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Dynamic Influence of Cryptocurrencies in Global Financial Affairs

Dynamic Influence of Cryptocurrencies in Global Financial Affairs Background: Story of Cryptocurrency and Bitcoin    Cryptocurrency is a counterfeit-proof intangible payment instrument to use as money in a digital form that can be sent directly from one person to another (peer-to-peer) without going through a financial institution. An individual, Satoshi Nakamoto, was claimed to be the first to solve a fundamental double-spending problem by eliminating the need for a trusted third party that could willingly or unwillingly reverse transactions. In place of a trusted party, Nakamoto used a chain of cryptographically-signed transactions secured by proof-of-work to order and validate payments. Cryptography is the backbone of distributed ledger technologies (DLT) like blockchain and other distributed networks mainly used to move money virtually in a decentralised environment, which was previously impossible. Bitcoin is one of Nakamoto's first virtual currencies invented and formulated using cryptographic principles; hence, it is called Cryptocurrency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, GBP, US dollars, Euros and other real currencies or digital assets. Although it does not have physical existence and can not be touched and felt, yet it has a tangible value that could be exchanged for goods and services in modern times.    Bitcoin has become a major hit in the market, but many others have also become popular among 21,671 cryptocurrencies in the global market today (7 November 20222022). The total value of the coin's existence, that is, the following market capitalisation, or market cap total, is $1.03 Trillion , which is one-sixth of President Biden's  budget for FY 2022, $6.011 trillion.  The top five major Cryptocurrencies by each of their current market prices and the capital of the existing coins are as follows:  Bitcoin (BTC): Current price $20,763.40, and Market Capital $398 billion Ethereum (ETH): Current price $1,579.07, and Market Capital $193 billion Tether (USDT): Current price $1.00, and Market Capital $69 billion USD Coin (USDC): Current price $1.00, and Market Capital $42 billion BNB (BNB): Current price $332.89, and Market Capital $43 billion (Data is from CoinMarketCap.com, as of 7 November 2022)   Data extracted from https://coinmarketcap.com/ on 7 November2022 In the categorisation of Cryptocurrency, It is a part of Financial Technology -the term " FinTech " is commonly used in the Financial services industry.   FinTech We are at a pivotal moment in the history of technological development, The world is being transformed by the technological revolution, with established firms across the economy being challenged by a new wave of disruptive technology to displace based technology. This is particularly true in the financial services sector, where FinTech promises to change how we bank, invest, insure and even pay for things. FinTech is an abbreviation for Financial Technology. Cryptocurrency, with its backbone technology and the blockchain, falls under the FinTech umbrella, creating a whole new digital finance sector and revolutionising it. Cryptocurrency is a powerful innovation in FinTech. Whilst it has started to play a vital role in the economic and geopolitical aspects providing many solutions in the heart of the Financial ecosystems; also, it has begun remarkably challenging the mighty fiat currencies as an alternative payment system.  Whilst the FinTech umbrella is expanding its horizons exponentially with innovation to disrupt the base industry using blockchain technology in a centralised and decentralised environment. I refer to the following diagram to familiarise it with some modern instruments.   Why is double-spending an issue for digital money? The economic logic of digital currencies lies in the double-spending problem, which cryptocurrencies have sought to overcome the challenges of accounting and accountabilities.  Physical/ fiat currency has unique features marked once you hand over in exchange for goods and services, which refers to spending. Unlike fiat currency, a single digital token can be spent more than once, which is possible because of a digital file that can be duplicated to send several times. A digital asset that has an equivalent value in real currency or acts as a substitute for actual cash has been referred to as convertible virtual currency.   Blockchain:  Distributed ledger (DLT) is a record of information achieved through consensus with a cryptographic audit trail maintained and validated by the peer-to-peer participants in a decentralised environment. All Blockchains are distributed ledgers, but all distributed ledgers are not necessarily blockchains.  Blockchain is the technology that enables the existence of Cryptocurrency, and Bitcoin was the first invention of Cryptocurrency for which blockchain technology was invented. Cryptoassets or Cryptocurrencies are also called tokens. If the token is the Cryptocurrency of a particular blockchain then it is commonly referred to as native token. It is also possible that a blockchain can hold token of other blockchain platforms. For example, Ethereum supports many non-native tokens representing Cryptocurrency of other platforms or fungible and tradable goods, such as currencies and reward points. New cryptocurrencies having no blockchain yet can use ERC 20 token to raise funds and build their blockchain using ICO. Another token (ERC 721) is called non-fungible token or NFT. Unlike a regular cryptocurrency, this token can distinguish each unit separately; hence, often used to represent certificates and art objects. Early involvement of Cryptocurrencies in the Financials space   If we see the evolution of  FinTech  started in 1838 with the invention of the electronic telegraph for the first time. In 1950 Diner's Club released the first universal credit card. In 1982 the world was introduced to tradeplus, the online brokerage platform, and in 2009 the first version of the Cryptocurrency Bitcoin was released.   Different types of Crypto Assets and their use case:   Following the development of Bitcoin using blockchain technology encouraged for the researcher to move forward and much new use -cases have been considered. Bitcoin alone contributed to developing a series of financial services, including cost-effective money transfers and payment processing using Bitcoin and money exchanges. Once this first wave of applications became stable, developers looked for use cases outside the financial industry. Blockchain platforms providing the underlying trust infrastructure are becoming popular, and industries are becoming more interested in adapting this technology to build new products or improve their current upshots. Any powerful application of this technology capable of changing our lives or society is yet to be seen.   