Regulating Digital Currencies in the Jamaica
Presenter
Marc A. Morgan, Legal Officer, Financial Services Commission
Disclaimer • This presentation should not be construed
as indicative of or representing the views of the Financial Services Commission of Jamaica on the regulation of digital currencies.
• This presentation represents the views of
the presenter on the regulation of digital currencies which are forward looking and may evolve.
Exciting Times •
Digital currencies are gaining popularity internationally. Presently Bitcoin is the most popular digital currency with a market cap as at October 1, 2016 of over 9 billion USD (and a value of 612.33 USD to 1 USD).
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A diverse range of persons are investing in Bitcoin, other digital currencies, and the associated technology. The list includes among others: Richard Branson, founder of the Virgin Group; Peter Thiel, founder of Paypal; Reid Hoffman, founder of Linkedin; Marc Andreessen, founder of Netscape; Sean Parker, founder of Napster; Li Ka-Shing, wealthiest person in Asia; Patrick Byrne, founder of Overstock.com; and Ashoton Kutcher, actor. And the list of businesses, billionaires, famous and otherwise noteworthy people investing in Bitcoin goes on and on.
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As at November 2015 over 1 Billion USD has been invested in Bitcoin startups.
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Digital currencies are accepted as a method of payment by Microsoft, Amazon, Subway, Bloomberg and other companies (more than 100,000 merchants accept Bitcoins and other virtual currencies worldwide).
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Digital currencies have been incorporated into various investment products. E.g. the Crypto Currency Fund which is regulated by the Cayman Islands Monetary Authority, and the Global Advisors Bitcoin Investment Fund regulated in the island of Jersey.
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The Jamaica Bobsled team when it qualified for the for the 2014 Sochi Olympic Games did not have the resources for training, equipment or travel expenses until a crowdfunding campaign raised 250,000 USD in digital currency which allowed the team to participate in the Winter Olympics.
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The Blockchain technology associated with digital currencies promises to change record keeping, voting, and even the nature of Contracts.
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Barbados based Bitt - a digital asset exchange, remittance channel, and merchant-processing gateway - received 1.5 million USD in seed funding from Avatar Capital, a Caribbean investment group based in T&T.
Important Terms •
Digital currency - refers to convertible centralized and decentralized currencies which can be stored and transferred electronically.
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Bitcoin- a decentralized crypto currency that is created and held digitally. Bitcoins are not printed but instead are mined by computers across the world through solving complex mathematical problems.
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Blockchain- a ledger that records digital currency transactions and allows for independent verification of ownership of certain digital currencies. A blockchain represents a full copy of every transaction executed in the digital currency. Mining – is the mechanism through which certain digital currencies are created. Computers across the globe compete with each other by solving mathematical problems to create the units of digital currency. Mining allows the nodes of the digital currency to achieve a consensus that is secure and tamper-resistant. Through mining, records of past transactions are added to the public ledger called the Blockchain. Individual blocks mined must have a proof of work in order to be considered valid, and the proof of work is confirmed by other nodes each time a block is received.
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Exchanges (“exchangers”) – are business services that create markets by enabling clients to trade digital currencies for other assets such as fiat money, gold or different crypto-currencies. An exchange can be either a brick-andmortar business, a strictly online business, or a mixture of both.
• Wallet/vault – are mediums/tools used to store (“custody”) digital currencies. They allow for the storage and transmission of digital currencies online or offline. • Cold storage – refers to the storage (“custody”) of digital currencies offline.
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Hot storage –refers to the storage (“custody”) of digital currencies online.
Pros and Cons of Digital Currencies •
PROs –
Digital currencies promise to speed up and lower the costs of conducting business transactions and transmitting money around the world.
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Digital currencies promise to strengthen privacy rights of their users through allowing a heightened degree of anonymity that offers protection from companies who resell sensitive client information to third parties or preserve client information in a manner vulnerable to hacking.
