We live in a world that has been permanently changed by the internet. This new technology changed the way in which people interact and perform commercial transactions. Taking this scenario into consideration, the citizens of the internet have begotten a new technology that revolutionized how payments systems work: the Cryptocurrency. This technology made it possible to perform international transactions without any intermediary (bank/clearing house) and without any trust between the parties. However, there are two sides to every coin, and cryptocurrencies are no different.
Regulators around the globe are facing great challenges.
Cryptocurrencies pose a number of challenges to national and international regulatory bodies for a variety of reasons, many of which are inherent to its issuance and means of operation. The unique characteristics of cryptocurrencies, such as the independence of any State, agility in performing operations, issuance of units of value in mathematical form, among others, were never observed on such a scale in the capitalist system. After all, how can one cope efficiently with a self-managed system that emits units of value independently while acting as both a means of payment and a means of ownership? Each of these functions is currently performed independently by private or public entities in today’s society and this new technology has broken with all the “old-world” paradigms, forcing us to view our institutions from a completely different perspective. Namely, the State no longer has the monopoly over the issuance of “tokens of value” called “fiat money” guaranteed by its authority and monopoly over violence.
These challenges are nothing new, though.
Regulation often lags behind the rapid growth of a new technology such that early entrants enjoy what has been called the “lawlessness of new frontiers” as the law catches up to the new public policy challenges that are created. For example, legislators, regulators, and the judiciary struggled to develop a model for regulation of the Internet in the mid-1990s. Like the virtual currency discussed here, certain legal issues arising from the Internet could potentially be managed with the existing law while other unique regulatory concerns were incapable of reconciliation by the simple application of existing approaches from related industries.
Few regulatory guidelines
To that end, we can conclude that there is much to learn from: (1) divesting from attempts to define or conceptualize virtual currency via established constructs for payment systems or investment vehicles, and (2) evaluating the policy goals (not the statutory language) of existing law as applied to the unique nuances of virtual currency. In doing so, policymakers can identify the considerations unique to virtual currency and develop appropriate regulatory requirements to mitigate the actual risks raised by virtual currency free from self-imposed constraints.
Avoiding an unnecessarily narrow debate constrained by the limits of presently existing regulatory structures and language, a more workable, comprehensive, and cohesive regulatory regime for virtual currencies might be forged.
The concept of Jurisdictional arbitrage and how all this ties together?
Jurisdictional arbitrage means the act of taking advantage of the disagreements between competing legal jurisdictions. It takes its name from arbitrage. For instance, the practice of hiring legal service for a lower value in one jurisdiction and offering it for a higher value in another jurisdiction is a jurisdictional arbitrage. Just as in financial arbitrage, the attractiveness of jurisdiction arbitrage depends largely on its costs of switching legal service providers from one government to another.
At the moment there is a great deal of variation in regulation of cryptocurrencies. The good thing is that the leading global economies have more favorable regulation because the population has the demand for cryptocurrencies and such countries have better institutions. All of this means that knowingly or unknowingly countries are competing against each other. In the same way that genes promulgate themselves across time, memes or ideas go through the same process of natural selection. Competition drives progress and innovation and that’s what we all want, don’t we? In the future, we expect to see the convergence to the favorable regulation regimes; those countries with the best regulatory solutions will greatly benefit from it and “outrun” the others. The small countries would simply adopt the best practices and a global harmonization of law and uniformization of practices will follow. May the winner take all.