Cryptocurrency in Investment Activities In recent years Venture capital companies and institutional investors had invested in digital currency startups and raised funds using Blockchain Technology. Traditionally Companies used to raise funds by: ·          Equity: selling company shares (ownership) in exchange for funds ·          Bond: Company borrows cash and promises to repay with interest with other covenant ·          Presell products and services: taking orders and payment in advance (deferred income) for a product or service that does not yet exist, is incomplete or is not yet available, e.g. event tickets, Tesla, Range Rover car or console games, or Kickstarter projects etc. In the traditional approach, there is a greater degree of government regulation to prevent investors from being scammed by crooks. In the funding aspect of digital currency, a new method, the Initial Coin Offering (ICO), which has been derived from Initial Public Offering (IPO), provided another way for the company to raise funds and capital. These new projects raised money by creating and then selling their own digital tokens through crowdfunding on a blockchain. Some interesting aspects to this approach are that the tokens are the currency that is used in the company/application that is being created or developed. The developers of the application (or contributors) are paid in these tokens. When needed, the tokens can be converted to any currency at the prevailing market rate. This really provides the ability to create and launch a project using a decentralised business model (DBM). There is a significant difference and divergence between these decentralised approaches to raising money and the traditional centralised ways.                    Cryptocurrency in Financial Services Traditional financial applications tend to be slow, error-prone and disjoint. This nature often necessitates intermediaries to reconcile the process and resolve disagreements. This practice costs stress, money and time that can be avoided or at least mitigated using blockchain-based services.  In the asset management industry, asset managers and their analyst teams trade, balance and rebalance assets, which can benefit from blockchain technology. The current practice incorporates brokers, custodians and settlement managers to keep records, creating inefficiencies and room for error. Distributed ledger technology (DLT) simplifies the process and removes unnecessary intermediaries, some of these faster throughputs, reduced costs, and speeding up trading and rebalancing activities.    Insurance, where claims processing can be a daunting and endless procedure, could be another great use case. Because processors must deal with a wide range of fraudulent claims, room for error is enormous. Use Cases such as smart cities and the Internet of Things might help establish trust between users and policy providers and build transparent and accountable management. Some other applications already available in some countries are cross-border payments, remittances, interbank money transfers, and regular payment facilities. Many blockchain platforms such as Abra, Align Commerce, and Bitspark facilitate some of these services, while Ripple and Stellar are designed to enable bank and financial services to use blockchain technology to enhance the quality of their services.    Cryptocurrency as Smart Contracts Smart contracts are self-executing lines of code with the terms of an agreement between buyer and seller automatically verified and executed via a computer network whole process using blockchain technology. It has the potential to revolutionise the traditional lending system. For example, hard money lenders providing loans and mortgages to customers with poor credit charge high-interest rates to recover potential losses even before the contract starts. It stresses borrowers and often put them into bankruptcy. Smart property can help lenders and borrowers settle ownership using smart contracts. Depending on the terms of the agreements, when borrowers pay a part of the mortgage or the full value, the properties will be transferred to their name. This system undercuts the risk and reduces the paperwork and bureaucratic process while allowing strangers to avail of loans at a lower rate. In this use-case, home is just an example where the property can be a piece of land, a car, a factory, a smartphone or laptop and so on. Ethereum, NEO and EOS can be used to develop applications based on this use case.   Cryptocurrency as Exchanging and Trading  Money exchange locally or overseas transfer and trading platforms are natural fits for blockchain technology. These applications are part of the oldest use-case that blockchain addressed in Bitcoin – transferring funds between parties in a decentralised environment. The current practice in the money exchange and payment industry is heavily centralised. A person willing to exchange foreign currency transfer funds needs to go through a broker or agent who acts to maximise his or her profits only. It happens because customers who want to exchange or transfer funds cannot see the corresponding and responding entire network; hence they remain oblivious to potential offers that might make both parties winners. Trading of stocks and other financial instruments similarly involves a middleman in the form of intermediaries, agents or brokers that costs people large fees and gives less decision making power when buying or selling assets. Blockchain technology has the potential to remove the middleman and connect these people to exchange their funds or assets at a better rate of gain and by paying fewer fees. There are several high-level protocols including the Lightning Network that use Bitcoin or similar blockchain to facilitate bidirectional payment channels without delegating custody of funds.   Ripple and Stellar are two notable distributed ledgers (DLT) aimed to build real-time gross settlement systems for exchanging and trading financial assets. Hundreds of companies have already been using the services offered by these two protocols, while many users are individually availing their services for exchanging foreign currencies, assets and other financial instruments through bids and offers.   