Society has evolved from the time that people would barter to buy goods and procure services. It was a matter of time before people realised that bartering was not a viable form to obtaining goods and services, as the value placed could be very subjective and in certain instances the value given away was more than the value received.
Legal tender such as currency became the most favoured form to transactions, as it was valued through exchange rate measures. Currency as a legal tender is regulated by each country's central bank. In most part citizens are assured that governmental authorities will take steps to ensure that the value of the currency remains positive. However, the financial crisis in 2008 led to consumer confidence in financial institutions decreasing, and consumers sought other ways to store and keep safe their valuable asset of money. The financial crisis led to the emergence cryptocurrency, a form of tender that is unregulated and falls outside the control of financial institutions and the central banks.
Cryptocurrency is essentially based on a belief system and with the cryptocurrency community agreeing on its value. Factors such as supply and demand are the main consideration that determines its value. Despite value being determined by the cryptocurrency community, cryptocurrency owners have confidence and trust in the block chain. Cryptocurrency owners believe that their currency is more secure and has more value than the legal tender controlled and regulated by governments. Some people are unable to believe how others can have confidence in an esoteric system.
There are some jurisdictions that have taken active steps to regulate cryptocurrency. The United Kingdom, as an example, has set up several cryptocurrency organisations to bring more legitimacy to the industry. When you think of cryptocurrency you think of Bitcoin, but there are actually over 1500 crypto-currencies globally.
Seven influential cryptocurrency companies (Coinbase, eToro, CryptoCompare, CEX.IO, BlockEx, CoinShares and CommerceBlock) in the United Kingdom have created a unique organisation called CryptoUK.
CryptoUK is open to members and supporters that are willing to sign up to a code of conduct and seeks to self-regulate members and supporters. In fact, CryptoUK plans to carry out its activities side by side with the British government, which will allow them to prevent money laundering and hacker attacks on crypto platforms.
In addition, there are some securities rating agencies (for example Weiss Ratings) that have taken it upon themselves to offer the first ratings on cryptocurrencies. No doubt ratings are likely to give sceptics some confidence in the value of the cryptocurrency, but until such times as cryptocurrencies are not rated, value will continue to be determined by:
- supply and demand;
- security of the block chain;
- the difficulty of "mining" to get more coins;
- use of the cryptocurrency as a form of payment or investment;
- media attention; and
- the value of fiat currency (fiat money, although considered a legal tender by governments, is not backed by a physical commodity such as gold or silver like traditional currencies. The value of fiat money is based solely on the faith and credit of the economy).
Despite popular belief cryptocurrency, although not regulated in a traditional sense, is in fact regulated through its community of users. Peer-to-peer regulation exists. Governments are only now intervening on the basis of taxing it as income or gains from trade and investment and with the intention of driving down the rate of fraud and other illicit activities that may be funded by cryptocurrency.
Legitimate regulation on cryptocurrency may increase confidence on existing users and possibly induce an investor appetite for potential users and thereby cause a rise in demand and, as mentioned above, the more demand for and confidence in the commodity, the more value it will earn.
Written by Christine Rodrigues, partner, and Craig de Bruyn, candidate attorney, at Hogan Lovells (South Africa)