secure as or more secure than traditional baking systems. The complex networks of Blockchain which form the basis of cryptocurrency makes breaching them quite difficult.
Moreover, your cryptocurrency is stored in your wallet which is locked using cryptographic keys. These keys are long sequences of complex alphanumeric characters which make it quite difficult to hack. Unless you’ve been stupid enough to leave your private key lying around, only you can send cryptocurrency. For the most part you can say that your cryptocurrency is probably as secure as Fort Knox.
Permissionless: Unlike with traditional money which is controlled by the state or government, cryptocurrency has no central authority. The state’s control over monetary systems might mean you need permission to access or transfer your funds. Cryptocurrencies being decentralized means you can send or receive money through your wallet address without anyone standing in the way. You just download the software for free and install it before transacting with your cryptocurrencies. The gatekeeper has been made redundant in the cryptocurrency world.
Controlled supply: Like fiat money, there is a limit to the amount of cryptocurrencies available. In Bitcoin’s case the total number of coins out there is 21 million. The supply decreases everyday with more bitcoins being mined. It’s estimated that all the bitcoins in the world will be mined by 2140. The developers insert the original code, the procedure and the amount of supply into the cryptocurrency during its creation itself. But there are several other cryptocurrencies which do not have a limit and there is an unlimited supply, for example – Dogecoin.
With the invention of cryptocurrencies, we now have a permissionless, irreversible and pseudonymous means of payment. This revolutionary concept attacks the control that banks and governments have over the monetary transactions of their citizens. Moreover, fiat money in your bank is created by debt and managed by the government. The supply of the money is controlled by the central bank.
Cryptocurrency on the other hand has a finite supply but it isn’t controlled or changeable by any central institution, government or otherwise. This attacks the monetary policy of banks and governments, which manipulate monetary supply to control inflation and deflation.
These revolutionary properties among others are making cryptocurrencies so popular among the masses. It’s become almost like a religion among its followers and enthusiasts.
Legality of cryptocurrencies
But with all that it has to offer, not everyone sees it as a boon. With more and more cryptocurrencies being released into the market, they have come under the scanner. And rightly so too, if you look closely you’ll find several Ponzi coins under the top 50 cryptocurrencies in the market. This scary prospect is why law enforcement agencies, tax authorities and governments are trying to understand them. They are also trying to piece together how they fit in existing regulations and legal frameworks.
The introduction of cryptocurrencies has brought about a paradigm shift in the financial world. This virtual money which is decentralized, self-sustained without any physical shape or form are not controlled by any singular entity. While it makes transactions simple and secure and faster, the lack of intermediaries like banks makes it cheaper too. No wonder it has caused such an uproar among the regulators!
But their decentralized nature and the ability to be used pseudonymously raises concerns over its usage in illegal activities. Those wishing to trade in illegal artifacts or fund terrorism have a lot to benefit from the decentralization and anonymity. Not only this, but it seems as if people can use it for money laundering and tax evasion schemes as well. This has got governments and authorities all over the world worried about this aspect of cryptocurrency trading.
So, where is it illegal?
As a result, a lot of countries have differing opinions on the legality of cryptocurrencies and mostly Bitcoin. Almost every country is coming up with changes to existing laws and regulations for this new phenomenon.
- Currently, Algeria, Bangladesh, Bolivia, Ecuador, Nepal and Macedonia have banned Bitcoin and other digital currencies. By banned we mean using and trading with these cryptocurrencies.
- It is illegal to use cryptocurrencies as a payment tool in Indonesia and Vietnam.
- Countries like Canada, India and Thailand have a banking ban on buying and selling cryptocurrency. In India, the RBI issued a statement that cryptocurrency is not recognized as legal tender.
- Several other jurisdictions and nations haven’t declared the usage of cryptocurrencies illegal yet. But the laws and regulations varies from country to country.
This rich ecosystem of coins and tokens experience extreme volatility in the market. You should do your research before buying into any cryptocurrency or token. We do not endorse the buying of any coin or token. In the crypto market right now, a coin could gain 10 percent a day or even 100 percent at once. But it could just as well dip to nothing the next day.
Image from shutterstock
Join our telegram group.