Online marketplace The online marketplace is an excellent example of how digital technology can change our day-to-day practices. The products we buy from a real market can now be purchased in a couple of mouse clicks or smartphone taps from the internet. Because of the advancement of the supply chain industry, delivery of that product is no longer a problem either; hence, it is no surprise that the world's biggest public limited company, Amazon, is an online marketplace. Involving blockchain in this domain can significantly enhance the quality of services. The following discusses how blockchain and marketplaces can work together by dividing this domain into three broad categories: e-commerce; online betting, gambling and gaming; and e-auctions and online bidding.    e-commerce Blockchains are a natural fit for e-commerce, as they are designed for storing transactional data. This data, however, does not have to be financial. It can be any action needing a permanent record. It may include payment, but can be extended to a diverse range of operations involving order fulfilment. Key advantages of using blockchain as the underlying platform for eCommerce sites include the visibility of the operation, transparency and automated dispute resolution. Because each block in the blockchain links to the previous block, it creates a visible chain of events showing the process of fulfilling past orders. Buyers can easily identify reliable sellers, while sellers can refuse to process orders depending on the reputation of the sellers. If a dispute still occurs, it can be resolved through an escrow account without involving someone from outside. For example, let's suppose a customer places an online order on a blockchain-powered e-commerce site. Each step in the ordering process such as order placement, payment, fulfilment and shipping each add a new block to the chain with the time that the action was performed. The seller, however, does not instantly receive the payment; rather once the buyer confirms receiving the parcel as ordered, the blockchain releases the payment to the seller; otherwise, the buyer needs to return the parcel to get a refund. At the moment, e-commerce sites such as Amazon, eBay and Alibaba offer an arrangement like this, but it is not reliable and hassle-free and involves the involvement of a third-party to addresses disputes adding extra costs. Blockchain, being decentralised and immutable, demonstrates the ability to revolutionise this industry by removing the need for a middleman. Contracts in Bitcoin have already implemented a form of e-commerce although for the wrong reasons for selling drugs, firearms and other illegal products (Chapter 16 further discusses the criminal activities of Bitcoin users). It is, however, the intention, not the technology that is wrong. To get the best out of blockchain, smart contract-based decentralised applications (DApps) will be necessary. NEO and EOS are two platforms that from the beginning targeted the e-commerce industry and developed architecture capable of handling thousands of transactions per second on a regular basis. It is no exaggeration that amongst the many potential applications discussed in this chapter, this use-case is amongst the most powerful ones.   e-Auction and online bidding Auctions and biddings are modes of securing possessions of goods and services by offering valid prices and challenging counter-offers with even higher but reasonable prices. It is a practice that has been in our societies for centuries. Government contracts given to private companies almost always go through auctions, while private possessions are commonly sold to the public through open bidding processes. The touch of digitisation even made the scope bigger, and now people can bid from their homes. This paradigm shift helps us observe governmental contracts going on e-auctions sites managed by public offices, and private properties being sold online using bidding marketplaces such as eBay, LiveAuctioneers, eBid and thesaleroom.com.    The general practice for governmental e-auctions is that bidders need to secretly provide a quote for a service or contract they seek to win followed by their statement of how they aim to achieve their goals. Amongst the viable bidders, the best quote wins. There are many government auction portals where companies can bid to win contracts for construction works, telecommunication license, communication routes and so on. These are expensive contracts where maintaining the confidentiality of the bid is critical; otherwise, any competitor company having information about others' quotes can easily win the bid by placing their price marginally higher than the original highest bid. If such a thing happens, it is not only unfair for the participating companies, but also for the governments or entities, who called for the auction as they may not get the most appropriate quote from the bidders     Global Cooperation, Regulatory compliance and Taxation  Cryptoassets can be traded and stored anywhere in the world; hence asset holders can hide the information by hiding their tax residency, which ultimately leads to tax evasion is one kind of money laundering.   Under US FATCA, Cryptoassets registered Firms are obliged to capture the Taxpayer tax residency information. Under the Common Reporting Standard (CRS) of OECD, its members of over 100 countries are also required to exchange information between countries. It is an information standard for the Automatic Exchange Of Information regarding financial accounts on a global level between tax authorities to prevent Tax evasion through reasonable Self Certification. FATCA usually maintains a reporting threshold, but CRS does not.   Taxation  While Cryptocurrency and Cryptoassets have the same meaning in accounting terms, cryptographic currency and cryptographic assets are just two sides of the same coin, another term, virtual currency.   Tax Consequences You may owe taxes on the following transactions: ● Sale of a digital asset ● Exchange of digital assets for property, goods or services ● Exchange or trade of one digital asset for another ● Receipt of a digital asset as payment for goods or services ● Receipt of a new digital asset as a result of mining and staking activities ● Receipt of a digital asset as a result of an airdrop ● Use of digital assets to pay for goods or services ● Any other disposition of financial interest in a digital asset ● Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift; however, IHT rules may apply.    The UK HMRC published manual guidance referring to similar treatment as the US does. Crypto asset exchange tokens you receive from employment in the UK, Income tax, and National Insurance contributions are applicable. However, when we buy them (Cryptoassets), there are no such types of tax levied yet as of today, but you will be paying capital gain tax when you sell them.   Cross-border individuals working for the UK employer Since Cryptocurrency has become a popular payment instrument, many Tech companies pay their overseas employees with Cryptocurrency. In this case, we accountants know about Appendix 8 as option 1 or option 2 Statutory Residence test and P85 NT Tax code.       