Approaches of international organizations to determining the essence of cryptocurrencies

Andrianova Natalia Gennadievna PhD in Law Researcher at the Department of Administrative Law and Administrative Process of the Institute of State and Law of the Russian Academy of Sciences 119019, Russia, Moscow, Znamenka str., 10 natalia.g.andrianova@gmail.com Other publications by this author

The appearance of the first cryptocurrency (bitcoin) in 2009 ^[1] and the subsequent rapid development of cryptocurrencies around the world actively began in 2014, while still the world has not developed a unified approach to understanding the essence of cryptocurrencies and general rules for their legal regulation.

There are different definitions of the concept of "cryptocurrency" in the scientific literature. It seems that the definition of this concept can be considered in several aspects.

From a technical point of view, a cryptocurrency is an algorithmic code that is the result of a computer program ^[2], or a record of transactions in the form of a registry distributed among network participants without an issue or settlement center ^[3]. Thus, from a technical point of view, the key feature is the electronic form of cryptocurrencies, which is implemented in the form of algorithmic code. An interesting position is that the emergence of cryptocurrencies is a consequence of the evolution of the carriers of monetary value – the circulation of cryptocurrencies does not involve their physical transfer, as well as the participation of financial intermediaries in transactions, which significantly reduces the costs of organizing their turnover ^{[4, p. 226; 5]}.

Some authors define cryptocurrency as a digital (virtual) currency ^[6], or a specific form of private money due to the use of distributed registry technology, existing exclusively in electronic form and actually representing information recorded on an electronic medium that is encrypted by cryptography ^[7]. It should be noted that there is no legislative definition of the term "cryptocurrency" in the Russian Federation, in Federal Law No. 259-FZ of 31.07.2020 "On Digital Financial Assets, Digital Currency and on Amendments to Certain Legislative Acts of the Russian Federation" [Federal Law No. 259-FZ of 31.07.2020 "On Digital Financial Assets, Digital Currency currency and amendments to certain legislative acts of the Russian Federation" // Collection of Legislation of the Russian Federation, 03.08.2020, No. 31 (Part I), Article 5018], which entered into force on January 01, 2021 (hereinafter - the CFA Law), contains a definition of the concept of "digital currency". A digital currency is a set of electronic data (digital code or designation) contained in an information system that is offered and (or) can be accepted as a means of payment that is not a monetary unit of the Russian Federation, a monetary unit of a foreign state and (or) an international monetary or settlement unit, and (or) as an investment and in respect of which there is no person obligated to each owner of such electronic data, with the exception of the operator and (or) nodes of the information system, who are only obliged to ensure compliance with the procedure for the release of these electronic data and the implementation of actions in relation to them to make (change) records in such an information system according to its rules. When correlating the terms "digital currency" and "cryptocurrency", one should adhere to the position that cryptocurrencies are one of the types of digital currency and, therefore, the term "digital currency" by its legal nature is broader than the term "cryptocurrency". In addition, it should be noted that cryptocurrencies are not a legal means of payment on the territory of the Russian Federation. The potential to use cryptocurrencies as a means of payment for goods, works and services allows some researchers to attribute cryptocurrencies to private funds. At the same time, one should agree with the position that the term "digital currency" will not be able to completely displace the established terms "cryptocurrency" and "virtual currency" from circulation ^[8].

From a legal point of view, cryptocurrency is a "kind of intangible property" ^[9] that cannot be converted into cash. In the Russian Federation, according to the CFA Law, digital currency is recognized as property for the purpose of applying certain laws (for example, Federal Law No. 127-FZ of 26.10.2002 "On Insolvency (Bankruptcy)" [Federal Law No. 127-FZ of 26.10.2002 "On Insolvency (Bankruptcy)"// Collection of Legislation of the Russian Federation, 28.10.2002, No. 43, v. 4190]. The procedure for taxation of cryptocurrency transactions depends on the definition of the essence of cryptocurrencies ^{[10, 11, 12]}.

Thus, despite the variety of definitions of the concept of "cryptocurrency", it can be concluded that the main features of cryptocurrencies are: 1) electronic form; 2) the absence of a single issuing center; 3) the type of digital currency; 4) the order of taxation of transactions with cryptocurrency depends on the definition of the essence of cryptocurrencies.  

Some work in the direction of determining the essence of cryptocurrencies is carried out by international organizations. Let's consider the approaches proposed by international organizations in this direction in more detail.

Cryptocurrencies are classified as virtual currencies by the Organization for Economic Cooperation and Development (OECD). The OECD expresses the position that virtual currencies are a rapidly developing form of crypto assets, which has the following main characteristics:

1) insufficiency of centralized control,

2) pseudo-anonymity,

3) the difficulty of determining their value,

4) some hybrid characteristics (combine some features inherent in both financial instruments and intangible assets).

