The sudden emergence and swift, sometimes scattershot development of cryptocurrencies has posed a serious challenge to governments worldwide. The inability to control the flow of money, tax avoidance and the facilitation of illicit activities have urged authorities to address cryptocurrencies as a top priority.
The action taken by governments has varied greatly. While some states seek to regulate every aspect of this new reality (think of how advanced the Swiss city of Zug or Singapore are), others simply impose strict bans.
A surprisingly large number have opted just to stand aside and watch. In fact, they are the majority.
Due to the unprecedented nature of cryptocurrencies, some countries have taken complete u-turns as they have found out their strategies weren’t working as well as originally hoped for. Below you will find some curious cases of states that have been attempting to address the cryptocurrency boom.
In November 2017, the executive director of the Reserve Bank of India stated that digital currencies would not be allowed “to be legally used across the country”. Later on, India’s finance minister, in his budget speech, promised a crackdown on “illegitimate activities involving crypto”.
The country’s presumably anti-crypto position gained much media attention, with BTC’s price falling by $800. A change.org petition in favor of “reversing the crypto ban” gained widespread support.
However, this turned out to be media speculation which did not reflect the real government’s stance and plans. The imposed bans regarded the financial institutions controlled by RBI, not single traders or owners. They also referred to a crackdown on illicit crypto activities, which was taken out of context.
In reality, Indian officials have expressed interest in taking advantage of blockchain technology, introducing new laws and launching its own currency.
In the beginning, cryptocurrencies in Russia were perceived rather negatively and associated with criminal activities. The first attempt to tackle the issue took place in 2014 when the Ministry of Finance suggested introducing fines for crypto operations and up to 2 years of community service for issuing and circulating virtual currencies.
However, as the number of cryptocurrency owners has skyrocketed, there has been no other option but to soften the stance. The hype was too huge to ignore: at some point, ‘Bitcoin’ became the second most searched word.
Since then, cryptocurrencies have been officially recognized as “other property” and accepted for trading, provided that certain rules are respected (e.g. initial investment of no more than ~750 USD for private citizens). In addition, mining was listed as a taxable entrepreneurial activity, and smart contracts received the same status as legal agreements.
The beginning of 2017 marked the prohibition of cryptocurrency transactions by the Central Bank of the UAE. The official declaration that “all virtual currencies [and transactions thereof] are prohibited” was widely interpreted as the government’s hard stance against crypto.
Coupled with further warnings from officials, everything signaled a very harsh crypto climate, a pattern not uncommon in the Middle East.
However, all these signs turned out to be a dust storm hiding an oasis for crypto believers. In parallel with media speculation came the legal recognition of ICOs and virtual currencies (as securities and commodities, respectively), the adoption of the national blockchain strategy and the conclusion of a number of big deals, including between the blockchain business registry and IBM.
Facing financial turmoil and severe depreciation of the national currency, Venezuela emerged in the crypto world as the most desired mining destination. With utility bills costing “as much as a cup of coffee” and mining one BTC costing just $530, cryptocurrencies soon gained more credibility than the national currency.
To save the Bolivar, Venezuela’s government banned the import of mining equipment and launched a nationwide sequestration campaign.
Despite the outward hostile signs, the government of Venezuela has actually become one of the most advanced crypto-friendly states. Not only has it introduced an ICO called Petro, which is pegged to the price of oil, but it has also been pushing — with lots of enthusiasm — for its use pretty much everywhere, including for salary payment, pensions, goods, services, passport fees… Petro was even discussed at OPEC as a new unit for oil trading.
In May 2018, the Reserve Bank of Zimbabwe imposed a ban on Zimbabwean financial institutions dealing with cryptocurrency transactions and exchanges. It also shut down any associated bank accounts. This is believed to be in response to rising global concerns about AML/terrorist funding, and the establishment of the first crypto ATM by Golix, a local cryptocurrency exchange.
The de facto ban was not taken without a fight. Golix sued the Reserve Bank of Zimbabwe, stating that only the Parliament would have the authority to impose a financial ban, and… won the case.
Shifting between pro- and anti-crypto positions can be explained by the very nature of the phenomenon.
On the one hand, cryptocurrencies have great potential to revolutionize the global financial market and make it a place of equal opportunity. With cryptocurrencies, anyone can afford to open a wallet, mine some initial tokens, become an investor and move funds internationally, including places that current financial institutions fail to reach.
On the other hand, governments fear losing control.
Cryptocurrencies affect not only their ability to oversee money flows and intervene in case of need but also to ensure state security. The anonymity and fast, borderless nature of blockchain transactions have up until now made it almost impossible to track or collect evidence of illicit activities.
With security and AML (Anti-Money Laundering) being the primary concern, there are at least three things that governments can do, which will allow them to soften their position on cryptocurrencies. In this regard, new technologies and especially automated blockchain analytics can play a crucial role.
Firstly, it is important to be able to follow the money. Given the sheer speed and scale of crypto transactions, this should be done by applying smart AI algorithms, capable of analyzing historical data and presenting crucial findings, such as the origin of a particular currency and the expenditure associated with it. This information can be checked with the help of tools like ORS CryptoHound.
The second step is to understand the relationships between different wallets, helping define whether transactions have come from random sources, or whether there are regular patterns that connect the specific address with others. With the help of Artificial Intelligence, one can set certain rules that keep track of inter-wallet relationships and signal if something seems fishy.
Finally, for all the previous information to make sense, it is important to deanonymize organizations’ addresses. These might include official crypto exchanges, public places (restaurants, cinemas, grocery stores), freelance marketplaces, municipal bodies and so on.
It is rather difficult to track the evolution of global approaches to regulating virtual currencies.
As such a large force, crypto can either be resisted by authorities, tolerated with governments keeping a watchful eye, or embraced.
We’ve covered a couple of interesting cases, which prove that a hard official stance can simply be a defensive maneuver. A desperate one, which will most likely soften against the tidal effect of cryptocurrencies, or by applying advanced technology for ensuring an increased level of security.
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