Why does the definition of virtual currency matter?
I am inspired to write this article after reading a recent tweet posted by Greg Abbott.
According to the Texas Government site, Mr Abbott is named “Best Governor in the Nation” in 2020. He continues to build on his record as a strong conservative leader who fights to preserve Texas values.
Based on information on Texas Legislature Online History, the bill [HB 4474] was signed in the senate and sent to the governor on 05/31/2021. The site's caption text for the bill shows "Relating to the control of virtual currency and the rights of purchasers who obtain control of virtual currency for purposes of the Uniform Commercial Code".
As reported in this source, the bill provides a formal definition of virtual currency and outlines guidelines for cryptocurrency businesses in the state. A "Virtual currency" means a digital representation of value that functions as a medium of exchange, unit of account, and/or store of value and is often secured using blockchain technology.
Let me elaborate on key points why the confirmation in this tweet is important for Texas which is also relevant to all Americans.
Definitions are critical to set boundaries in life and bring order to the business world. Without definition, we will face chaos.
The cryptocurrency world is murky. It is full of unknowns.
Cryptocurrencies are relatively new and cause unusual clashing with the physical world. As documented in IEEE digital library, the first cryptocurrency paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" was published in 2009.
The conclusion of the paper was well-defined and clear: "We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control ownership, but is incomplete without a way to prevent double-spending".
This excellent definition made Blockchain and Bitcoin a globally accepted monetary system.
Like in many countries, cryptocurrencies, especially, Bitcoin is legal in America. There are some countries still restricting the use of Bitcoin, and some countries even prohibit its use. The following diagram illustrates an overall acceptance status globally.
Like in any business, scams also proliferate in the crypto world. It is so bad that even the savviest traders face them. If you follow crypt news and discussions on social media, you will come across a scam encounter each day.
Many scams use loopholes caused by a lack of definitions. Unregulated businesses are prone to risks of exploitation manifesting as scams. Most cryptocurrencies are not supported by tangible assets and other securities. Not having clear intrinsic value may weaken price discovery and increases the risk of market manipulation.
Coupled with fundamental technological complexities, the lack of definitions with comparable information on cryptocurrency assets creates vulnerability. The legislation closes this gap and merits regulatory care for consumer protection requesting necessary disclosure and transparency.
Undefined boundaries cause people to act inappropriately and create more vulnerabilities. Furthermore, hackers work systematically exploiting the vulnerabilities of people who are confused.
Democracy is a wonderful thing however it does not mean irresponsible freedom. Laws guide people to act with responsibility and integrity. In addition, the legislation aims to protect consumers and investors from abuse. Legislation can create collaboration between industry governors and jurisdictional regulators to prevent regulatory arbitrage.
There are many scenarios that require regulations in the crypto world. For example, crypto-service providers in control of funds could experience bankruptcy. The service providers may also be using a mix of virtual and physical assets. If laws do not define these assets adequately, legal entities can struggle when dealing with issues.
Texas Governor Greg Abbott’s signing of this new law is the first step in creating a solid business foundation for cryptocurrencies in the state. This formal recognition gives confidence to investors and creates a certain legitimacy to crypto-assets which it had been lacking in public perceptions.
Thank you for reading my perspectives.