The OECD focused on the issues of analyzing the tax consequences of transactions with crypto assets ^[13], in addition, since crypto assets can be transferred and stored without interaction with traditional financial intermediaries and without any central administrator having full information about transactions and the location of crypto assets, the OECD has adjusted the rules for automatic exchange of tax information by including such an exchange of information about transactions with crypto assets, which will be transmitted in a standardized manner with the jurisdictions of taxpayers' residence on an annual basis ^[14]. Thus, the OECD considers cryptocurrencies as a virtual currency, due to the high risks of committing illegal actions with cryptocurrencies, information about transactions with cryptocurrencies is included in the automatic exchange of tax information.

The Group for the Development of Financial Measures to Combat Money Laundering (FATF) refers cryptocurrencies to virtual currencies. According to the FATF, a virtual currency is a digital display of value that functions as: 1) a medium of exchange; 2) a unit of account; 3) a means of saving, but does not have the status of a legal tender. Virtual currencies are not issued or guaranteed by any jurisdiction and performs the above functions only by agreement in the community of virtual currency users. The FATF notes that the legitimate use of virtual currencies offers many advantages, such as increasing the efficiency of payments and reducing transaction costs.  Virtual currencies facilitate international payments and allow settlements to the population that does not have access or has only limited access to conventional banking services, while the use of virtual currencies poses potential AML/CFT risks ^[15], due to: anonymity, limited opportunities to identify and verify participants in transactions, the absence of a central supervisory authority in relation to transactions with virtual currencies^[16]. The FATF has updated its AML/CFT Recommendations, indicating that the Recommendations apply to financial activities related to transactions with virtual assets. Definitions of such concepts as "virtual assets", "virtual asset service provider" were disclosed in the FATF Glossary. The FATF determined that emerging new subjects of relations in this area (for example, virtual asset service providers) are subject to AML/CFT requirements, and, consequently, such new subjects are subject to registration and licensing, effective control and supervision systems should apply to them ^[17]. Thus, the FATF also classifies cryptocurrencies as virtual currencies. Emerging new entities in the field of operations with cryptocurrencies, according to the FATF position, must comply with AML/CFT requirements.

The International Monetary Fund (IMF) expresses a restrained position regarding cryptocurrencies. Thus, the IMF notes such signs of cryptocurrencies as: high volatility of quotations, significant risks of use due to the presence of signs of a financial pyramid, energy consumption of cryptocurrency mining technology. The IMF points out that crypto assets can pose significant macro-financial risks, including for the implementation of capital flow management measures. The emergence of crypto assets and related ecosystems, according to the IMF, may call into question the ability of the authorities to control capital flows and ensure compliance with capital flow management measures through regulated intermediaries. The decentralized and pseudo-anonymous features of crypto assets make them potentially attractive tools for circumventing capital flow management measures ^[18].

The IMF advocates the formation of a global, consistent and coordinated regulation of the sphere of cryptocurrency turnover in order to maintain the stability of the entire financial system ^[19]. The following rules should be the main ones. Firstly, service providers in the field of cryptocurrency turnover should be subject to licensing. At the same time, the requirements for service providers in the sphere of cryptocurrency turnover should be similar to those established for financial service providers. Secondly, transactions with cryptocurrencies should be regulated by clear rules for regulated financial organizations. Thus, the IMF sees high risks of using cryptocurrencies, especially in the field of capital flow management, and advocates the formation of a global, consistent and coordinated regulation of the sphere of cryptocurrency turnover.

The Bank for International Settlements (BIS) classifies cryptocurrencies as digital currencies. The BIS points out that digital currencies have a rather serious impact on the financial market and the economy as a whole. On the one hand, digital currencies can facilitate payment transactions and possibly make them faster and less expensive for end users. However, there are also significant risks of using digital currencies. According to the BIS, digital currencies have a number of key features that distinguish them from traditional electronic money ^[20]. Firstly, digital currencies are assets whose value is determined by supply and demand, which, in general, is similar to commodities such as gold. However, unlike commodities, digital currencies have zero intrinsic value. Unlike traditional electronic money, digital currencies are not an obligation of any person or institution and are not issued by any authority. As a result, their value depends only on the users' belief that they can be exchanged for other goods or services or a certain amount of sovereign national currency at a later point in time. The procedure for issuing new units of digital currency (i.e., managing the general supply) is usually determined by a computer protocol with an algorithm embedded in it. Each digital currency has its own predefined rules for issuing new digital units. These predefined rules help create a supply shortage. In addition, digital currencies, as a rule, are not tied to a sovereign national currency. The next distinctive feature of digital currencies is the method of transferring digital units from the payer to the recipient of the payment. Due to the use of distributed registries, it is possible to carry out remote peer-to-peer exchange of digital units in the absence of trust between the parties and without the need for intermediaries. Another distinctive feature of the turnover of digital currencies is the institutional structure that ensures their movement from one person to another. There are only intermediaries who provide various technical services. These intermediaries may provide "wallet" services that allow digital currency users to move digital units, or may offer services to facilitate the exchange between digital currency units and sovereign national currencies, other digital currency units or other assets.

Thus, we can conclude that the position of international organizations in relation to cryptocurrencies, in general, is similar. Most international organizations classify cryptocurrencies as virtual/digital currencies, noting, at the same time, the significant risks of their use and the need to create a coordinated and systematic regulation of the sphere of turnover of cryptocurrencies.