Regulating Cryptocurrency
1. Regulating Cryptocurrency Copyright © 2015 Orren Prunckun. All Rights Reserved.
2. A Primer On Currency, Money & Banking… • Currency is a system of money. • “Commodity currency” is backed by a commodity such as gold. • “Fiat currency” is legal tender, but is not backed by a physical commodity. Value is created from supply and demand not the physical material behind it. • “Money “is the medium or exchange of value. • “Cash” is physical money such as bank notes and coins. • You can prove cash existence – it is physical and you can hold it. • You can’t double spend it – you either have cash or you don’t.
3. A Primer On Currency, Money & Banking… • With online/digital/e-money you cannot prove its existence – you can’t hold it. • A bank has to vouch that it exists (hence many regulations to keep banks accountable.) • Electronic money is simply a number attached to an account. • Unlike cash money, electronic money has the ability to double spend as it is simply a number attached to an account. • You also can’t keep electronic money on your computer electronically, you need a bank to store it. • If everyone was to withdraw all of the money in their bank accounts, there wouldn’t be enough cash in circulation to do so.
4. A Primer On Currency, Money & Banking… • Once you make an electronic bank transaction, the bank validates it so you can’t double spend it – via a time/date stamp, with a debit, credit & balance. • Banks keep track of transactions through a “ledger.” • A ledger is a book/collection of financial accounts. • This system works via trust we place in banks – keep electronic money honest. • The Federal Reserve Bank of Australia keeps cash money honest by validating it with various physical security measures. • But, what if there was a way to transact in electronic money without having banks? • In other words, what if there was no need for a central authority of money.
5. This is where cryptocurrency steps in…
6. Why Is Cryptocurrency Important For Society?
7. The Libertarian Dream… Cryptocurrency provides a way to exchange “value online without having to rely on centralised intermediaries, such as banks.” -The Economist A Libertarian is a person who believes in the doctrine of free will, freedom of regulation and small government. No central authority is a Libertarian’s dream!
8. Byzantine Generals Problem… • Cryptocurrency gives a practical solution to computer science problem called Byzantine Generals Problem. • Byzantine was Greek city on the Bosporus/Sea of Marmara, renamed Constantine and rebuilt/renamed Constantinople A.D. • The Byzantine Generals Problem works like this: many Byzantine army generals and their troops gather around an enemy city. • The generals can only communicate via a messenger. • All generals must agree upon a common battle plan for taking over the enemy city. • When all generals are working together (a common plan) they win.
9. Byzantine Generals Problem… • If they do not have a common plan, they will be over powered by the enemy – success relies on working together. • However one or more of the generals could be traitors – thus lies the problem. • The loyal Generals must reach an agreement for attack. • The Byzantine Generals Problem raises the following question: how do you create trust between unrelated parties over an untrusted network (like the internet) where there is no pre-existing trust or knowledge? • The Byzantine Generals Problem relates to the transfer of digital property from one user to another – the transfer needs to safe and secure, legitimate & clear it has taken place without needing an intermediary such as bank or broker.
10. Source: https://medium.com/@DebrajG/how-the-byzantine-general-sacked-the-castle-a-look-into-blockchain-370fe637502c
11. Importance Of Cryptocurrency… • This means no approval is needed and thus no or very low transfer fees. • Low fees means growth for business, not tax or banks. • A new currency – anyone can use at any time and could replace banks entirely. • A new technology means fraud is almost impossible, unlike for banking or credit cards. Fraudsters don’t get information so they can’t steal. • Investment vehicle (including ICO’s.) • Touted as the future of commerce. • Efficiencies compared to alternatives (credit cards.)
12. Source: https://www.finder.com.au/credit-card-info-for-dummies-beginners-and-first-time-credit-card-owners
13. “Innovation will drive productivity growth in Australia….“The Government is committed to establishing Australia as a leading global financial technology (FinTech) hub and is announcing a new package that aims to position our local fintech industry as a world leader.” -The Australian Budget 2017-2018
14. Value… • Cryptocurrency doesn’t itself have value. • It is like fiat currency which is not backed by physical commodity. • Value is created from supply and demand not the physical material behind it. • Value is created by system itself, its use now and potential increased use in the future. • Similar to cash money, the cultural system determines the value of cash, which is based on trust and use. • Nothing exists unless there is agreement that it exists. • Therefore, something is only valuable if all agree it is valuable.
15. • Cryptocurrency needs to have value before people will start to uses it – a horse and cart problem. • Network effects are needed – the more who use it, the more valuable it is like the telephone, web, Facebook, etc. • Inflation/supply of money also creates value (later). • Currency fluctuates in value in relation to other currencies because of supply and demand. • Popularity (demand) means more users of the system. • More users of the system means more transactions and coin becomes circulated. • More users mean higher value of the currency. • Talking of users and uses… Value…
16. The block chain is “A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.”
17. Use Of The Block Chain/Ledger… • Voting. • Identity. • Signatures. • Contracts. • Keys & locks. • Cars sales. • Property sales. • Stocks & bonds sales. • Money. • International remittance (40% with no bank accounts + reduced fees to help raise quality of life). • Micro payments to 8 decimal places (Newspaper content, email get rid of spammers).
