States against cryptocurrency: a history of regulation and struggle

On October 10, I gave a lecture on “The Legal Nature of Cryptocurrency” at Moscow State University. I publish the main theses - about the history of relations between states and cryptocurrencies.


In 2008, someone under the pseudonym Satoshi Nakamoto placed his article “Bitcoin: a peer-to-peer electronic money system” on the cryptography mailing list. Since then, at least, as the official mythology of the blockchain says, the world has changed dramatically. It is all the more unusual that cryptocurrencies in Russia are still not regulated by regulation, and their regime has not been studied in legal literature.

1. Private and "electronic" money

Private money - that is, money issued by a non-subject of public authority - has historically been quite common. The monopoly of states on the issue of money was established only in the 19th century. In the epoch of metal circulation, private money did not represent a danger to states and was legalized, for example, in the form of bank notes. After the emergence of truly fiat currencies - without metal security - the issue of private money was to some extent limited.
However, wars, natural disasters and economic crises associated with the loss of public money billing function, generate private money until our days. Economic disasters are accompanied by the emergence of financial pyramids, based on private money (MMM), the struggle of regions for autonomy is often also supported by the emergence of "separatist" currencies (karbovanets UNR, Ural franc, Chechen nahar, etc.)

Thanks to technology, private money has received a new development. Technology has allowed, firstly, to simplify the issuance of private money, and, secondly, to expand their turnover in the growing market of Internet payments. In the late 90s, online payment systems appeared and grew up trying to use “electronic money”: PayPal, and in Russia WebMoney, Yandex.Money, “conventional units” of mobile operators. At about the same time, large-scale loyalty programs became popular, suggesting, in effect, the issuance of restricted means of payment - “miles” from air carriers, “points” from discount cards like the Guest of Honor or Raspberry. The audience of online games has expanded, and, accordingly, the turnover of game currencies, which can (not without difficulty, of course) be converted into real money: for example, game items in Lineage 2 or Eve online.

Of course, private money, especially non-cash, raises serious concerns among law enforcement and fiscal authorities. Internet platforms do not identify their customers (KYC, AML / CFT) - as a result, a lot of dirty money rotates in the systems. Issued money has no collateral and there is no compensation for technical failures, especially when it comes to “unreal” money. For example, when, as a result of a bug with integer overflow in Diablo III, players were able to double gold, no one was held accountable for the subsequent hyperinflation.

In this situation, the states take all measures to reduce their risks: platforms are equal to financial organizations with all the ensuing consequences for identifying customers, anonymous payments are prohibited. Access of legal entities to the sites is limited so that “dirty” money does not get into the settlement systems. As a result, the use of private money is reduced to technical goals - this is how transactions between customers are simplified, and at the entrance and at the exit, private money is transformed into state, "fiat".

Theoretically, the Internet-based payment system may act extraterritorially, being in a deep offshore, but all attempts to create such invariably encountered active opposition from financial regulators and law enforcement agencies, primarily American ones. The loudest example is the Liberty Reserve system. Its creators were convicted in the United States for the GoldAge financial system (under the article on "laundering"). They went to Costa Rica and opened the next version of the payment system - already with its own currency - there. But after a few years, the FBI, on the basis of the Patriotic Act, detained the head of Liberty Reserve in Spain, blocked the domains, and searched the largest contractors in Europe and the United States. Custom money, of course, did not return to anyone.

And before the collapse of LibertyReserve, it was clear that anonymous payment systems and private money exchanges, although technologically possible, are unacceptable for the largest state players from a political point of view. However, by the 2000s, the architecture of the Internet, the computing power of its nodes and the increased connection speed allowed in some cases to switch from multi-tier network architectures (client-server) to decentralized peer-to-peer architectures (peer-to-peer, p2p). Decentralized networks have found application in situations of constant pressure from outside, including the exchange of controversial content. Examples of such networks include decentralized and partially decentralized file sharing networks (including BitTorrent), as well as anonymous darknets.