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The decentralized and mathematically determined nature of some digital currencies are attractive to those concerned about the control presently exercised over fiat currencies by central authorities. Digital currencies have been promoted as a tool that can be used to increase financial inclusion because at present it is easy to open a digital currency address on your computer in seconds with no questions or fees to be paid, as opposed to the many requirements that must be satisfied to open a bank deposit account.
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Digital currencies may contribute to increased transparency through the associated innovation known as the blockchain which acts as a general ledger recording the quantities of the digital currency used in every single transaction that takes place.
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The non-repudiable nature of many digital currencies can be viewed positively from the viewpoint of retailers as this provides a measure of protection from fraud not available with credit cards that allow chargebacks for transactions associated with fraud.
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Many digital currency services providers have implemented AML/CFT Policies, consumer protection technologies, and some have entered into insurance arrangements as protections for client assets.
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Cons –
digital currencies have proven susceptible to market volatility in the values of floating digital currencies.
– digital currencies can be used to facilitate illegal transactions and to hide
proceeds of crime due to the fact that transactions can be conducted without being linked to names, addresses or identifying information of a personal nature. Digital currencies also have been utilized in fraud and other criminal schemes.
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The non-repudiable nature of many digital currencies can be viewed negatively from a consumer protection perspective. When digital currencies are sent, there is no mechanism to have them returned (unless they were sent to a third party), unless the recipient returns them.
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Digital currencies may not be recoverable where the owner or a third party custodian holding the digital currency for the owner loses the password for the address in which they are stored.
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The lack of consumer education and regulatory protections.
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Where clients rely on third party service providers to facilitate digital currency transactions there remain threats to privacy rights associated with a third party having records of personal information. Also where digital currencies are stored on their personal computers there still exist threats from hackers.
Jurisdictional Approaches • • • • •
Usage Taxation AML Incentives Consumer Protection
Usage • China – In China digital currencies are viewed as a virtual commodity. Banks and payment institutes in China are not permitted to deal in digital currencies. • Germany – In Germany digital currencies are viewed as legally binding financial instruments within the category of units of account, related to foreign currencies. Digital currencies are considered units of value, that is, a private payment means within private trading exchanges, or are substitute currencies used as a method of payment in multilateral trading transactions on the basis of legal agreements of private law. The German view is that digital currencies presently do not require bank supervisory licensing, but licensing may become necessary in the future.
• Jamaica –An article in the Jamaica Gleaner (September 18) suggests that the BOJ views Bitcoin and other digital currencies as falling within Jamaica’s “Payment Clearing and Settlement Act and as a consequence they require authorisation".
Taxation • United Kingdom
–Income received from mining activities for Bitcoin or similar digital currencies will generally be outside the scope of VAT. When bitcoins or similar digital currencies are exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be charged on their value. Charges (in whatever form) made over Bitcoins or similar digital currencies that are above the value of the digital currencies for arranging or carrying out any transactions will be exempt from VAT. Suppliers of any goods or services sold in exchange for Bitcoin or other similar digital currency will be required to pay VAT. Also, the value of the supply of goods or services on which VAT is due will be the sterling value of the Bitcoins or similar digital currency at the point the transaction takes place. • Australia – In Australia transactions with Bitcoin are viewed as akin to a barter arrangement. Bitcoin, as an asset, is subject to Capital Gains Tax (CGT).
• Norway - The Norwegian Tax Authority has issued a principle statement that bitcoins will be treated as capital property for tax-related purposes. Capital property legislation permits deductions for losses and taxes on winnings. Also, the sale of bitcoins is subject to 25% value-added tax (VAT) as the trade in bitcoins on a Web-based site is an electronic service subject to VAT and not a VAT-exempted financial service.
Anti-Money Laundering /Combating of Terrorism Financing •
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As digital currencies gain popularity, governments’ interest in them have increased. Reviews have been commenced to get a clearer understanding of appropriate regulatory requirements. The only consistency amongst jurisdictions has been an acknowledgment that digital currencies by their very nature are highly susceptible to money laundering and terrorism financing risks and should be subjected to AML/CFT regulations. This is due to the level of anonymity involved coupled with the speed of transfer. In contrast, no uniformed approach has emerged to deal with other matters such as usage, taxation, consumer protection, inter alia.