18. What Is Cryptocurrency?
19. Cryptography: “The art of writing or solving codes.”
20. “Practice and study of techniques for secure communication in the presence of third parties called adversaries.”
21. Currency: “a system of money in general use in a particular country.”
22. Cryptocurrency: “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
23. “A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
24. What Is The History Of Cryptocurrency? .
25. The History Of Cryptocurrency… • 1998: Wei Dai published the B-money proposal of an anonymous, distributed electronic cash system • 1998: Nick Szabo created Bit gold and the “proof of work” theory. • 2004: Hal Finney created a “proof of work system” for currency. • 2008: Satoshi Nakamoto (unknown identify) created Bitcoin. • Hundreds of alternative cryptocurrencies have been created since.
26. 6D’s of Disruption… • Cryptocurrency is not past Digitization & Innovators stage. • Currently in the Deception and Early Adopters/Majority stage. • It potentially needs to be easier to use for the common person to reach the Disruption and Early Majority stages. • Cryptocurrency is not currently intuitive to use.. Source: Peter H. Diamandis & Steven Kotler, Bold: How to Go Big, Create Wealth and Impact the World (1st ed, 2015) Source: http://open.lib.umn.edu/mediaandculture/chapter/16-6-mass- media-new-technology-and-the-public/
27. What Are Some Types Of Cryptocurrency?
28. Types Of Cryptocurrency… • Bitcoin. • Ethereum. • Litecoin. • Dogecoin. • And many, many more… For example: • Bitcoin is a specific currency system. • bitcoins are the money/currency of Bitcoin.
29. How Do Cryptocurrencies Work?
30. How Cryptocurrencies Work… • Instead of entrusting 1 bank, trust is distributed over many users, with no personal information exchanged. • In other words a decentralized bank. • Bitcoin is a distributed ledger. • The ledger has a fixed number of slots. • A “coin” is a slot in the ledger.
31. How Cryptocurrencies Work… Buying In • One can buy into the ledger/slots with cash (no credit). • Purchasing into the block chain is via an online “Exchange.” • One connects a bank account to an online exchange. • One transfers local fiat currency into the exchange and changes it for Bitcoin, much like a Foreign Currency Exchange at an airport. • An example is Coinbase or MtGox. • AUD Bank account –> AUD Exchange –> Bitcoin Exchange/address. • The alternative it to sell a product or service and be paid Bitcoin.
32. How Cryptocurrencies Work… Transacting • It is Pseudo anonymous not fully anonymous. • Every transaction is tracked and logged forever in the block chain/ledger, for all to see. • The block chain grows indefinably, like a chain. • Only 1 ledger/block chain – massive collection of all verified transaction • Unlike single personal ledger in your banks. • A transaction is a piece of the block chain.
33. How Cryptocurrencies Work… Transacting • Transfer form public key to public key. • Bitcoin Exchange/address –> another Bitcoin Exchange/address . • Public key/address/id number, belong to real people. • There is no physical transfer, only transfer of keys. • history, coin don’t sit on an account, therefore don’t lose the key. • No waiting 3-5 days for transfer like with banks. • Ones own part of the block chain.
34. Source: http://feexit.blogspot.com/2016/07/silent-weapons-12.html
35. How Cryptocurrencies Work… Selling out • Can trade out at any time – to reduce risk of volatility of price. • A string of numbers sent (random series of letter and numbers). • Wallets store private keys. 3 types of wallets: • Computer or mobile storage. • Cloud storage – they have access to your funds such as Coinbase. • Paper storage – printed Private Key and address + QR code.
36. How Cryptocurrencies Work… Verification • Verification of transactions is done via “Mining,” instead of a central bank. • Many people checking to make sure that transaction is legitimate. • Competition to validate creates an incentive to get reward/payment. • Work together to solve a problem and split the reward. • It is like “competitive bookkeeping.” • They are rewarded with Bitcoins or parts of Bitcoins.
37. How Cryptocurrencies Work… Verification • They are paid to validate which create maintain/integrity in the system, just like a bank. • Paid only if validate/results/outcomes not by the hour like in banks. • This means no one can corrupt the system. • Mining technically is done via specialized computers, commuting power and software to solve a mathematical puzzle/problem. • They create a hash of block header. Hash is representation of information in a bundle. And a Header is a summary of the contents of the block.
38. How Cryptocurrencies Work… Verification • Mining occurs in 10 minute blocks – 20 minutes in batches of 25 coins. • Miners take pending transactions and turns into mathematical puzzles. • Miners needs to find solution and announce it. • Other Miners check if answer is correct and the transactors have the right to transact. • If majority agree on both the grant approval of the transaction.
39. Source: https://bitcoin.org/en/how-it-works
40. Circulation & Inflation… “Currency in circulation is the total value of currency (coins and paper currency) that has ever been issued minus the amount that has been removed from the economy by the central bank.”
