Bitcoin works. Until last week, using cryptocurrencies was something that other people did, like space travel or botox. On 27 June 2014 though, I went to a bit.coin.je meet up and afterwards progressed with the othe attendees to the Forum Bar in St Helier, conveniently located directly opposite Digital Jersey’s Hub. Robbie Andrews, Jersey’s very own King of Crypto, bought me a glass of wine, paying with bitcoin. The process was simple and took no longer than using a credit card. The wine tasted very much like any other glass of pub wine.
Digital Jersey and local entrepreneurs, including Robbie Andrews, Jon Day, Mark Loane and Danny Masters, have been looking at cryptocurrencies for some time. From a lawyer’s perspective, cryptocurrencies are fascinating. Is bitcoin a currency, a payment mechanism or an asset? It depends, is the rather unhelpful answer.
According to the European Central Bank’s 2012 report on virtual currencies:
“Modern economies are typically based on “fiat” money, which is similar to commodity-backed money in its appearance, but radically different in concept, as it can no longer be redeemed for a commodity. Fiat money is any legal tender designated and issued by a central authority. People are willing to accept it in exchange for goods and services simply because they trust this central authority. Trust is therefore a crucial element of any fiat money system.
Regardless of the form of money, it is traditionally associated with three different functions:
- Medium of exchange: money is used as an intermediary in trade to avoid the inconveniences of a barter system, i.e. the need for a coincidence of wants between the two parties involved in the transaction.
- Unit of account: money acts as a standard numerical unit for the measurement of value and costs of goods, services, assets and liabilities.
- Store of value: money can be saved and retrieved in the future.”
Cryptocurrencies are significantly different from fiat currencies. They have not been officially issued or approved and their legal status is uncertain. The question of categorization and the meaning of “currency” were addressed in a December 2013 report by Bank of America Merrill Lynch:
“…To the extent that Bitcoin offers users many benefits and efficiencies as a medium of exchange, this means it possesses some fundamental value that may increase over time as it gains wider use. However, as a unit of account and store of a value, it has considerable shortcomings which we believe will ultimately hinder it from ascending to international currency status.”
Volatility is just one issue and there are other understandable concerns around cryptocurrencies. However, one might argue that these are of no greater significance than concerns around other commodities and payment systems. Cash has always been used for illegal transactions, just as it has always also been used for legitimate reasons. Our response is not to say “let’s get rid of sterling and go back to trading in shells”. We’ve built up meticulous regulatory regimes to provide consumers and businesses with proper protection.
An unstoppable force
Use of cryptocurrencies is not going to stop. Attempts to ignore it are as constructive as King Canute’s efforts to turn back the tide – and this is a spring tide. Numerous international companies are starting to engage with this new technology. Just look for example, at Expedia’s decision of 11 June 2014, to accept bitcoin transactions as a form of payment.
Jersey has a history of financial innovation, most notably with the development of the Trusts (Jersey) Law 1984. In 2012 Bailliff Sir Michael Birt described this law as: “…one of Jersey’s success stories…” He noted that:
“…the law did not try to provide a detailed code so as to provide an answer to all the problems which might arise. It is in fact a surprisingly short law given the complexity of the subject with which it has to deal.”
Issuing guidance or consulting on implementation of a legal framework would be in the interests of the public and is eminently do-able. In June 2014 Canada announced that it will be regulating use of digital currencies, while in the same month the Financial Action Task Force (FATF), an intergovernmental body of high standing, published a paper providing (amongst other things) “a common definitional vocabulary that clarifies what virtual currency is”. Even the Isle of Man is in on the act, having announced its intention to bring in legislation later this year.
Addressing all of this head on, by publicly confirming how Jersey’s Comptroller of Income Tax will deal with bitcoin and whether there are any consumer protection measures which the Jersey Financial Services Commission or Trading Standards would like to see implemented, would provide an opportunity to shine light on the flaws and strengths of cryptocurrencies. Such transparency would be consistent with Jersey’s reputation as a mature and responsible jurisdiction. Whether or not such an approach is consistent with the concept of bitcoin as a decentralized currency is a different question. The starting point is that bitcoin is here and it works.
Vicky Milner is an advocate at Callington Chambers and Chair of Digital Jersey’s Regulation & Legislation TAG.