Cryptocurrency is a digital phenomenon sweeping the world and the media darling for the last few years has been Bitcoin but what is Bitcoin and, how in a world where the internet has no borders, will the government see it in a regulatory space.
For the purposes of this article the focus will be on Bitcoin the most well known and most valuable crypto currency available in today’s market.
As a point of departure it is to be noted that although Bitcoin and crypto currency has been described numerous times as “Currency” it does not strictly fit the description of what a currency is.
It must be born in mind that the creation of currency is generally the responsibility of that nation’s central bank and the creation and distribution of currency is strictly regulated. Bitcoin is completely decentralised and has no government intervention with regards to creation and distribution. It must be further noted that Bitcoin is “Mined” and not “minted” and neither is it backed by any governmental security of precious metal, only the trust in Bitcoin gives it Value.
Even should Bitcoin be used as a foreign currency under Article V of the International Monetary Fund’s Articles of Association 1945, a major problem exists in that the government will still be responsible to collect a portion and subsequently pay that portion over to the IMF, a duty no government at this stage is willing to take on.
Another major flaw with Bitcoin is the time it takes for a transaction to be finalised, the average waiting time is currently between 15 and 60+ min, making everyday transaction almost impossible.
So as Bitcoin does not fit the currency mould where does it now fit in.
Let us look at Bitcoin as a security, a single Bitcoin Share in the larger Bitcoin Company but does a Bitcoin qualify as a share.
On an international level and following American Security Regulation two main tests exist in law to determine whether something is a security or not, the Howey and Reeves tests for Securities, for the purposes of this short article only the Howey test will be applied.
Under the Howey Test establishes whether there exists an investment contract or not and 4 elements are applicable:
a. When money is invested
b. In a common enterprise
c. With the expectations of profit
d. At the efforts of another
if all four elements are present the transaction is an investment contract and therefore a security, when applied to Bitcoin:
- Investment of Money: Bitcoin users to obtain bitcoins with the intention to use bitcoin as an investment will generally invest money.
- In a Common Enterprise: Although Bitcoin is not a common enterprise as traditionally understood, for example a company. This is the greatest challenge to apply security law to Bitcoin however this becomes much easier where an intermediary is involved such as a Bitcoin Exchange.
- With Expectation of Profits: Ultimately the purpose of any invest by anyone is to make profit otherwise it would not be considered an investment.
- At the Efforts of Another: Considering investment would be run by an intermediary and knowing when to buy is key the individuals investing in Bitcoin expect that the third parties efforts is what would make them the money therefore this applies and Bitcoin and cryptocurrency checks this box as well.
It can be seen from the above that Bitcoin transactions especially those involving an intermediary third party are definitely investment contracts and can thus the logical conclusion is that A Bitcoin can be treated as a security.
SARS however on 6 April 2018, released a statement stating that Bitcoin is considered assets of an intangible asset similar to that of a goodwill and copyright, SARS however provided no justification for this analysis in this statement.
Despite the above short analysis it must be remembered that Bitcoin and cryptocurrency is in its infancy and normal regulatory laws and frameworks evolve to slowly to keep up with the high paced world the internet has created and new laws and frame works will have to be developed.
Written by : Jean Vermaas (B.Com Law, LL.B, LL.M)