41. Circulation & Inflation… In Australia: • Currency: Cash $70.9 billion approx. • M1: Currency plus bank current deposits from the private non-bank sector. • M3: M1 + all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits. • A maximum of 21 million Bitcoins issued can be issued by 2024. Drops ½ every four years. • Increase of money supply creates monetary inflation (as opposed to price inflation which is just raising prices.) • More Bitcoins (use of the system) creates Bitcoin inflation which creates higher price of the coin. Source: https://en.wikipedia.org/wiki/Money_supply#/media/File:Australian_Money_Supply.PNG
42. Who Are The Various Stakeholders That Influence The Development Of Legal Regulation Of Cryptocurrency?
43. Stakeholders That Influence The Development Of Regulation For Cryptocurrency… Domestic Regulators • The Australian Executive (Department of Industry, Innovation and Science). • Parliament of Australia. Entrepreneurs, developers & their legal entities building on the block chain. • Exchanges – Coinbase etc. • Wallets. • Infrastructure. • Payment Processors. • Financial Services. • Currency block chains – Bitcoin etc. Consumers. Merchants. Miners.
44. What Are The Current International And Domestic Frameworks That Regulate Cryptocurrency?
45. Current Regulatory Frameworks… Domestic Regulations Banks are regulated by the Australian Legislature: • Australian Prudential Regulation Authority Act 1998 (Cth). • Corporations Act 2001 (Cth). • Reserve Bank Act 1959 (Cth). • Banking Act 1959 (Cth). • Financial Sector (Shareholdings) Act 1998 (Cth). • Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). • Financial Sector (Collection of Data) Act 2001 (Cth). • Australian Notes Act 1910 (Cth). • Bank Notes Tax Act 1910 (Cth). • Competition and Consumer Act 2010 (Cth).
46. Current Regulatory Frameworks… Domestic Regulations Supervision of financial institutions and markets are done with the following Executive departments and agencies: • Australian Prudential Regulation Authority (APRA). • Supervision of banks and insurance. • Australian Securities and Investments Commission (ASIC). • Companies, markets and investor protection • Reserve Bank of Australia (RBA). • Monetary policy. • Federal Treasury. • Economic policy.
47. Current Regulatory Frameworks… Domestic Regulations • Australian Competition and Consumer Commission (ACCC). • Fair trade. • Australian Taxation Office (ATO) • Taxation. • Australian Transaction Reports & Analysis Centre (AUSTRAC). • Anti-money laundering. • Foreign Investment Review Board (FIRB). • Foreign investments. • The Australian Securities Exchange (ASX). • Domestic investments.
48. A Brief History… Trading “You can hold US dollars or euros or whatever in Australia completely freely if you want to and there would be nothing to stop people in this country deciding to transact in some other currency in a shop if they wanted to. There’s no law against that so we do have competing currencies.” -Glenn Stevens former Governor of the Reserve Bank of Australia ,December 2013.
49. A Brief History… GST “GST won’t be paid more than once. In 2014 the Australian Tax Office designated bitcoin as an “intangible asset” rather than a currency, making it subject to GST.” “The Government will make it easier for new innovative digital currency businesses to operate in Australia.” “From 1 July 2017, purchases of digital currency will no longer be subject to the GST, allowing digital currencies to be treated just like money for GST purposes. Currently, consumers who use digital currencies can effectively bear GST twice: once on the purchase of the digital currency and once again on its use in exchange for other goods and services subject to the GST.” -The Australian Budget 2017-2018
50. AUSTRAC… • Because of anonymity of transaction it could be seen as a way to launder money. • First regulations for Australia Regulate Bitcoin exchanges under AUSTRAC via “Know Your Customer.” • This could be seen as a detriment to the cryptocurrency ideology. • Regulate where there risk: • MtGox launched in 2010 handled over 70% of Bitcoin transactions had $420,000,000 of Bitcoins stolen. • Silk Road Marketplace launched in 2011 as an online black market. • AUSTRAC may be inadequate to deal with offshore exchanges that serve Australian customers.
51. Current Regulatory Frameworks… Other domestic regulations that related to use of block chain: • Consumer laws. • Car sales. • The Fair Trading Act • House sales. • Conveyancers Act 1994. • Land Agents Act 1994. • Land and business (Sale and conveyancing) Act 1994. • Land and Business (Sale and Conveyancing) Regulations 2010. • Voting. • Stock sales.
52. Are The Current International And Domestic Frameworks That Regulate Cryptocurrency Adequate?
53. Activity • You have been tasked with create new regulations for Bitcoin. • Represent each stakeholder group from before: – Domestic Regulator. – Entrepreneurs, developers & their legal entities building on the block chain. – Libertarian Consumers/Merchants/Miners. – Currency Investors. • Determine your stakeholder groups interests (15 minutes). • Create a regulations based on International treaties and Australian domestic law that regulate Bitcoin taking into consideration your stakeholder groups interests (15 minutes). • Discuss if this is mutually beneficial for all stakeholder groups (15 minutes).
54. More Questions… • Should cryptocurrencies be further regulated in the future? • If so, regulated by what type of regulations?
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