Exceptional interest has arisen during the past five years in respect of virtual currencies (cryptocurrency, cryptomoney), the best known being Bitcoin, Ether, Litecoin and Dogecoin. According to experts, there are more than 1,800 different virtual currencies at present that, additionally, have created “exchange” platforms.


Doubtless, Bitcoin is the best known virtual currency whose less than ten years’ existence has given rise to such interest that, all in all, mention is being made about more than 100 billion dollars. Likewise, Ether, created under the abstract concept known as “White Paper” – based on a decentralized algorithm system – has mutated into a negotiable asset estimated at a value of more than 20 billion dollars. There is no doubt that the market value of crypto currencies has been variable during the past five years, but they enjoyed a boom as of 2016 and unusual growth in mid-2017.


Besides, an interesting comparative analysis involves placing the value of one ounce of gold side by side with the value of one Bicoin unit.  According to Bloomberg, the value of gold was exceeded even three or four times by the Bitcoin value in 2017. This explains the volatility of crypto currencies versus the value of commodities such as gold which, although fluctuating, is within a controlled range. It ought to be asked how different may those commodities be vis-à-vis the crypto currencies as a valuable deposit concept. In a first instance, for example, we could think that commodities, on the one hand, have high transactional and storage costs and are highly inconvenient for division, and that, on the other hand, commodities supplies are scarce and, it might be added, fixed; in other words, their sources are limited. Furthermore, virtual currencies such as Bitcoin are based on a digital record (blockchain) making it possible to estimate the network size in terms of transactions. This network is growing and allowing to increase the reserve value; additionally, liquidity is generally convenient both because transactional costs are low as well as because how easy it is to do this around the world.


However, the high transactionality allowed by virtual currencies and how easy it is to exchange  conventional currencies (fiat) with those crypto currencies in “exchanges” that are not regulated has captured the attention of the authorities as well as of criminals who have considered it a place of endless possibilities for transnational crime or for laundering money deriving from illicit activities.


In order to access to the virtual currency market, investors rely on platforms for trading virtual assets commonly known as “exchanges”. Those digital platforms are able to link buyers and sellers of virtual currencies, and they perform functions similar to those of traditional stock exchanges, private trading centers and stockbrokers. However, unlike traditional players, the current platforms for trading virtual assets are not registered under local securities or commodities laws. Neither have those platforms implemented common security standards, internal controls, market surveillance protocols, disclosures, or other protections for investors and consumers.


Consequently, the customers of virtual assets platforms face significant risks. During the past years, information hackers have infiltrated those “exchanges” and stolen billions of dollars in virtual currency, leaving the customers with little or no recourse. Delays and interruptions are common in those platforms, resulting in that customers cannot withdraw funds in due course and are liable to suffer significant losses due to volatile prices.


Public reports submitted by the General Prosecutor in the State of New York, for example, have linked certain commercial platforms to misleading and predatory practices, market manipulation and abuse of privileged information. Trading platforms vary in respect of their response to those risks. Some have taken significant and specific steps to improve the security, reliability and transparency of their operations, but others have not. In the meantime, customers have had limited access to the necessary information in order to assess the basic security and impartiality of platforms, or to compare among them.


All the above considerations give rise to an intense debate on the regulation – whether by the State or private – of virtual currencies and of “exchange” platforms. We must recall that all virtual currencies are based on blockchain, smart contracts, or algorithm technology allowing transactions not to pass through centralized nodes and, since they are totally decentralized, they do not depend from a central node, unlike legal currencies such as the U.S. dollar or the euro that require a centralized entity to control their flow and their transactionality (central bank, banking system). Precisely the lack of regulation of these new realities raises questions about protecting the rights of users of virtual currencies and “exchange” platforms, preventing crimes that might be perpetrated through these new technologies, and eradicating conducts and activities that can damage the private and public assets of individuals and state entities. The first step taken by the authorities was a total prohibition, but it seems that this approach to the problem is not giving its expected results.



Warning: This newsletter by Pérez Bustamante & Ponce (PBP) is not and cannot be used as legal advice or opinion since it is merely of an informative nature.