The use of decentralized architecture in the financial sector has become a matter of time. The single-level network architecture and electronic digital signature technology, which is necessary for identifying network participants, were sufficiently developed and tested in the mid-2000s. The principal problem remained only the sharing of information about the transactions made by unscrupulous system participants (the problem of multiple spending). This problem was solved by the blockchain technology, proposed by Satoshi Nakamoto, an anonymous author.

2. State Response

Transfers in a decentralized system do not require the participation of intermediaries and, accordingly, cannot be canceled or modified by these intermediaries. This advantage provided bitcoin - the first implementation of the blockchain - an unprecedented success. The first exchange of Bitcoins for property and money occurred in 2010; in 2011, the bitcoin exchange rate reached $ 1 per bitcoin; in 2013 - 100 dollars. At the moment, the bitcoin rate exceeds $ 5,000 (300,000 rubles).

Speaking about the legal regulation of cryptocurrency, I like to compare the reaction of states to cryptocurrency - including the reaction of Russian officials - with the “five stages” of adoption. The initial reaction (denial) - the complete absence of the reaction. After the first bitcoin boom in 2013, some supervisors issued warnings against the Bitcoin Foundation and individual users (anger), but did not take any concrete measures. As a result, despite the discussions (bargaining) about the prospects for a complete ban, a difficult decision was made (depression) on the future legalization of cryptocurrencies under a special federal law. When it is adopted, it will be possible to talk about the victory of supporters of cryptocurrency (adoption).

States that are faced with the need to regulate the blockchain (and cryptocurrency in particular) are faced with new challenges. Cross-border data exchange does not allow direct linking of wallets and transactions with them to a single jurisdiction. Moreover, each state has its own traditions in the legal regulation of information technologies, international regulation in this area is minimal. Regulation of cryptocurrency and blockchain refers to currency, financial legislation and securities market regulation - traditionally local areas of legislation. The only such area in which strong international cooperation operates is the fight against money laundering (FATF), but it will be difficult to build a positive agenda on its basis.

A natural question arises: is it necessary to regulate the blockchain and cryptocurrency at all, and why? To understand, remember that generally subject to regulation. Law is a system of norms established by the state; thus, through law, the functions of the state are manifested, and in those relationships where legal regulation is impossible or unacceptable, the state should not interfere. During the last centuries, the tasks of the state grew, and, accordingly, the scope of state regulation expanded. Money circulation, securities regulation, social security, education - many of these areas were “occupied” by the state and, accordingly, were settled by law relatively recently. There are few examples of reverse examples when the state transferred its functions to the invisible hand of the market; only the collapse of authoritarian regimes or the privatization of individual industries come to mind. However, these examples are not associated with a global reassessment of the role of the state.

But more recently, we have seen a different trend: technologies either radically reduce government intervention in certain areas, or make it impossible. For example, taxi aggregators, combined with navigators, make unnecessary legal regulation in the field of taxis like exams and supervisory authorities. The emergence of blogs and social networks makes media legislation meaningless. The implementation of “e-democracy” (including on the basis of the blockchain) will simplify the conduct of referendums, and in the future, perhaps, elections. Examples can be given for a long time.

Before our eyes, technological algorithms limit state intervention in the lives of citizens. This also applies to the smart contract technology implemented in the blockchain. From the point of view of the so-called "contractual" theories of state origin - from John Locke to Douglas North - the states emerged as a result of the treaty. The public authority received the functions of enforcing obligations and protecting property rights in exchange for taxes. However, the use of the blockchain provides an irreversible execution of transactions, and therefore, such transactions can be made without state participation. In the blockchain, it is also possible to fix a number of rights.

These objective features of the blockchain allow technology enthusiasts to look at the state’s attempts to reconcile cryptocurrencies and blockchains as imposing an inefficient means, as justifying outdated government mechanisms that lose the fight against technology. Such a view is not without meaning; on the example of the “Law of Spring”, the “Law on bloggers” and other regulatory acts adopted in recent years, it’s good video that the state cannot effectively replace technological relations with legal regulation, but does not want to abandon regulation at all. Changing the paradigm that is required to effectively solve emerging problems takes time, especially in large, inert legal order. It is this, and not the deliberate collusion of elites, according to conspiracy theorists that the ineffective regulation of relations on the Internet is explained.