Cryptoassets and Regulatory Oversight    Why regulation is essential in the Cryptocurrency domain   Although the cryptocurrency industry has been developing exponentially as an emerging technology, lawmakers still determine where to start and what to regulate to establish a regulatory framework. Criminals are working intensely to find new ways every day, and Cryptocurrency has become one of their targeted tools for money laundering. I scratch the following diagram to illustrate the money laundering process using Cryptocurrency. You would imagine how important it is to develop AML regulatory framework embracing Cryptoassets worldwide.     How criminals use Cryptoassets for Money Laundering       In 2018, the UK government planned to be the world's most innovative economy and maintain its position as one of the global leading financial centers. With this ambition to be succeeded, the government formed a Cryptoassets Task Force consisting of HM Treasury, FCA, and the Bank of England. To address the risks associated with cryptoassets protecting consumers and combating Money Laundering and Terrorist Financing by analysing the regulatory perimeter through its respective set of regulations such as FSMA 2000 for investment activity; PSR 2017 and updated version PSR 2019 for Payment Service activities; and post-Brexit UK GDPR to provide consumer and investor privacy.  Accountants are critical gatekeepers for the financial system and have a significant role in ensuring services are not used to further a criminal purpose. As professionals, accountants must act with integrity, uphold the law, and not engage in criminal activity, as said by CCAB in the published guidance for the accountancy sector in May 2022.   Critical Observation:  Blockchain debate will be ongoing until it reaches a maturity level regarding what can and cannot be done using this disruptive technology. Interestingly, the world seems to get divided into two while discussing blockchain. Academics, industry leaders, developers – every group has opinions on this technology, criticising or praising its ability to change the existing digital infrastructures and practices. Cryptocurrency is irresistible to stop its development and practice in this modern time, although it has some downsides and upsides too; i n many countries, Cryptoassets are still unofficial. Most of the developed countries are welcoming through a strict regulatory framework, either through updating the existing one or ultimately setting out a new one.    Across the world, Cryptocurrency has become a significant factor in the global Finance and  Investment landscape; countries are taking different steps to protect consumer rights by developing a new set of regulatory frameworks to address the associated risks and rewards while welcoming technological evolution. To understand the approaches of the countries, some of the highlights are as follows:   The USA - announced a new framework in 2022 to tickle illegal cryptocurrency activities by empowering the Securities and Exchange Commission (SEC), which has been doing needful by a lawsuit against Ripple selling its native coin XRP in unregistered securities transactions. Also, SEC has been targeting Coinbase and Binance over their Cryptoassets.   China classifies cryptocurrencies as property to determine inheritances. Chinese central Bank  (PBOC) banned crypto exchanges but introduced a new currency (CBDC) pilot test program to have on their own coins.   Crypto is not considered legal tender in Canada, the country has been more proactive than others about crypto regulation. Canada classifies all crypto investment firms as money service businesses (MSBs) and requires that they register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).       United Kingdom, there are no cryptocurrency-specific laws in the UK yet; in the earlier paragraph, we already spoke. The UK considers Cryptocurrency as property (not legal tender), and crypto exchanges must register with the UK Financial Conduct Authority (FCA). European Union Cryptocurrency is legal throughout most European Union (EU), although exchange governance depends on individual member states. Meanwhile, taxation also varies by country within the EU, ranging from 0% to 50%. In recent years, the EU's 5AMLD and 6AMLD have come into effect, which tightens KYC/CFT obligations and standard reporting requirements. Japan took a progressive approach to crypto regulations, recognising cryptocurrencies as legal property under the Payment Services Act (PSA). Meanwhile, crypto exchanges in the country must register with the Financial Services Agency (FSA) and comply with AML/CFT obligations.  Australia classifies cryptocurrencies as legal property, subsequently subjecting them to capital gains tax. Exchanges are free to operate in the country, provided that they register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations. In the rest of the world, Impacts are fast-moving and addressed according to their needs and capabilities according to the country's own initiatives.   Harnessing the potential of emerging technologies like Cryptocurrency, one of the key challenges for governments worldwide is understanding and engaging with the implications of new technologies. Tech companies continuously develop new products and services; some successfully reach their goals and objectives while others fail, yet startups create new ideas to implement through blockchain every day irresistibly to thrive in the industry.     The government must be well-placed to support and take advantage of positive innovation. This includes understanding and managing any risks associated with it that might otherwise limit its beneficial potential.   Conclusion  Last but not least, this is high time for accountants to understand the cryptography industry's insight, particularly those who are forwarding themselves practicing in the Cryptography industry. In a recent publication from CCAB, accountants are critical gatekeepers for the financial system and have a significant role in ensuring services are not used to further a criminal purpose. As professionals, accountants must act with integrity, uphold the law, and not engage in criminal activity. CCAB's latest publications guidance for the accountancy sector highlighted Cryptocurrency in section 4.6.7 to address Money Laundering and Terrorist Financing (MLTF); However, the message is small, yet the implications are much more extensive for now and in the future.   Kaykobad Bhuiyan ACCA,MCSI Tax and regulatory consultant at RNT And, Global Cryptoassets researcher and consultant at Compliance house

27/05/2023
Dynamic Influence of Cryptocurrencies in Global Financial Affairs

About this CPD

