Since the Bank of Russia has taken the lead with its determination to develop national cryptocurrencies through its announcement in May to legalise their use, it may be a signal that other non-fiat currencies are about to go mainstream.
At the St. Petersburg International Economic Forum in June 2017, the deputy chief of the Bank of Russia highlighted Russia’s pressing desire to develop cryptocurrencies such as Bitcoin, Ethereum and Litecoin in hope of eventually improving economic cooperation with EU countries. Recent months have also seen Japan follow suit, passing a law to make Bitcoin a legal form of online payment, and even the Bank of England has become a member of the Linux Foundation-led Hyperledger blockchain initiative, opening its doors to this new form of currency. So why are states beginning to accept cryptocurrencies as legal monetary forms- and should others follow?
Out of Hand?
Cryptocurrencies are becoming increasingly prominent in today’s society and their momentum has soared this month, with Bitcoin prices reaching a record-breaking high of $4,500, reinforcing Bitcoin’s superior strength on the market. The recent events following the UAHF (User-Activated Hard Fork) have bifurcated the blockchain into two, leading to the creation of Bitcoin Cash- which aims to increase the rapidity of transactions- and SegWit2x, which will alter the storage of some data. This is thus attracting a large amount of attention of millennials.
The transparency associated with cryptocurrencies is revolutionary, with all transactions being listed on the blockchain. Llew Classen, the Executive Director of the Bitcoin Foundation, underlined the fact that cryptocurrencies offered individuals more power over their assets. The lack of an external source of control inevitably means that governments seek to influence these currencies.
One serious disadvantage to the transparency of Bitcoin is developers’ issues raised with its design, which is moulded around distributed ledger technology, meaning that all users possess identical payment records, stored in the blockchain. This, coupled with potential manipulation and fraudulent transactions – such as those associated with the Silk Road marketplace – is a cause for concern noted by the US Securities and Exchange Commission. The SEC highlighted the necessity for regulatory administration in the Bitcoin exchange market.
Legalisation – Bitcoin by Bitcoin
More states are beginning to recognise the immense benefits associated with cryptocurrencies, with countries such as Australia and Japan implementing policies to legally recognise Bitcoin exchanges. The regulations of exchanges ensure that cryptocurrency transactions comply with current anti-money laundering laws and prevent terrorism financing, with Japan consequently imposing injunctions such as compulsory registration with the government and obligatory auditing by a verified accountant annually.
Following the legalisation of the Bitcoin payment in Japan in early May, the clear elevation in prices of Bitcoin demonstrates that institutional investors have been encouraged to purchase the currencies. This embracing approach has also been displayed by Nevada, which passed Bill 398 to safeguard the blockchain by preventing local governments from taxing or imposing conditions that would prevent its use.
Although disparaged by several governments and institutions such as the Bank of Mexico, cryptocurrencies hold great importance in the future of finance. The use of Fintech to create smart contracts offers hope regarding regulations, but this predominantly relies on states accepting the legality of currencies such as Bitcoin. Governments should seriously consider legalising cryptocurrencies as methods of payment in order to encourage their wider use for instantaneous transactions, heightened security and recognition at a universal level. In these changing times, we live in a fast-paced, multi-dimensional society and it is vital that governments compete in a progressively globalised and cyber age through the use of cryptocurrencies.