The essence of cryptocurrency. What legislative changes are required for regulation of cryptocurrency?

Cryptocurrencies are gaining popularity every day due to the simplicity and transparency of their circulation. However, due to the lack of direct regulation, there is an issue of taxing cryptocurrency transactions, as well as their compliance with the law on money laundering, and on countering the financing of terrorism. The complexity of this issue lies in the fact that there is no clear legislative definition of cryptocurrency, nor even a common understanding of its nature.

Some regulators consider cryptocurrencies a financial asset and a subject to regulation under securities laws (SEC, MAS). Others believe that cryptocurrency is a commodity, and all payments  for goods and services are just a usual trade, while others consider cryptocurrencies a foreign currency (for example, Japan). The least popular option for determining the nature of cryptocurrencies is calling them a money surrogate, since this approach usually means ban on their use.

As for taxation, there is also no consensus: most often, cryptocurrency is a subject to a profit tax or a capital gains tax, which directly depends on the legal nature of cryptocurrency. So, the capital gains tax is applied to financial assets, and is based on the difference between the cost of buying and selling cryptocurrency. For example, in the United States there are two tax rates: long-term and short-term.

The first is applied when the purchase and sale of cryptocurrency and as a result the profit from the exchange rate difference is made over a period of more than 12 months. This tax is equal to 15-20% of the profit. Short-term for its part is applied in cases when this period is less than 12 months. The complexity of this type of taxation for small traders is the need to constantly monitor and store information about the value of the cryptocurrency on the day of its purchase in order to correctly calculate the tax base.

When cryptocurrency is seen as a subject of income tax, the costs associated with the purchase and possession of cryptocurrency may be considered as an expense reducing the tax base, while the income, respectively, will increase it.

Another option is a tax on the exchange of foreign currency. This method is applied in those countries where cryptocurrency is recognized as a foreign currency, for example, Japan. As a rule, this type of taxation is associated with a high interest rate, however, there is a certain minimum exchange threshold. If transaction doesn't exceed the approved level it is not subject to taxation. This approach makes it easy for ordinary citizens to use cryptocurrencies in everyday life and at the same time can protect the economy from moving large sums out of the country.

Now let's move from analyzing the general state of the cryptocurrency to the private one, namely: the changes that need to be made to the current legislation, in order to regulate this sphere, by reducing the risks of using cryptocurrency and at the same time keep citizen's interest in it alive.

In my opinion, states need to follow the path of a comprehensive examination of cryptocurrency's nature. Considering it as a foreign currency and a financial asset seems to be the most preferred combination. This approach is primarily based on the fact that part of the existing and new cryptocurrencies issued during the ICO, by its nature, is similar in its features to securities.

A commission with participation of the financial regulator must be created. It has to determine which of the cryptocurrencies meets the requirements imposed on securities. And afterwards they will be regulated in accordance with the legislation on the securities market.

All other cryptocurrencies must be recognized as foreign currencies and regulated in accordance with the current legislation on foreign currencies. It is also necessary to amend the tax legislation with regard to the taxation of the currencies exchange, by setting both the tax rate and the minimum threshold, for example 3,000 dollars. All the transactions below this level should not be taxed.

Such a complex approach to the state's understanding of the cryptocurrency's essence, on the one hand will enable the state to protect the rights of those individuals who become investors with respect to cryptocurrencies recognized as securities, and to prevent a rapid outflow of capital from the domestic economy, and on the other - allow ordinary people to use cryptocurrency in their everyday life.

It should be remembered that cryptocurrency is a global phenomenon and its problems can't be resolved just within a single state or even within an association (for example, the EU). In order to achieve a common regulation of cryptocurrency, and therefore, their convenient use by both companies and individuals, it is necessary to create the International Commission on cryptocurrency in the United Nations.

Within the framework of this commission, a unified strategy for the regulation of cryptocurrencies, fixed by international treaty, should be worked out. Such a treaty will create a unified system of legislation in the sphere of circulation and taxation of cryptocurrency. On the one hand, it will secure the use of cryptocurrency, as individuals and companies finally will be able to understand how to build their own calculations in cryptocurrency, and it will clarify their obligations associated with these cryptocurrencies. And on the other hand, the state will receive a certain guarantee that will minimize the risks of an accelerated outflow of fiat capital.

The commission itself should consist of members engaged in regulation sphere.  Thus, the International Commission will be able to take into account the experience of individual countries in regulation and settlement of cryptocurrency issues. These experts can quickly develop an international treaty on cryptocurrency regulation.

Thus, due to the complexity of cryptocurrency,'a nature it is necessary to create a unified international regulation. To understand its very nature, one should use an complex approach that combines the nature of securities and foreign currencies.