Financial institutions and designated non-financial institutions have been specifically tasked with implementing procedures for combating ML/TF risks. They are dubbed the “gatekeepers� of the legitimate financial system.
Due to a lack of regulations and the sophistication of the technology associated with digital currencies they can be used by money launderers to circumvent existing regulatory channels of exchange unless they too become regulated.
The use of digital currency streams to circumvent the heavily regulated AML/CFT financial system is real. This has been demonstrated by a number of cases involving digital currencies and money laundering. Three (3) of the most popular being:
•Silk Road •Liberty Reserve •Western Express International However, it should be noted, a number of digital currency service providers have pre-emptively invested in the development an AML/CFT policies and the development of software that facilitates compliance.
AML Approaches ↖
USA- In March of 2013, FinCEN issued AML/CFT guidance to persons administering, exchanging or using virtual currencies by virtue of its authority to administer the Bank Secrecy Act (BSA). As such, administrators and exchangers have been deemed “money services business” and registration, reporting and record keeping requirements for the purposes of AML/CFT, were imposed. Canada – Similarly, Canada amended its AML/CFT legislation to impose new /additional requirements on MSBs involved in digital currency transactions. However, specific regulations are still being developed.
Switzerland – treats dealing in digital currency as trading and deems that such activities fall within the scope of their existing AML/CFT regulatory framework.
FATF’S Staged Approach In June of 2014, FATF issued the report Virtual Currencies Key Definitions and Potential AML/CFT Risks, which documents a risk assessment of conducted by FATF of digital currencies. The result: convertible digital currencies are high risk. In June 2015, FATF issued its Guidance for a risk-based approach to Virtual Currencies. According to FATF, the purpose of the guidance is to “explain the application of a risk-based approach to AML/CFT measures in the VC context…[and] to help national authorities understand and potentially develop regulatory responses including the need to amend their national laws in order to address the ML/TF risks of VCPPS.”
Incentives/Facilitating Innovation •
New York – The New York Regulations do not necessarily incorporate incentives for digital currency service providers and software developers, but the regulatory regime does not fetter developers as they do not target software developers and innovators who do not have custody of client funds.
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The New York Regulations exempt persons with charters under New York Banking Law and who have received approval from the New York Department of Financial Services.
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FinCEN registrants that already file Suspicious Activity Reports (SARs) in compliance with FinCEN regulations will not need to duplicate their work by filing SARs with the NYDFS.
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Most other countries and states within the United States are addressing AML/CFT concerns and Tax concerns while otherwise adopting a wait and see approach about otherwise regulating digital currencies and associated service providers.
Consumer Protection •
The following examples indicate the need for consumer protections in regards to digital: currencies: • Mt. GOX • SEC v Shavers
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Digital Service providers may take advantage of insurance regimes to increase protection for their clients.
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Additionally Regulators of business conduct should take the lead in educating the public about purchasing goods and services in digital currencies. The FTC in the US has already begun such steps.
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Consumer protections needed would vary depending on the nature of the digital currencies and the associated service providers. Service providers who act as custodians may need to be subject to agent/trustee laws and/or Securities and Banking laws depending on how they are organized. Service providers who allow for the conversion of digital currencies into fiat currencies and vice versa may need to be subject to Regulations applicable to money transmitters. Stores and services that accept digital currencies may need to address digital currencies in their return and dispute resolution policies.
Consumer Protection Approaches •
New York - There are also capital and custody requirements which are subject to the discretion of the superintendent. Each Licensee must maintain a surety bond or trust account in United States dollars for the benefit of its customers (Licensees are required to maintain the trust account with a Qualified Custodian).
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Where the licensee stores, holds, or maintains custody of a virtual currency, such licensee is required to hold virtual currency of the same type and amount as that which is owed or obligation to the client.