On the other hand, the blockchain provides only the fixation of information, ensuring the correctness of transactions within the blockchain. But only information can be placed on the blockchain, and not objects of the real world. This is enough to ensure the exchange of one information to another inside the blockchain without outside interference - for example, to acquire an address in the .bit zone (namecoin) for Bitcoins. However, in the case where the exchange affects items outside the blockchain, it is necessary to place the relevant information inside the blockchain, and therefore the actor who is not connected by technology appears. This inherent restriction cannot be removed, although it can be partially compensated: for example, by a consensus system of reflecting information about the material world in the blockchain (“oracles”, “data channels”). Therefore, blockchain and cryptocurrency will somehow interact with the legal system.

3. Settlement problems

In the current situation, the lack of legal regulation of cryptocurrency is much more acute than the lack of regulation of the blockchain as a whole. The volume of "money supply" issued by bitcoins is already at the current rate of 5 trillion 90 billion rubles - about a third of the Russian budget for 2017. At the same time, it is impossible for conscientious entrepreneurs to use it without regulatory regulation of cryptocurrency: it is impossible to substantiate the income received from the sale of cryptocurrency, it is impossible to pay taxes on them, it is impossible to pass currency control, it is impossible to legally mine. Moreover: while the legal regime of cryptocurrency is not defined, an operation with it can be recognized as a one-sided transaction, donation of goods, or generally a transaction contrary to the law: these are huge risks that deter "white" market participants.

Setting a cryptocurrency will allow them to be used more often as a medium of exchange, which will reduce the speculative component in their use and, accordingly, the cryptocurrency market will become less volatile. The settlement will attract large businesses to operations using cryptocurrencies, which will reduce the shadow market and improve the reputation of cryptocurrencies, which, in turn, will also attract medium and large businesses to carry out operations using cryptocurrencies. An increase in the number of participants in the respective blockchains will enhance their decentralization, and, consequently, their reliability.

However, there are a number of theoretical and practical obstacles. From the point of view of private law, the most acute problem of cryptocurrency is the lack of suitable institutions, to which cryptocurrency can be equated. Entries in the blockchain are absolute rights and by nature are similar to things : their number is known, they are transferred from the owner to the owner in a strictly defined order, they do not contain any rights of claim (like securities). However, the Russian legal doctrine still does not accept intangible things: for example, non-cash money and non-documentary securities are recognized as rights of claim (to the bank and the registrar, respectively). Cryptocurrencies, unlike non-cash money, due to the absence of a depositary or a bank, do not imply any rights. Cryptocurrency - one hundred percent thing, which in itself does not give anything and does not mean anything. It is even theoretically impossible to count the rights of the requirement.


Of course, it is more correct to create a new object of law specifically for cryptocurrencies (sui generis) - for example, exclusive rights were settled at one time. However, most likely we are waiting for the application of property rights by analogy (as for things, for example, they refer electricity), which will give rise to another fiction in legal regulation. In any case, it will be better than the analogy with exclusive rights (blockchain = database) or with “information” under the law “On Information, Information Technologies and Protection of Information”.

Also to solve the problem with the state. Our settlement system is more or less closed: all incoming funds pass through currency control, the KYC and AML / CFT procedures, and thus the majority of suspicious and criminal transactions are excluded. Of course, some ways of dirty money remain - offshore companies, criminal banks in third world countries, etc. However, the full-fledged way for “dirty” money in the settlement system is closed. Legalization of cryptocurrency in one degree or another opens this path; that is why states are not in a hurry to allow cryptocurrencies on stock exchanges or in the settlement system. If a small country decides to take such a step, it will face powerful opposition from the FATF and SWIFT.

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