Dynamic Influence of Cryptocurrencies in Global Financial Affairs Background: Story of Cryptocurrency and Bitcoin    Cryptocurrency is a counterfeit-proof intangible payment instrument to use as money in a digital form that can be sent directly from one person to another (peer-to-peer) without going through a financial institution. An individual, Satoshi Nakamoto, was claimed to be the first to solve a fundamental double-spending problem by eliminating the need for a trusted third party that could willingly or unwillingly reverse transactions. In place of a trusted party, Nakamoto used a chain of cryptographically-signed transactions secured by proof-of-work to order and validate payments. Cryptography is the backbone of distributed ledger technologies (DLT) like blockchain and other distributed networks mainly used to move money virtually in a decentralised environment, which was previously impossible. Bitcoin is one of Nakamoto's first virtual currencies invented and formulated using cryptographic principles; hence, it is called Cryptocurrency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, GBP, US dollars, Euros and other real currencies or digital assets. Although it does not have physical existence and can not be touched and felt, yet it has a tangible value that could be exchanged for goods and services in modern times.    Bitcoin has become a major hit in the market, but many others have also become popular among 21,671 cryptocurrencies in the global market today (7 November 20222022). The total value of the coin's existence, that is, the following market capitalisation, or market cap total, is $1.03 Trillion , which is one-sixth of President Biden's  budget for FY 2022, $6.011 trillion.  The top five major Cryptocurrencies by each of their current market prices and the capital of the existing coins are as follows:  Bitcoin (BTC): Current price $20,763.40, and Market Capital $398 billion Ethereum (ETH): Current price $1,579.07, and Market Capital $193 billion Tether (USDT): Current price $1.00, and Market Capital $69 billion USD Coin (USDC): Current price $1.00, and Market Capital $42 billion BNB (BNB): Current price $332.89, and Market Capital $43 billion (Data is from CoinMarketCap.com, as of 7 November 2022)   Data extracted from https://coinmarketcap.com/ on 7 November2022 In the categorisation of Cryptocurrency, It is a part of Financial Technology -the term " FinTech " is commonly used in the Financial services industry.   FinTech We are at a pivotal moment in the history of technological development, The world is being transformed by the technological revolution, with established firms across the economy being challenged by a new wave of disruptive technology to displace based technology. This is particularly true in the financial services sector, where FinTech promises to change how we bank, invest, insure and even pay for things. FinTech is an abbreviation for Financial Technology. Cryptocurrency, with its backbone technology and the blockchain, falls under the FinTech umbrella, creating a whole new digital finance sector and revolutionising it. Cryptocurrency is a powerful innovation in FinTech. Whilst it has started to play a vital role in the economic and geopolitical aspects providing many solutions in the heart of the Financial ecosystems; also, it has begun remarkably challenging the mighty fiat currencies as an alternative payment system.  Whilst the FinTech umbrella is expanding its horizons exponentially with innovation to disrupt the base industry using blockchain technology in a centralised and decentralised environment. I refer to the following diagram to familiarise it with some modern instruments.   Why is double-spending an issue for digital money? The economic logic of digital currencies lies in the double-spending problem, which cryptocurrencies have sought to overcome the challenges of accounting and accountabilities.  Physical/ fiat currency has unique features marked once you hand over in exchange for goods and services, which refers to spending. Unlike fiat currency, a single digital token can be spent more than once, which is possible because of a digital file that can be duplicated to send several times. A digital asset that has an equivalent value in real currency or acts as a substitute for actual cash has been referred to as convertible virtual currency.   Blockchain:  Distributed ledger (DLT) is a record of information achieved through consensus with a cryptographic audit trail maintained and validated by the peer-to-peer participants in a decentralised environment. All Blockchains are distributed ledgers, but all distributed ledgers are not necessarily blockchains.  Blockchain is the technology that enables the existence of Cryptocurrency, and Bitcoin was the first invention of Cryptocurrency for which blockchain technology was invented. Cryptoassets or Cryptocurrencies are also called tokens. If the token is the Cryptocurrency of a particular blockchain then it is commonly referred to as native token. It is also possible that a blockchain can hold token of other blockchain platforms. For example, Ethereum supports many non-native tokens representing Cryptocurrency of other platforms or fungible and tradable goods, such as currencies and reward points. New cryptocurrencies having no blockchain yet can use ERC 20 token to raise funds and build their blockchain using ICO. Another token (ERC 721) is called non-fungible token or NFT. Unlike a regular cryptocurrency, this token can distinguish each unit separately; hence, often used to represent certificates and art objects. Early involvement of Cryptocurrencies in the Financials space   If we see the evolution of  FinTech  started in 1838 with the invention of the electronic telegraph for the first time. In 1950 Diner's Club released the first universal credit card. In 1982 the world was introduced to tradeplus, the online brokerage platform, and in 2009 the first version of the Cryptocurrency Bitcoin was released.   Different types of Crypto Assets and their use case:   Following the development of Bitcoin using blockchain technology encouraged for the researcher to move forward and much new use -cases have been considered. Bitcoin alone contributed to developing a series of financial services, including cost-effective money transfers and payment processing using Bitcoin and money exchanges. Once this first wave of applications became stable, developers looked for use cases outside the financial industry. Blockchain platforms providing the underlying trust infrastructure are becoming popular, and industries are becoming more interested in adapting this technology to build new products or improve their current upshots. Any powerful application of this technology capable of changing our lives or society is yet to be seen.   