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Each Licensee is prohibited from selling, transferring, assigning, lending, hypothecating, pledging, or otherwise using or encumbering assets, including Virtual Currency, stored, held, or maintained by, or under the custody or control of, such Licensee on behalf of another Person except for the sale, transfer, or assignment of such assets at the direction of such other Person.
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The Regulations also introduce record keeping requirements, quarterly financial reporting requirements to the superintendent, approval requirements for certain changes of control by the licensee, and advertising, marketing and consumer protection requirements inclusive of disclosure requirements
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North Carolina – Steps are being taken to enact a new Money Transmitters Act (MTA), which would specifically address the transmission of virtual currencies such as bitcoin. It should be noted that Digital currencies already are captured by the existing MTA as the existing Act makes provision for non-bank companies that engage in the business of transmitting funds on behalf of others.
Regulatory Proposals • • • • •
Usage AML Taxation Incentives Consumer protection
Usage/Tax Treatment •
A review of the treatment of digital currencies in other jurisdictions indicate that digital currencies could be treated as either a foreign currency, commodity or payment system. However, a majority of jurisdictions reviewed have taken the approach of treating digital currencies as commodities.
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A strong economic argument could be made for the treatment of digital currency as a foreign currency because they fulfills three (3) functions associated with money, i.e. medium of exchange, storage of value and unit of account.
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The argument in support of treating digital currencies as commodities is that such currencies are not created through claims, like deposits held at a bank which are a liability for the bank and an IOU to the account holder. Digital currencies are also distinct from physical commodities such as gold as they can be viewed as intangible assets or digital commodities.
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Digital currencies could be viewed as a set of agreed upon rules and procedures that apply to rendering a financial service to participants – payment systems.
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The Tax treatment will depend on how digital currency is categorised.
AML/CFT The approach taken to apply AML/CFT requirements to digital currency varies among jurisdictions. While the approach taken in the US and Canada are similar, a subtle distinction emerges in the route; both have deemed it necessary to impose AML/CFT requirements on money transmitters; the US by deeming exchangers and administrators as money services businesses, while Canada has amended its AML/CFT laws to impose additional requirements on money services business involved in digital currency. FATF proposes that at the points at which digital currency interact with businesses regulated within existing AML/CFT framework, AML/CFT requirements should be applied.
Incentives â—?
Consideration should be given by Jamaica to creating a regime that attracts digital currency services providers and associated software developers through the provision of tax incentives and/or exemptions to any licensing regimes applicable to such service providers and developers working on such technologies that are not yet being distributed to the public.
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This could attract foreign investment to Jamaica as top businesses and business leaders across the world are either investing in digital currencies and associated technologies; or are exploring ways to allow their businesses to accept, convert and in some cases store digital currencies.
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This could have a positive impact on social issues such as financial inclusion. Noting that 33.65% of the Jamaican population un-banked (Source: Elliot, Dawn, 2011), while 52.45 % are under-banked. Digital currency has the potential to serve the un-banked and the under-banked within our region.
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Digital Currency also promise to lower money transmission costs by 2.5% - 5%. This is of particular importance to our region as we rely heavily on remittances. However, with the introduction of regulations, the gap between remittance fees for digital currencies and traditional channels may shrink.
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It is also noted that technologies have been developed and are being built upon that allow for improved AML compliance by digital currency service providers by limiting transaction size, velocity of transfer, inter alia and introducing third-party digital identification systems. Providing incentives to software developers will strengthen initiatives in that sphere.
Consumer protection •
The Consumer Affairs Commission should release statements educating the public about the use of digital currencies to purchase goods and services.
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Digital currency exchangers and custodians should be subject to AML/CFT laws.
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flexibility and scalability should be the name of the game in implementing non AML/CFT legal requirements.
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It will be necessary to apply money transmitter requirements to digital currency exchangers and research should be done on the ideal regime (but let it not be assumed that existing money transmitter laws would fit the regulatory needs for digital currency exchangers).
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It will be necessary to apply record keeping, segregation and other such requirements to custodians of digital currencies.