Despite recent fluctuations in value, the Bitcoin phenomenon shows no sign of slowing. The meteoric rise of the cryptocurrency presents a range of issues that law enforcement agencies, legal regulators and tax authorities must consider in determining how it fits within their existing regulatory frameworks.
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Different reasons are driving the interest in Bitcoin, depending on the stakeholder. Many stakeholders are engaged in speculation, becoming rich by mining Bitcoin or accepting it as a form of payment. Bitcoin is also interesting because a new set of technologies is being built to enable it to function (eg, to enable Bitcoin mining and Bitcoin ATMs). These technologies will lead the way for new advances in payment techniques. Technology and financial companies have seen the potential of Bitcoin and are becoming involved.
Another issue driving interest in Bitcoin is the fact that it is decentralised. The US Treasury classifies it as a "convertible decentralised virtual currency". Bitcoin gives users anonymity, as no personal details are involved and it cannot be traced.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
At present, the Central Bank of Nigeria does not regulate virtual currencies. It remains to be seen what concrete steps the bank will take to regulate Bitcoin and other virtual currencies in future. Perhaps. after its work to stabilise the naira during the ongoing oil price slump is complete (for further details please see "Implications of record drop in value of naira"), it may focus attention on Bitcoin and other virtual currencies. The bank is committed to achieving a cashless economy.
However, Bitcoin is bought and sold in Nigeria freely. For example, Nigerian retailer Minku, which makes leather goods, accepts Bitcoin as payment on its website.
The use of Bitcoin is becoming increasingly popular in Nigeria. Its users include forex traders, online investors, importers, exporters and betting sites. At present, 1 bitcoin is worth N47,126.
There are a number of merchants in Nigeria where Bitcoin can be bought and sold using the naira.
How are transactions using virtual currencies as the medium of exchange taxed in your jurisdiction?
As Bitcoin is largely unregulated in Nigeria, it is not taxed. It remains to be seen what actions the tax authorities will take in future. During 2015 the Federal Inland Revenue Service released new guidelines in a bid to raise more money for the government. However, the guidelines are silent on Bitcoin.
In contrast, there may be cases where a Bitcoin transaction is initiated in Nigeria and concluded in another jurisdiction where Bitcoin is taxed. The US Internal Revenue Service taxes virtual currencies such as Bitcoin. Depending on the circumstances, it treats transactions involving virtual currencies as ordinary income or capital gains and applies the applicable tax rates accordingly.
If virtual currencies were to become a mainstream payment system, how might this affect the ability to control inflation in your jurisdiction?
If virtual currencies became a mainstream payment system in Nigeria, they would complement regular currency rather than replacing it as a means of payment.
As virtual currencies are decentralised, no central authority regulates them. Further, financial institutions are not involved in the transactions, as users carry out all of the functions themselves, with no government or supervisory body oversight. Thus, virtual currencies are difficult to regulate and, as such, controlling inflation will be a challenging task.
What are the potential risks of virtual currencies in terms of fraud? How would these be addressed in your jurisdiction? Have any specific instances emerged in which virtual currencies have been used for money-laundering or other fraudulent purposes?
As virtual currencies are decentralised and unregulated, there is a high risk of fraud, which may not be easily traced due to the anonymity of transactions involving Bitcoin and other virtual currencies. The lack of regulation and monitoring tools makes it difficult to ascertain cases of fraud in relation to virtual currencies.
In Nigeria, until the authorities regulate Bitcoin and other virtual currencies, the risk of fraud will endure. One method of preventing fraud has been demonstrated by the Chinese government, which has banned the trading of Bitcoin.
There are no reported specific instances of virtual currencies being used for money laundering or other fraudulent purposes in Nigeria.
When the US Federal Bureau of Investigation shut down Silk Road (an online marketplace which allowed users to remain anonymous) in 2013, it seized 26,000 bitcoins worth $3.6 million
Is it time for international standard-setting bodies to develop standards which leave room for technological innovation while preventing the illegal use of virtual currencies? How might this be achieved? What would be the main challenges
The time is ripe for international bodies to develop standards that will allow for technological innovation at the same time as preventing the illegal use of virtual currencies. Virtual currencies are not a flash in the pan and their wide use is a cause of concern for many governments. Thus, governments and international bodies must come together first to recognise the use of Bitcoin and other virtual currencies, and then to agree how to regulate and prevent crime involving virtual currencies.
Recently, US federal and state regulators have focused on Bitcoin and the adoption of a regulatory framework for Bitcoin and other virtual currencies, as well as how to enforce the existing securities laws against offerings denominated in Bitcoin. The Financial Crimes Enforcement Network (FinCEN) recently released two administrative rulings clarifying the application of the Bank Secrecy Act and FinCEN regulations to Bitcoin.
The European Central Bank (ECB) is also concerned about Bitcoin and other virtual currencies and is thus investigating ways to strike a balance between money and payment innovations on the one hand, and consumer protection and financial stability on the other. The ECB also wants to combat the use of virtual currencies for illegal purposes, stating that: "Registering these companies as financial institutions would at least reduce the incentive for terrorists, criminals and money launderers to make use of these virtual currency schemes for illegal purposes."
The main challenge in regard to Bitcoin will be how to introduce regulation to a completely unregulated area. Some form of control over a decentralised system which affords anonymity to all will be key in order to deal with the legal challenges posed by virtual currencies.
For further information on this topic please contact Victor Olabode Munis at TRLPLAW by telephone (+234 1 4533 100) or email (firstname.lastname@example.org). The TRLPLAW website can be accessed at www.trlplaw.com.