Cryptocurrency in Investment Activities In recent years Venture capital companies and institutional investors had invested in digital currency startups and raised funds using Blockchain Technology. Traditionally Companies used to raise funds by: ·          Equity: selling company shares (ownership) in exchange for funds ·          Bond: Company borrows cash and promises to repay with interest with other covenant ·          Presell products and services: taking orders and payment in advance (deferred income) for a product or service that does not yet exist, is incomplete or is not yet available, e.g. event tickets, Tesla, Range Rover car or console games, or Kickstarter projects etc. In the traditional approach, there is a greater degree of government regulation to prevent investors from being scammed by crooks. In the funding aspect of digital currency, a new method, the Initial Coin Offering (ICO), which has been derived from Initial Public Offering (IPO), provided another way for the company to raise funds and capital. These new projects raised money by creating and then selling their own digital tokens through crowdfunding on a blockchain. Some interesting aspects to this approach are that the tokens are the currency that is used in the company/application that is being created or developed. The developers of the application (or contributors) are paid in these tokens. When needed, the tokens can be converted to any currency at the prevailing market rate. This really provides the ability to create and launch a project using a decentralised business model (DBM). There is a significant difference and divergence between these decentralised approaches to raising money and the traditional centralised ways.                    Cryptocurrency in Financial Services Traditional financial applications tend to be slow, error-prone and disjoint. This nature often necessitates intermediaries to reconcile the process and resolve disagreements. This practice costs stress, money and time that can be avoided or at least mitigated using blockchain-based services.  In the asset management industry, asset managers and their analyst teams trade, balance and rebalance assets, which can benefit from blockchain technology. The current practice incorporates brokers, custodians and settlement managers to keep records, creating inefficiencies and room for error. Distributed ledger technology (DLT) simplifies the process and removes unnecessary intermediaries, some of these faster throughputs, reduced costs, and speeding up trading and rebalancing activities.    Insurance, where claims processing can be a daunting and endless procedure, could be another great use case. Because processors must deal with a wide range of fraudulent claims, room for error is enormous. Use Cases such as smart cities and the Internet of Things might help establish trust between users and policy providers and build transparent and accountable management. Some other applications already available in some countries are cross-border payments, remittances, interbank money transfers, and regular payment facilities. Many blockchain platforms such as Abra, Align Commerce, and Bitspark facilitate some of these services, while Ripple and Stellar are designed to enable bank and financial services to use blockchain technology to enhance the quality of their services.    Cryptocurrency as Smart Contracts Smart contracts are self-executing lines of code with the terms of an agreement between buyer and seller automatically verified and executed via a computer network whole process using blockchain technology. It has the potential to revolutionise the traditional lending system. For example, hard money lenders providing loans and mortgages to customers with poor credit charge high-interest rates to recover potential losses even before the contract starts. It stresses borrowers and often put them into bankruptcy. Smart property can help lenders and borrowers settle ownership using smart contracts. Depending on the terms of the agreements, when borrowers pay a part of the mortgage or the full value, the properties will be transferred to their name. This system undercuts the risk and reduces the paperwork and bureaucratic process while allowing strangers to avail of loans at a lower rate. In this use-case, home is just an example where the property can be a piece of land, a car, a factory, a smartphone or laptop and so on. Ethereum, NEO and EOS can be used to develop applications based on this use case.   Cryptocurrency as Exchanging and Trading  Money exchange locally or overseas transfer and trading platforms are natural fits for blockchain technology. These applications are part of the oldest use-case that blockchain addressed in Bitcoin – transferring funds between parties in a decentralised environment. The current practice in the money exchange and payment industry is heavily centralised. A person willing to exchange foreign currency transfer funds needs to go through a broker or agent who acts to maximise his or her profits only. It happens because customers who want to exchange or transfer funds cannot see the corresponding and responding entire network; hence they remain oblivious to potential offers that might make both parties winners. Trading of stocks and other financial instruments similarly involves a middleman in the form of intermediaries, agents or brokers that costs people large fees and gives less decision making power when buying or selling assets. Blockchain technology has the potential to remove the middleman and connect these people to exchange their funds or assets at a better rate of gain and by paying fewer fees. There are several high-level protocols including the Lightning Network that use Bitcoin or similar blockchain to facilitate bidirectional payment channels without delegating custody of funds.   Ripple and Stellar are two notable distributed ledgers (DLT) aimed to build real-time gross settlement systems for exchanging and trading financial assets. Hundreds of companies have already been using the services offered by these two protocols, while many users are individually availing their services for exchanging foreign currencies, assets and other financial instruments through bids and offers.   Online marketplace The online marketplace is an excellent example of how digital technology can change our day-to-day practices. The products we buy from a real market can now be purchased in a couple of mouse clicks or smartphone taps from the internet. Because of the advancement of the supply chain industry, delivery of that product is no longer a problem either; hence, it is no surprise that the world's biggest public limited company, Amazon, is an online marketplace. Involving blockchain in this domain can significantly enhance the quality of services. The following discusses how blockchain and marketplaces can work together by dividing this domain into three broad categories: e-commerce; online betting, gambling and gaming; and e-auctions and online bidding.    