Is Crypto a New Form of Private Currency?

Private currency is the money issued by a business, an individual, or a nonprofit enterprise. But, as long as in many countries the issuance of private currencies may be forbidden, issuance of private cryptocurrency is usually not.

According to Business Insider, for a quarter of a century, America's states and territories, and the institutions within them began circulating their own currency, as the agrarian mistrust of centralized banking eventually climaxed in the destruction of the Second Bank of the United States in 1832. States, municipalities, private banks, service companies, religion institutions, groceries, bars, and individuals had printed over several thousands of different types of money by 1860. And if an issuer went out of business, things got bad. This phenomenon was called "wildcat banks" due to issuers’ unreliability, and because such businesses were often situated in remote, unpopulated locales said to be inhabited more by wildcats than by people.

Private Currency Decentralization

As in 1832, today, a lot of businesses are issuing private currencies, but in a form of cryptocurrency. A "currency" which is a form of digital or virtual currency where cryptography secures the transactions and controls the creation of additional units of the currency. That means that it does not look like "wildcat bank" and is actually controlled by a programme. Meanwhile, underlying cryptographic systems allow to decentralize the whole thing. A decentralized cryptocurrency is money, but one without a central banking/governmental system to go south.

There are over several thousand privately issued cryptocurrencies all over the world. These include commercial trade exchanges that use barter credits as units of exchange or other commercial institutions, local marketplace or digital service money, computerized systems of credits and debits, digital currencies in limited circulation, and others.

Private and Public Blockchain

Since almost any blockchain ledger is public, all transactions by all addresses are entirely exposed. This rightly may cause impressions of strong publicity, which may be positive for regulators (tax authorities), crypto banks (KYC/AML), and other financial regulators. However, there are ways to make the transactions anonymous. Ultimately, people will always break the weakest link to destroy a chain on an end-to-end transaction. To counter this issue, so-called "mixers" were created. Mixers are, in this case, a collective of people who come together to share tokens, mix them up, and then redistribute them. This makes it more difficult for individuals to be linked to specific tokens.

On the other hand, public blockchain may appear insecure. For that, we do have a private blockchain. But, even if a transaction itself is private, what about everything else? What about keeping transactional communication and purchase history private? The sense of anonymity that is associated with the famous cryptocurrencies, therefore, comes from the "fact that wallets are not connected to our names," according to a report on Steemit. While wallets are not given specific investor names, they can often be traced back to individual users through transaction history, service providers, IP addresses, and similar means.

Regulatory Regime for Private Cryptocurrency

The analysis of different regulators around the world shows a cautious and moderately conservative position taken by most countries (including Switzerland, which managed to win the reputation of the "Cryptocurrency Valley," Singapore, Hong Kong, EU). Assuming that tokens issued in the ICO process (a process of private cryptocurrency issuance) can be qualified as financial tools, currency, or assets, they might be subject to special legislation.

For instance, on 6 August 2013, Federal Judge Amos Mazzant of the Eastern District of Texas of the Fifth Circuit ruled that bitcoins are "a currency or a form of money," and as such was subject to the court's jurisdiction. In August 2013, the German Finance Ministry characterized Bitcoin as a unit of account, usable in multilateral clearing circles and subject to capital gains tax if held less than one year. The financial authorities of some other countries such as Australia, Canada, and Liechtenstein encourage companies planning issuance of own cryptocurrency to cooperate on the application of financial regulation rules.

Almost all the regulators are skeptical about the safety of investments in private cryptocurrency projects, urging potential investors to assess the associated risks carefully: at the same time the cryptocurrency is uncontrollable and it is usually impossible for buyers to use any protection rights available in the regulated financial market. Of the total number, China and South Korea made statements aimed at banning activities related to the issuance of private cryptocurrency. Gibraltar, on the contrary, announced the development of "ICO-friendly" regulations.

Legal consequences for violations in regulated financial markets vary from country to country and may include both economic sanctions and criminal liability. As national currencies can be counterfeited, so can private currencies. Private currencies are subject to other criminal issues as well, including fraud. In this regard, it is important for both the issuer and the buyer to look at different jurisdictions to carefully evaluate and calculate regulatory risks at the earliest stages.

Conclusion

It may look like crypto is a new form of private currency. However, private currencies are evolving, controlled by the cryptographic systems that allow decentralization. Decentralization without a single governmental or banking system, without central administration or centralized data storage, but with the distributed ledger technology. Businesses should be allowed to make their own currency, if it makes the world a better place after all.

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