e-commerce Blockchains are a natural fit for e-commerce, as they are designed for storing transactional data. This data, however, does not have to be financial. It can be any action needing a permanent record. It may include payment, but can be extended to a diverse range of operations involving order fulfilment. Key advantages of using blockchain as the underlying platform for eCommerce sites include the visibility of the operation, transparency and automated dispute resolution. Because each block in the blockchain links to the previous block, it creates a visible chain of events showing the process of fulfilling past orders. Buyers can easily identify reliable sellers, while sellers can refuse to process orders depending on the reputation of the sellers. If a dispute still occurs, it can be resolved through an escrow account without involving someone from outside. For example, let's suppose a customer places an online order on a blockchain-powered e-commerce site. Each step in the ordering process such as order placement, payment, fulfilment and shipping each add a new block to the chain with the time that the action was performed. The seller, however, does not instantly receive the payment; rather once the buyer confirms receiving the parcel as ordered, the blockchain releases the payment to the seller; otherwise, the buyer needs to return the parcel to get a refund. At the moment, e-commerce sites such as Amazon, eBay and Alibaba offer an arrangement like this, but it is not reliable and hassle-free and involves the involvement of a third-party to addresses disputes adding extra costs. Blockchain, being decentralised and immutable, demonstrates the ability to revolutionise this industry by removing the need for a middleman. Contracts in Bitcoin have already implemented a form of e-commerce although for the wrong reasons for selling drugs, firearms and other illegal products (Chapter 16 further discusses the criminal activities of Bitcoin users). It is, however, the intention, not the technology that is wrong. To get the best out of blockchain, smart contract-based decentralised applications (DApps) will be necessary. NEO and EOS are two platforms that from the beginning targeted the e-commerce industry and developed architecture capable of handling thousands of transactions per second on a regular basis. It is no exaggeration that amongst the many potential applications discussed in this chapter, this use-case is amongst the most powerful ones.   e-Auction and online bidding Auctions and biddings are modes of securing possessions of goods and services by offering valid prices and challenging counter-offers with even higher but reasonable prices. It is a practice that has been in our societies for centuries. Government contracts given to private companies almost always go through auctions, while private possessions are commonly sold to the public through open bidding processes. The touch of digitisation even made the scope bigger, and now people can bid from their homes. This paradigm shift helps us observe governmental contracts going on e-auctions sites managed by public offices, and private properties being sold online using bidding marketplaces such as eBay, LiveAuctioneers, eBid and thesaleroom.com.    The general practice for governmental e-auctions is that bidders need to secretly provide a quote for a service or contract they seek to win followed by their statement of how they aim to achieve their goals. Amongst the viable bidders, the best quote wins. There are many government auction portals where companies can bid to win contracts for construction works, telecommunication license, communication routes and so on. These are expensive contracts where maintaining the confidentiality of the bid is critical; otherwise, any competitor company having information about others' quotes can easily win the bid by placing their price marginally higher than the original highest bid. If such a thing happens, it is not only unfair for the participating companies, but also for the governments or entities, who called for the auction as they may not get the most appropriate quote from the bidders     Global Cooperation, Regulatory compliance and Taxation  Cryptoassets can be traded and stored anywhere in the world; hence asset holders can hide the information by hiding their tax residency, which ultimately leads to tax evasion is one kind of money laundering.   Under US FATCA, Cryptoassets registered Firms are obliged to capture the Taxpayer tax residency information. Under the Common Reporting Standard (CRS) of OECD, its members of over 100 countries are also required to exchange information between countries. It is an information standard for the Automatic Exchange Of Information regarding financial accounts on a global level between tax authorities to prevent Tax evasion through reasonable Self Certification. FATCA usually maintains a reporting threshold, but CRS does not.   Taxation  While Cryptocurrency and Cryptoassets have the same meaning in accounting terms, cryptographic currency and cryptographic assets are just two sides of the same coin, another term, virtual currency.   Tax Consequences You may owe taxes on the following transactions: ● Sale of a digital asset ● Exchange of digital assets for property, goods or services ● Exchange or trade of one digital asset for another ● Receipt of a digital asset as payment for goods or services ● Receipt of a new digital asset as a result of mining and staking activities ● Receipt of a digital asset as a result of an airdrop ● Use of digital assets to pay for goods or services ● Any other disposition of financial interest in a digital asset ● Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift; however, IHT rules may apply.    The UK HMRC published manual guidance referring to similar treatment as the US does. Crypto asset exchange tokens you receive from employment in the UK, Income tax, and National Insurance contributions are applicable. However, when we buy them (Cryptoassets), there are no such types of tax levied yet as of today, but you will be paying capital gain tax when you sell them.   Cross-border individuals working for the UK employer Since Cryptocurrency has become a popular payment instrument, many Tech companies pay their overseas employees with Cryptocurrency. In this case, we accountants know about Appendix 8 as option 1 or option 2 Statutory Residence test and P85 NT Tax code.       Cryptoassets and Regulatory Oversight    Why regulation is essential in the Cryptocurrency domain   Although the cryptocurrency industry has been developing exponentially as an emerging technology, lawmakers still determine where to start and what to regulate to establish a regulatory framework. Criminals are working intensely to find new ways every day, and Cryptocurrency has become one of their targeted tools for money laundering. I scratch the following diagram to illustrate the money laundering process using Cryptocurrency. You would imagine how important it is to develop AML regulatory framework embracing Cryptoassets worldwide.     How criminals use Cryptoassets for Money Laundering       In 2018, the UK government planned to be the world's most innovative economy and maintain its position as one of the global leading financial centers. With this ambition to be succeeded, the government formed a Cryptoassets Task Force consisting of HM Treasury, FCA, and the Bank of England. To address the risks associated with cryptoassets protecting consumers and combating Money Laundering and Terrorist Financing by analysing the regulatory perimeter through its respective set of regulations such as FSMA 2000 for investment activity; PSR 2017 and updated version PSR 2019 for Payment Service activities; and post-Brexit UK GDPR to provide consumer and investor privacy.  Accountants are critical gatekeepers for the financial system and have a significant role in ensuring services are not used to further a criminal purpose. As professionals, accountants must act with integrity, uphold the law, and not engage in criminal activity, as said by CCAB in the published guidance for the accountancy sector in May 2022.   Critical Observation:  Blockchain debate will be ongoing until it reaches a maturity level regarding what can and cannot be done using this disruptive technology. Interestingly, the world seems to get divided into two while discussing blockchain. Academics, industry leaders, developers – every group has opinions on this technology, criticising or praising its ability to change the existing digital infrastructures and practices. Cryptocurrency is irresistible to stop its development and practice in this modern time, although it has some downsides and upsides too; i n many countries, Cryptoassets are still unofficial. Most of the developed countries are welcoming through a strict regulatory framework, either through updating the existing one or ultimately setting out a new one.    Across the world, Cryptocurrency has become a significant factor in the global Finance and  Investment landscape; countries are taking different steps to protect consumer rights by developing a new set of regulatory frameworks to address the associated risks and rewards while welcoming technological evolution. To understand the approaches of the countries, some of the highlights are as follows:   The USA - announced a new framework in 2022 to tickle illegal cryptocurrency activities by empowering the Securities and Exchange Commission (SEC), which has been doing needful by a lawsuit against Ripple selling its native coin XRP in unregistered securities transactions. Also, SEC has been targeting Coinbase and Binance over their Cryptoassets.   China classifies cryptocurrencies as property to determine inheritances. Chinese central Bank  (PBOC) banned crypto exchanges but introduced a new currency (CBDC) pilot test program to have on their own coins.   Crypto is not considered legal tender in Canada, the country has been more proactive than others about crypto regulation. Canada classifies all crypto investment firms as money service businesses (MSBs) and requires that they register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).       United Kingdom, there are no cryptocurrency-specific laws in the UK yet; in the earlier paragraph, we already spoke. The UK considers Cryptocurrency as property (not legal tender), and crypto exchanges must register with the UK Financial Conduct Authority (FCA). European Union Cryptocurrency is legal throughout most European Union (EU), although exchange governance depends on individual member states. Meanwhile, taxation also varies by country within the EU, ranging from 0% to 50%. In recent years, the EU's 5AMLD and 6AMLD have come into effect, which tightens KYC/CFT obligations and standard reporting requirements. Japan took a progressive approach to crypto regulations, recognising cryptocurrencies as legal property under the Payment Services Act (PSA). Meanwhile, crypto exchanges in the country must register with the Financial Services Agency (FSA) and comply with AML/CFT obligations.  Australia classifies cryptocurrencies as legal property, subsequently subjecting them to capital gains tax. Exchanges are free to operate in the country, provided that they register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations. In the rest of the world, Impacts are fast-moving and addressed according to their needs and capabilities according to the country's own initiatives.   Harnessing the potential of emerging technologies like Cryptocurrency, one of the key challenges for governments worldwide is understanding and engaging with the implications of new technologies. Tech companies continuously develop new products and services; some successfully reach their goals and objectives while others fail, yet startups create new ideas to implement through blockchain every day irresistibly to thrive in the industry.     The government must be well-placed to support and take advantage of positive innovation. This includes understanding and managing any risks associated with it that might otherwise limit its beneficial potential.   Conclusion  Last but not least, this is high time for accountants to understand the cryptography industry's insight, particularly those who are forwarding themselves practicing in the Cryptography industry. In a recent publication from CCAB, accountants are critical gatekeepers for the financial system and have a significant role in ensuring services are not used to further a criminal purpose. As professionals, accountants must act with integrity, uphold the law, and not engage in criminal activity. CCAB's latest publications guidance for the accountancy sector highlighted Cryptocurrency in section 4.6.7 to address Money Laundering and Terrorist Financing (MLTF); However, the message is small, yet the implications are much more extensive for now and in the future.   Kaykobad Bhuiyan ACCA,MCSI Tax and regulatory consultant at RNT And, Global Cryptoassets researcher and consultant at Compliance house

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  • ✓Written for The Accountants Club's CPD Article by Kaykobad Bhuiyan ACCA,MCSI Tax and regulatory consultant at RNT And, Global Cryptoassets researcher and consultant at Compliance house